Evaluation of investment projects. Risk assessment of an investment project. Criteria for evaluating investment projects

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Successful business development often requires an entrepreneur to be able to attract investment. He can do this using a variety of tools. But in many cases, the investor's decision on whether or not to invest in a particular business will be based on an independent analysis, an assessment of the prospects of a particular project. What criteria may be involved in this?

Simplicity and complexity

Evaluation of investment projects, according to many experts, on the one hand, is associated with the multifactorial nature of the study of a business idea. At the same time, not only the properties of the concept itself can be taken into account, but also external factors - the state of the market, political processes, etc. The attractiveness of an investment project can be analyzed from the point of view of the personality of the entrepreneur, the level of elaboration of the financial plan. On the other hand, the whole essence of the relevant research, as a rule, comes down to answering a set of simple questions: will the project be profitable, how much, and when to expect income?

Universal criteria that would make it possible to unambiguously determine which particular analysis factors most clearly affect the future profitability of a business initiative have not yet been invented even among professional investors. However, the tools that can be used to conduct a qualitative assessment and analysis of investment projects in a wide range of specific solutions are quite accessible. What are the criteria by which modern investors evaluate the prospects of business ideas?

Key criteria

First of all, these are indicators that reflect the economic efficiency of investments. In the "formula" applicable to the calculation of specific figures for this criterion, there are two basic "variables" - the actual investment, as well as annual profit (sometimes expressed in profitability, that is, as a percentage). In some cases, the criteria for evaluating investment projects in this "formula" are supplemented by such an aspect as the payback period. That is, if we talk, for example, about the first year of doing business, then the investor may want to know in how many months the project will even come to zero. In general, we can say that the methodology for evaluating investment projects is tied to the time factor. The totality of the most important criteria from an economic point of view is analyzed in relation to specific periods.

If we consider the criteria for evaluating investment projects that are tied to time in more detail, then we canhighlight their following list:

• net present value;
• internal and modified rates of return;
• average rate and profitability index.

What is the advantage of these criteria? In almost all cases, the investor receives some rational numerical indicator, which can allow comparing several potential projects.

Optimal business model

Calculate the "variables" in relation to the "formula" that we have given above, or similar ones, the investor will try, analyzing, first of all, the business model proposed by the entrepreneur. That is, to study it for the availability of solutions that are able to provide the desired revenue stream in the period of time that suits the investor and other stakeholders. The principles for evaluating investment projects, based on the specifics of the business model, are based on the use of special methods for calculating key indicators. Consider them.

Calculation of indicators

In practice, the calculation of indicators, as a rule, is carried out using discounting methods. That is, the size of the weighted average capital is taken, or, if it is more suitable from the point of view of the business model, the average market return on similar projects. There are discounting methods based on bank rates. That is, the profitability of the project is compared, as an option, with the profitability when placing a similar amount of funds on a bank deposit. As a rule, such indicators for evaluating the effectiveness of investment projectsthey also take into account inflation or related processes that reflect the depreciation of assets that are especially important for the investor.

Now let's move from theory to practice. Let's consider how the evaluation of investment projects is carried out on the example of the analysis of some of the criteria we have identified above. Let's start with the payback period. This is one of the key indicators by which investment projects are evaluated. If, for example, the other criteria of the two compared business initiatives are the same, then preference is usually given to the one where the investments will “go to zero” faster.

Payback analysis

This criterion is the time interval between the launch of a business project (or a financial tranche of an investor's investments) and the fixation of an event when the total amount of accumulated net profit becomes equal to the total volume of investments. Some experts add one more condition - the trend that characterizes the exit of the business "to zero" must be stable. That is, if in some of the months after the start of the business, the accumulated profit became equal to the investments, and after some time the costs again exceeded the revenue, then the payback period is not fixed. However, there are analysts who do not take this criterion into consideration or take it into account within the framework of complex formulas with a large number of conditions.

In what cases is the investor inclined to make a positive decision based on the results of the analysis of the periodpayback? Experts distinguish two main cases. First, if, in relation to this period, a profit equal to or comparable to the minimum discount rate on an annualized basis will be received faster than in 12 months. That is, relatively speaking, if in 10 months of the project implementation the investor receives a profitability of 15%, equal to 15% per annum in the bank, he will prefer to invest in the project than to open a deposit, so that in the remaining 2 months, upon the fact of the release of capital, invest them somewhere else. anything. Secondly, the decision to invest in a business can be made if the investor considers the payback period acceptable, provided that the risk assessment of the investment project does not reveal factors that may affect the decrease in profitability. Such cases are mainly typical for economies with low inflation and low exchange rate volatility (and, therefore, with low interest on bank deposits) - then investors are more willing to consider investing in real business, paying more attention not only to profitability, but also to risks.

However, the evaluation of investment projects, based only on the payback period, is not enough. Mainly because it does not take into account the profit that can be received after the revenue exceeds the costs. Relatively speaking, it may well turn out that an investor, having received 15% and withdrawing capital, will miss the opportunity to earn another 30% over the next year.

Net present value

As we said above,indicators for evaluating the effectiveness of investment projects include such a criterion as net present income. It is the difference between the expected revenue and the initial investment in the business. That is, it reflects how much the total capital of the company can grow. The investor will give preference to the project in which the net present value for the same level of risk and for the same time period is expected to be higher. In this case, the payback period may not be taken into consideration at all (although this does not happen often).

