Modern methods for evaluating investment projects

The adoption of any investment decision is bound to be bound with an assessment of the economic efficiency of projects. This often raises the question of which parameters of effectiveness, which criteria to give preference. For example, what is more important: less risk or greater efficiency? Therefore, the need for a systematic approach to resolving this issue is obvious. We need objective methods for evaluating investment projects that take into account the economic, production, social, environmental and even political situation in each individual case. At the same time, when speaking about the factors of the external environment, one should not forget about the time factor.

Main methods of investment valuation

One of the basic requirements for an enterprise in market conditions is its ability to create value added, which includes employee salaries, borrowed interest, profits, minimum liabilities to shareholders. If an enterprise does not possess such a capability, then, having lost its competitiveness, it is being squeezed out of the market.

The enterprise develops due to the growth of net income, which is formed from net profit (enrichment of the owner) and depreciation charges. Therefore, as the criterion of effectiveness, we can consider the value of the ratio of added value and capital that was spent on its creation, and the more there are (services or products must be of high quality), the enterprise has a profit per unit of costs, the more competitive it will be.

Some methods for evaluating investment projects are based on this effectiveness criterion. These include profitable (effective) and costly methods:

• The cost method is based on an analysis of the costs associated with the project. They provide an opportunity to assess the economic annual effect of this project in comparison with the alternative.

• A profitable, or spectacular, method is based on analyzing the results from the invested investments, that is, the profit (additional, balance, net), net present value (NPV), net output, annual economic effect. NPV is a reflection of the absolute result from investing, and PI (profitability indices) and IRR (internal rates of return), including the efficiency coefficient - relative.

Time-sensitive methods for evaluating investment projects are divided into two main groups: static and dynamic.

Static methods (comparison of costs, payback, profitability, profitability) are based on indicators that use accounting estimates, for example, efficiency factor, reduced costs, payback period, economic annual effect.

Dynamic methods (value added, annuity, discounting) use indicators that are based on the net discounted income, internal rate of return, the ROI, the payback period of the project, that is, at discounted estimates.

Methods for evaluating investment projects are also differentiated by the number of criteria used in the assessment. From this position, the models of assessment are divided into normative and multifactorial, and in the methods one- and multi-criteria are singled out.

In the multicriteria method of evaluation, the criteria for optimality, in addition to the profitability of the project, are also indicators such as: stability of capital growth, security, risk, payback period, social and environmental efficiency. Since in normative models the evaluation is carried out only on the basis of financial and economic indicators, multi-criteria method should use multifactorial modeling.

Efficiency can be calculated in forecasted or current prices:

• At the initial stage of the development of the investment project, settlements can be made at current prices;

• The effectiveness of the whole project in general is produced both in forecasted and current prices;

• For the development of a financing scheme and evaluation of the effectiveness of participation, forecast prices are used.