The level of profitability of the enterprise is affected by how quickly and correctly the entrepreneur is able to make decisions regarding the investment of free cash. That is why evaluating the effectiveness of investment projects is so important. It aims to identify possible risks for them, as well as to predict the potential value of profits associated with the implementation.
Therefore, the evaluation of the
economic efficiency of the investment project involves the use of statistical methods that take into account the time factor, which is crucial for the investor. In order to compare the future level of income for the project and the necessary investments today, use the mathematical method of discounting. Assessing the effectiveness of an investment project takes into account factors that lead to the depreciation of money. The analysis calculates the possible effect of changes in prices for goods, increase or decrease in sales and
market demand for goods, as well as costs associated with the sale of products.
In this regard, the assessment of the effectiveness of investment projects takes into account four main factors, the calculation of which allows you to make a positive or negative decision in a particular case. These factors include the following:
net profit (NPV), rate of return and efficiency (PI), level of internal project profitability (IRR) and its payback period (PP).
Thus, the assessment of the effectiveness of investment projects begins with the calculation of the integral indicator of the level of net income, which is the difference between the future income of the project, discounted taking into account the time factor, and the necessary initial income. If this indicator is less than zero, then further consideration of such an investment does not make sense. Further, evaluating the effectiveness of investment projects requires calculating the efficiency of material use and the rate of return, which is the quotient of discounted future revenues and initial investments. If this index is less than one, then the project will never pay for itself, so you better not take on its implementation.
A more complete analysis requires the calculation of indicators of the rate of return and the
payback time
of the project. The rate of internal profitability is nothing but the
discount rate at which the amount of net income changes its sign from plus to minus, i.e. the project becomes profitable for the investor.
If the IRR is greater than the existing deposit rate or rate of return for an alternative financial transaction, then such a project must be accepted if its payback period is acceptable to the investor. This last condition is the key in calculating the payback period of investments. In general, PI should be less than the loan repayment period for this amount. If you invest your own funds, then you first need to think about how long you are ready to put them into circulation, i.e. when you need them again.