Internal rate of return

The above indicators for evaluating investment projects are often supplemented by such a criterion as the internal rate of return. The main advantage of this tool is that the investor's profit can be calculated without taking into account the discount rate. How is this possible? The fact is that the internal form of return assumes compliance with the same discount rate, but at the same time, the amount of expected revenue will coincide with the amount of invested funds. Relatively speaking, an investor, having invested 100,000 rubles in a project, can be sure that he will receive at least the same amount after a given period of time, as well as a “surcharge” that suits him, based on the selected discount rate.

Modified Norm

Estimation of the investment attractiveness of the project can also be supplemented by such a criterion as the modified internal rate of return. It can be used if, for example, the net present value turns out to be negative (less than the chosendiscount rates), although other indicators are positive. For example, the usual internal rate of return. That is, relatively speaking, an investor, having invested 100 thousand rubles in a specific period of time, returns them with a surcharge of 15% after 10 months of business operation, however, after 24 months, the overall profitability of the enterprise is 1-2%. In this case, it becomes necessary to adjust the internal return, based on periods when revenue is not enough to meet the discount rate criterion, up to fixing a net loss. Thus, it is important for the investor to know: perhaps it is better for him to invest 100 thousand rubles on a return basis with interest in 10 months and gain 15 thousand than to send finances into circulation for 24 months and gain only 1-2 thousand rubles.

Profitability index

Economic evaluation of investment projects, as a rule, involves the inclusion in the analysis of such a criterion as the profitability index. This parameter allows you to determine how much, on average, all investors (or the only one, if the entire capital of the company is his) will receive after a specified period of time, based on the initial amount of funds directed.

Quality criteria

Above we have considered rational, quantitative criteria by which a financial evaluation of an investment project can be made. At the same time, there are also qualitative parameters. They are quite difficult to express in numbers (although in some aspects, of course, it is possible). But they are often no less important than the "formulas" that take into accountthe parameters we studied above. What criteria can be discussed? Experts identify the following set of them.

Firstly, the studied business project must be balanced, take into account the objective conditions of the market, meet the stated goals. Secondly, the intentions and expectations of the entrepreneur must be adequate to the available resources - personnel, fixed assets, sources of financing. Thirdly, a qualitative assessment of the risks of the investment project should be carried out to the proper extent. Fourthly, the enterprise should calculate the possible impact of the implementation of a business initiative on non-economic areas - society, politics at the regional or municipal level, the environment, analyze the image consequences.

Profit factors

Actually, where do the numbers come from that are substituted into the "formulas" to determine rational criteria on the basis of which an assessment of the investment attractiveness of a project can be carried out? There can be many sources of data. Let's try to determine what their nature might be. Experts identify two main groups of factors that affect the "variables" for "formulas" in relation to rational indicators - those that affect the size of profits, and those that affect costs. However, this classification is variable in that the same factor can simultaneously increase the income of one firm and at the same time complicate business for another. A simple example is the exchange rate of the ruble. Its growth is very beneficial for exporters - theirrevenue in the Russian national currency is growing. In turn, importers have to significantly overpay. In addition to currency trading, what other factors can be cited?

It could be an increase or decrease in capacity in a specific market segment, and as a result, sales volumes will increase or decrease. As a rule, this is due to the emergence of new players in the industry, mergers, bankruptcies, etc., in some cases - state policy. Another factor is the growth of the company's costs due to inflationary processes, changes in the market stability of suppliers and contractors. Another example is the impact of technological processes - the introduction of certain sales tools or in production can significantly affect the overall dynamics of revenue in a business. As a rule, newer equipment implies a reduction in the technological cycle. As a result, the product gets to the market faster. An estimate of the cost of an investment project with a more advanced production base may turn out to be higher than one that involves the use of equipment, albeit reliable, but more conservative in terms of the dynamics of output of goods.

Additional criteria

There are also indicators for evaluating investment projects, which are not so much of an economic nature as they are based, to a greater extent, on accounting principles. That is, it is studied how effectively accounting is established in the enterprise, how regularly the cost of fixed assets is assessed and re-analyzed, to what extent the document flow is effectively established.within the company and with partner organizations, government agencies.

Economic evaluation of investment projects at the macro level is also possible. That is, there is an analysis of a combination of factors that can affect the prospects of a business, based on the national or global market conditions. In some cases, the peculiarities of the legislation are taken into account. That is, if, for example, at the level of sources of law at the federal level, private adjustments are possible in terms of customs legislation (for example, a ban on the import of such and such goods from abroad), then the investor may consider it inappropriate to invest in such and such a business, despite the fact that the calculated profitability and profitability indicators are very promising.

Not only a financial assessment of an investment project can be carried out, but also, for example, an analysis of the personality of a business owner at the level of psychology, his connections, recommendations from other market players. It is possible that an investor makes a decision based on a personal relationship with a person who is considered as a candidate for business partners.

It is also possible that investment prospects will be assessed based on the recommendations of other market participants, industry ratings, the frequency of brand presence and company executives in the media. When it comes to serious investments, an investor, as a rule, uses an integrated approach in evaluating an investment project.