Calculation of the economic efficiency of an investment project

Option 6

CALCULATION OF THE ECONOMIC EFFICIENCY OF THE INVESTMENT PROJECT

Evaluate the effectiveness of the project as a whole and the effectiveness of participation in the project.

The effectiveness of the project as a whole is assessed in order to determine the potential attractiveness of the project for potential participants and the search for funding sources.

The effectiveness of participation in the project is determined in order to check the feasibility of the investment project and the interest of all its participants.

The effectiveness of an investment project is assessed during the calculation period, covering the time interval from the beginning of the project to its termination.

The calculation period is divided into steps - segments within which the aggregation of data used to assess financial indicators is performed. Time is measured in years or fractions of a year and is counted from a fixed moment t o = 0, taken as the base one. In our example, the time interval is 8 years.

The project, like any financial transaction, generates cash flows. The cash flow of an investment project is the difference between the net inflows and outflows of cash in a given calculation period.

Cash flow consists of flows from individual activities:

─ cash flow from investment activities;

─ cash flow from operating activities;

─ cash flow from financial activities;

At each step, the value of the cash flow is characterized by the inflow, outflow of funds and the balance (the difference between inflow and outflow).

Table 1

Cash flow composition

Kind of activity	Tributaries	Outflows
Investment activities	Sale of assets; Proceeds from a decrease in working capital.	Capital investments; Commissioning costs; Elimination costs at the end of the project; The cost of increasing working capital.
Operating activities	Revenues from sales; Non-operating income.	Production costs;
Financial activities	Equity capital investments; Raised funds (subsidies, grants, issue of debt securities); Borrowed funds.	Loan repayment and servicing costs; Payment of dividends.

The performance indicators of the project as a whole are determined based on the results of investment and operating activities. Performance indicators for project participants include all actual cash inflows and outflows, including from financial activities.

1. Based on the data in Table 1, we group the inflows and outflows of funds for the project as a whole and for the project participant and enter them in Table 2.

table 2

Composition of inflows and outflows

Name	Inflow composition	Outflow composition
Project as a whole: investment activities operating activities	Revenues from sales	Investment costs Production costs, taxes
Customer (owner): investment activities operating activities financial activities	Revenues from sales Equity capital investments; borrowed funds	Investment costs Production costs; taxes Loan return and service costs

2. Based on the initial data (Appendix 2) and table. 2 we will calculate the cash flow for the project and for the customer. The data for the calculation are entered in table. 3 and 4. All inflows are entered in the table with a "+" sign, and outflows with a "-" sign.

The revenue is specified in the first planning interval - $ 400. and the step of increasing the proceeds in each subsequent interval is set - 950 USD. Then the revenue will be:

1st year: $ 400

2nd year: 400 + 950 = 1350 USD

3rd year: 1350 + 950 = 2300 USD

4th year: 2300 + 950 = 3250 USD

5th year: 3250 + 950 = 4200 USD

6th year: 4200 + 950 = 5150 USD

7th year: 5150 + 950 = 6100 USD

8th year: 6100 + 950 = 7050 USD

Production costs are determined based on the following percentages of revenue: 1st year - 57%; 2nd year - 43%; 3rd year - 41%; 4th year and all subsequent years - 40%. Production costs will be:

1st year: 400 * 0.57 = 228 c.u.

2nd year: 1350 * 0.43 = 580.5 c.u.

3rd year: 2300 * 0.41 = 943 c.u.

4th year: 3250 * 0.40 = 1300 c.u.

5th year: 4200 * 0.40 = 1680 rubles.

6th year: 5150 * 0.40 = 2060 c.u.

7th year: 6100 * 0.40 = 2440 c.u.

8th year: 7050 * 0.40 = 2820 c.u.

Table 3

Cash flow calculation for the project

Indicator name	Planning interval
	0	1	2	3	4	5	6	7	8
Inflows
TOTAL by ID
2.Operating activities
Revenues from sales		400	1350	2300	3250	4200	5150	6100	7050
TOTAL for OD		400	1350	2300	3250	4200	5150	6100	7050
Total tributaries		400	1350	2300	3250	4200	5150	6100	7050
Outflows
1.Investment activities
Investment costs	-950	-116	-65
TOTAL by ID	-950	-116	-65	0	0	0	0	0	0
2.Operating activities
Production costs		-228	-580,5	-943	-1300	-1680	-2060	-2440	-2820
Tax		-113,3	-427,7	-739,7	-1053,0	-1360,8	-1668,6	-1976,4	-2284,2
TOTAL for OD	0	-341,3	-1008,2	-1682,7	-2353,0	-3040,8	-3728,6	-4416,4	-5104,2
Total outflows	-950	-457,3	-1073,2	-1682,7	-2353,0	-3040,8	-3728,6	-4416,4	-5104,2
Cash flow NCF	-950	-57,3	276,8	617,3	897,0	1159,2	1421,4	1683,6	1945,8

