The adoption of any investment decision is inevitably connected with the assessment of the economic efficiency of projects. At the same time, the question often arises of which performance parameters and which criteria to give preference to. For example, which is more important: less risk or more efficiency? Therefore, the need for a systematic approach to solving this issue is obvious. We need objective methods for evaluating investment projects that take into account the economic, industrial, social, environmental and even political situation in each individual case. At the same time, speaking about environmental factors, one should not forget about the time factor.
The main methods for evaluating investments
One of the main requirements for an enterprise in market conditions is its ability to create added value, which includes employees' salaries, borrowed interest, profit, and minimum obligations to shareholders. If the enterprise does not possess such ability, then, having lost its competitiveness, it is forced out of the market.
The company is developing due to the growth of net income, which is formed from net profit (enrichment of the owner) and depreciation. Therefore, as an efficiency criterion, we can consider the value of the ratio of value added and capital that was spent on its creation, and the more (the services or products must be of high quality) the company has profit per unit of cost, the more competitive it will be.
Some methods of evaluating investment projects are based on this criterion of effectiveness. These include profitable (effective) and costly methods:
- The cost method is based on the analysis of costs associated with the project. They make it possible to evaluate the economic annual effect of this project in comparison with the alternative.
- The profitable, or effective, method is based on the analysis of the results from the investments made, that is, profit (additional, book, net), net present value (NPV), net production, annual economic effect. NPV is a reflection of the absolute result from investments, and PI (profitability indices) and IRR (internal profitability standards), including the efficiency ratio, are relative.
Time-sensitive methods for evaluating investment projects are divided into two main groups: static and dynamic.
Static methods (comparison of costs, payback, profit, profitability) are based on indicators using accounting estimates, for example, efficiency ratio, reduced costs, payback period, economic annual effect.
Dynamic methods (accrued value, annuity, discounting) use indicators that are based on net present value, internal rate of return, return on investment index, project payback period, that is, discounted estimates.
Methods for evaluating investment projects are also differentiated by the number of criteria used in the evaluation. From this perspective, assessment models are divided into normative and multivariate, and single- and multicriteria are distinguished in the methods.
In the multicriteria method of evaluating optimality criteria , in addition to project profitability, indicators such as: stability of capital growth, safety, risk, payback period, social and environmental efficiency also act. Since in normative models the assessment is carried out only on the basis of financial and economic indicators, multivariate modeling should be used with the multicriteria method.
Efficiency can be calculated at forecasted or current prices:
- at the initial stage of developing an investment project, calculations can be made at current prices;
- the effectiveness of the entire project as a whole is produced both at forecasted and current prices;
- To develop a financing scheme and evaluate the effectiveness of participation in it, forecast prices are used.