Table 4

Cash flow calculation for the customer

Indicator name	Planning interval
	0	1	2	3	4	5	6	7	8
Inflows
1.Operating activities
Revenues from sales		400	1350	2300	3250	4200	5150	6100	7050
TOTAL for OD		400	1350	2300	3250	4200	5150	6100	7050
2.Financial activity
Equity investments	400
Borrowed funds	950
TOTAL by FD	1350	0	0	0	0	0	0	0	0
Total tributaries	1350	400	1350	2300	3250	4200	5150	6100	7050
Outflows
1.Investment activities
Investment costs	-950	-116	-65
TOTAL by ID	-950	-116	-65	0	0	0	0	0	0
2.Operating activities
Production costs		-228	-580,5	-943,0	-1300,0	-1680,0	-2060,0	-2440,0	-2820,0
Tax		-113	-427,7	-739,7	-1053,0	-1360,8	-1668,6	-1976,4	-2284,2
TOTAL for OD	0	-341	-1008,2	-1682,7	-2353,0	-3040,8	-3728,6	-4416,4	-5104,2
2.Financial activity
Loan return and service costs		-266	-266,0	-380,0	-335,7	-291,3	-247,0	-202,7	-158,3
TOTAL by FD		-266	-266,0	-380,0	-335,7	-291,3	-247,0	-202,7	-158,3
Total outflows	-950	-723	-1339,2	-2062,7	-2688,7	-3332,1	-3975,6	-4619,1	-5262,5
Cash flow NCF	400	-323	10,8	237,3	561,3	867,9	1174,4	1480,9	1787,5

3. To calculate the amount of tax deductions, we will use additional table 5. According to the assignment, only value added tax (18%) and income tax (24%) are taken into account. We proceed from the assumption that taxable profit is defined as the difference between revenue and production costs.

Table 5

Calculation of tax deductions

Indicator name	planning interval
	1	2	3	4	5	6	7	8
Revenues from sales	400	1350	2300	3250	4200	5150	6100	7050
VAT (18%)	72,0	243,0	414,0	585,0	756,0	927,0	1098,0	1269,0
Balance sheet profit	172	769,5	1357	1950	2520	3090	3660	4230
Income tax	41,28	184,68	325,68	468	604,8	741,6	878,4	1015,2
Total tax payments	113,3	427,7	739,7	1053,0	1360,8	1668,6	1976,4	2284,2

4. To calculate the costs of repayment and servicing of the loan, we will use additional table 6. The need for additional financing is found as the maximum value of the absolute value of the negative accumulated balance from investment and operating activities (see Table 3). When paying off the debt, we proceed from the assumption that the debt is repaid in equal parts, starting from the third planning interval. Under the condition - the cost of borrowed funds - 28%.

Table 6

Calculating the cost of returning and servicing a loan

Indicator name	planning interval
	0	1	2	3	4	5	6	7	8
Repayment of the loan amount				158,33	158,33	158,33	158,33	158,33	158,33
Remaining loan in use	950,0	950,0	950,0	791,7	633,3	475,0	316,7	158,3	0,0
Loan service		266	266	221,67	177,33	133,00	88,67	44,33	0,0
Total loan repayment and servicing		266	266	380,00	335,67	291,33	247,00	202,67	158,33

Making additional calculations made in table. 5 and 6 in the corresponding outflows table. 3 and 4, we will calculate the cash flow for the project and for the customer.

The main indicators used to calculate the efficiency of investment projects are the following:

─ net income;

─ net present value;

─ internal rate of return;

─ indices of profitability of costs and investments;

─ payback period.

Net income (NV) is the accumulated effect (cash flow balance) for the accounting period. It is determined by the formula:

NV = ∑ NСF n (1)

Net present value (NPV) is the accumulated discounted effect for the accounting period:

NPV = NCF (0) + NCF (1) * DF (1) + ……… NCF (n) * DF (n) (2)

Cash flow discounting is carried out by multiplying the cash flow by the discount factor:

DF = 1 / (1 + E) n (3)

where E is the discount rate.

By condition E = 16%.

DF 1 = 1 / (1 + 0.16) 1 = 0.86

DF 2 = 1 / (1 + 0.16) 2 = 0.74

DF 3 = 1 / (1 + 0.16) 3 = 0.64

DF 4 = 1 / (1 + 0.16) 4 = 0.55

DF 5 = 1 / (1 + 0.16) 5 = 0.48

DF 6 = 1 / (1 + 0.16) 6 = 0.41

DF 7 = 1 / (1 + 0.16) 7 = 0.35

DF 8 = 1 / (1 + 0.16) 8 = 0.17

Net income will be:

a) for the project as a whole

NV = (- 950) + (- 57.3) + 276.8 + 617.3 + 897 + 1159.2 +

1421.4 + 1683.6 + 1945.8 = 6993.7 c.u.

b) the customer of the project

NV = 400 + (- 323.3) + 10.8 + 237.3 + 561.3 + 867.9 + 1174.4 +

1480.9 + 1787.5 = 6196.7 c.u.

The net present value will be:

a) for the project as a whole

NPV == (- 950) + (- 57.3) * 0.86 + 276.8 * 0.74 + 617.3 *

0,64+897*0,55+1159,2*0,48+1421,4*0,41+1683,6*0,35+1945,8*0,31=

b) for the customer of the project

NPV = 400 + (- 323.3) * 0.86 + 10.8 * 0.74 + 237.3 * 0.64 +

561.3 * 0.55 + 867.9 * 0.48 + 1174.4 * 0.41 + 1480.9 * 0.35 + 1787.5 * 0.31 = 2555.9 c.u.

A positive value of net present value is considered to be a confirmation of the feasibility of investing funds in the project.

The internal rate of return (IRR) is such a positive number E, at which the project's net present value turns to "0".

To assess the efficiency of investment projects, the IRR value must be compared with the discount rate E. Projects with IRR> E, have a positive NPV, are effective. Projects with IRR<Е, имеют отрицательный NPV - неэффективны.

IRR is determined by selecting the value of the discount rate and graphically (Fig. 1) and (Fig. 2).

Let's calculate the net present value at different discount rates for the project as a whole:

at E = 16%, NPV = +2421.78 c.u. at E = 40%, NPV = +304.66 c.u.

at E = 20%, NPV = +1848.60 c.u. at E = 50%, NPV = -53.16 c.u.

at E = 30%, NPV = + 878.32 c.u.

According to the graph shown in Fig. 1, and by selection we determine the internal rate of return for the project as a whole. IRR ranges from 45 to 50%. IRR> E and NPV> 0, therefore, the project is efficient.

Rice. 1. Dependence of NPV on the discount rate for the project as a whole

Let's calculate the net present value at different discount rates for the project customer:

at E = 16%, NPV = +2555.7 c.u. at E = 150%, NPV = +319.27 c.u.

at E = 30%, NPV = +1394.5 c.u. at E = 180%, NPV = +314.9 c.u.

at E = 60%, NPV = +595.32 c.u. at E = 210%, NPV = +315.99 c.u.

at E = 90%, NPV = + 397.6 c.u. at E = 240%, NPV = +319.1 c.u.

at E = 120%, NPV = +337.9 c.u. at E = 270%, NPV = +323.0 c.u.

Thus, the equation NPV (E) = 0 has no roots, then the internal rate of return for the project customer does not exist.

Rice. 2 Dependence of NPV on the discount rate (for the customer)

Return on investment index (ID) - the ratio of the sum of the elements of the cash flow from operating activities to the absolute value of the sum of the elements of the cash flow from investment activities. It is equal to the ratio of NP to the accumulated investment volume increased by one:

ID = 1 + BH / Σ I n (4)

When calculating ID and IDD, either all capital investments for the billing period, including investments in the replacement of retired fixed assets, or only the initial capital investments made before commissioning can be taken into account. In our case, we take into account the initial capital investment.

Thus, the return on investment index will be:

For the project as a whole:

ID =

For the customer:

ID =

Discounted Cost Profitability Index - the ratio of the amount of discounted cash inflows to the amount of discounted cash outflows (in absolute value):

IDDZ = NСF (inflow) / NСF (outflow) (5)

Let us find the discounted cash inflows and discounted cash outflows (taking into account the discount factors calculated by formula (3)).

For the project as a whole:

400*0,86+1350*0,74+2300*0,64+3250*0,55+4200*0,48+5150*0,41+

6100 * 0.35 + 7050 * 0.31 = 13038.8 c.u.

950+(-457,3)*0,86+(-1073,2)*0,74+(-1682,7)*0,64+(-2353)*0,55+

+ (- 3040.8) * 0.48 + (- 3728.6) * 0.41 + (- 4416.4) * 0.35 + (- 5104.2) * 0.31 = -10617.0 y .e.

IDRS for the project as a whole =

For the customer:

discounted cash inflows will be:

400+400*0,86+1350*0,74+2300*0,64+3250*0,55+4200*0,48+5150*0,41+

6100 * 0.35 + 7050 * 0.31 = 13438.8 c.u.

discounted cash outflows will be:

950+(-723,3)*0,86+(-1339,2)*0,74+(-2062,7)*0,64+(-2688,7)*0,55+

+ (- 3332.1) * 0.48 + (- 3975.6) * 0.41 + (- 4619.1) * 0.35 + (- 5262.5) * 0.31 = -11832.9 y .e.

IDDZ for the customer =

IDDZ> 1, which means that the project is effective both as a whole and for the customer.

The index of profitability of discounted investments is equal to the ratio of NPV increased by one to the accumulated discounted volume of investments:

IDD = 1 + NPV / PVI (6)

The discounted investment profitability index will be:

For the project as a whole:

IDD =

For the customer:

IDD =

IDD> 1 means that the project is effective.

The payback period is the period of time during which the current net income becomes non-negative. So, the payback period for the project as a whole and for the customer is equal to the 2nd planning interval.

Thus, based on the results of calculating all indicators of the efficiency of investment projects, it can be concluded that this project is effective both for the project as a whole and for the customer.

Therefore, being the consumed part of the investment, it cannot be a means of measuring the efficiency of investments. Thus, the definition of the effectiveness of investment projects using the new methodology is unreliable. Differences in the indicators of the economic efficiency of investment projects according to different methods are characterized by the results shown in Table 1 on average for all 36 projects. Table 1 ...

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