Methods of assessing the effectiveness of investments based on discounted cash flows - Английский язык - Презентации

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Methods of assessing the effectiveness of investments based on discounted cash flows

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TopicTopic : Methods of assessing the : Methods of assessing the effectiveness of investments effectiveness of investments based on discounted cash flowsbased on discounted cash flows • 1. The nature and importance of the evaluation of investment projects • 2. The processes of compounding and discounting • 3. Methods of assessing the effectiveness of investments based on discounted cash flows • 4. Simple (traditional) methods of evaluation of investment projects • www.ARXIV.UZ

• The Investment project - a complex action on realization of the capital investments in order to obtain certain benefits in the future. • The Investment project - a project, where all actions are described with the position in which financial, material and non-material sources are invested to the object and get expected results. www.ARXIV.UZ

• Investment project first of all, must aimed at achieving development such kind of priority industries of the country as oil and chemistry industries, transport and communication, power engineering, mining and processing sectors, construction, agrarian sectors and tourism. www.ARXIV.UZ

• Implementation of investment projects contribute to improve of production processes in the country, they are required to improve the quality of domestic products and to increase exports, etc.; • Investment projects provide the basis for: accelerating scientific and technological progress, updating equipment and technology for the production of competitive products; • Implementation of investment projects helps to create new jobs and to solve the problems of employment of the population and so on.www.ARXIV.UZ

• In general understanding, performance is called the degree of achievement the best results with the least costs. • The effectiveness of the investment project is regarded as a category, reflecting the compliance of the investment project to the objectives and interests of the participants. For different members of the project, the efficiency can be just different. Financially realizable project can be at the same time ineffective for its participants. www.ARXIV.UZ

• Implementation of the investment project and the effectiveness of participation in the project should be checked using target prices, taking into account inflation when assessing the effectiveness of the project, and the currencies in which these investment projects are carried out. • Indicators of efficiency used in order to: • - Estimate benefits of the project or participation in it; • - Identification of the boundary conditions for effective implementation of projects; • - Assess the risk associated with the project; • - Assessment of project sustainability; • - Economic evaluation of the results of selecting one of alternative projects (project options), or select a group of independent projects from a given list with a limited amount of financial resources. www.ARXIV.UZ

In an analysis of the effectiveness of investments are mainly oriented to the following indicators: • The need for funding; • Net income; • Net Present Value; • The index of profitability; • Discounted profitability index of investment; • Internal rate of return; • Payback period. www.ARXIV.UZ

The main sources of information of data analysis of the investment are accounting and reporting: • the balance sheet; • "Profit and Loss“; • "Statement of Cash Flows”; • Information on the financial status of the organization; • the data of corporate planning and forecasting. www.ARXIV.UZ

• The investment process accompanied by a cash flow. Cash flow of investment project - cash receipts and payments for the implementation of the investment project, determined for the entire billing period. • Receipt of funds on the account of an organization called the inflow or positive cash flow. Payments of cash called outflows or negative flow. • The difference between the inflow and outflow of funds over a period forms the balance. The balance seen as a positive result from the project, and it is called a pure flow . www.ARXIV.UZ

From investment activities: Sale of assets during and after the project, the revenue from the reduction in working capital From operational activities: sales revenue, as well as other and non- operating income and, including the revenue of funds invested in additional funds From financing activities: investments of its own (equity) capital and borrowed funds: grants and subsidies, loan funds, including the issue of enterprise their own debt securities Cash Flow Inflow Outflow From investment activities: capital investments, the cost of commissioning, the liquidation costs at the end of the project, the cost of working capital and funds invested in additional funds From operating activity: production costs, tax From financing activities: the cost of return and loan servicing company and iss

The process by which an initial amount of investment and the interest rate income from them, in financial calculations called compounding process. In financial practice common with the task of reverse accrued interest: given the amount of FV, which the organization plans to get some time t, to determine the amount of funds invested under the PV given interest rate. In these cases we say that the sum of FV discounted. The process of interest accrual and retention called as a count and deducted interest as discount . www.ARXIV.UZ

Real Processes Future The initial amount Interest rate Accretion Refund an amount The reduced amount Discounting Refund an amount Discounts raten n n n k FV k FV PV ) 1( 1 ) 1(     FV = PV (1+k) n www.ARXIV.UZ

Task # 1. The company needs to choose the most effective way of investing for 10 years. The first is the company may sell the supermarket for 500 thousand US $ and put money to the bank deposit at 15% per annum. The company may lease the supermarket for 10 years and receive annual net rental income 195 thousand US $. Task # 2. Select the best way of investing 120 thousand US $ on deposit for one year. The choices are: a) the bank pays 23% of income on a quarterly basis ; b) the bank pays an income of 30% every four months ; c) the bank pays 45% income twice a year ; g ) the bank pays 120% of annual income . www.ARXIV.UZ

In world practice designed several In world practice designed several methods of the evaluation of methods of the evaluation of investment projects, All methods can investment projects, All methods can be divided into two groups:be divided into two groups: • Methods of assessing the effectiveness of investments based on discounted cash flows • Simple (traditional) methods of evaluation of investment projects www.ARXIV.UZ

Methods of assessing the effectiveness of investments based on discounted cash flows are: • Net present value (NPV); • Profitability index (PI); • Internal rate of return (IRR); • Discount payback period (DPP); www.ARXIV.UZ

Simple (traditional) methods of evaluation of efficiency of the investment projects are: • Payback period (PP); • Annual coverage ratio (ARR). www.ARXIV.UZ

Evaluation of efficiency of the investment projects Financial Economic B alans - Sheet ( form № 1 ) Financial coefficients Payback period Report about profit and loss ( form № 2 ) Cash Flow ( form № 4 ) Simple ( Statistic ) methods Methods based on discounted cash flows Annual coverage ratio Net present value Profitability index Internal rate of return Discount payback period www.ARXIV.UZ

Net present value (NPV)Net present value (NPV) • Net present value (NPV) - the net present value of the difference between the amount of cash flow generated by the investment project, discounted to their present value and the discounted sum of all costs required to implement this project. The method is based on two assumptions: any company seeks to maximize its value and different time period costs are unequal in value. • The Formula is as follows:             n t t t t t I d CF orNPV I d CF d CF d CF NPV 1 0 0 2 2 1 1 ) 1( ) 1( ... ) 1( ) 1(  If NPV> 0, the project is acceptable, the value of the company is increased by this amount.  NPV = 0, the project is neither profitable nor unprofitable.  NPV <0, the project is not accepted, unprofitable. www.ARXIV.UZ

Profitability index (PI)Profitability index (PI) • Profitability index (PI); • which measures the extent to which increases the value of the company based on 1 dollar investment. • The higher the PI, the greater the returns of each sum invested in the project. Due to this the figure is very handy when you select one project from a number of alternative, having approximately the same NPV. • The Formula is as follows: • or0 1 / ) ( I d I CF PI n t t t           , ) 1( / ) 1( 1 1                    n t t t n t t t d I d CF PI  If PI > 1, the project is acceptable.  PI = 1, the project is neither profitable nor unprofitable.  PI < 1, the project is not accepted, unprofitable. www.ARXIV.UZ

Internal rate of return (IRR)Internal rate of return (IRR) • Internal rate of return (IRR) - is the value of the discount rate at which NPV equals zero. There are 2 ways to find IRR: • - Calculate it using the equations of calculation of the present value; • - To find it in the table of coefficients cast • Procedure for determining the IRR can formally express this equation that should be solved with respect to k:0 ) 1( 0 1       I d CF NPV t t n t        n t n t t t t t d I d CF 1 1 ) 1( ) 1( This figure indicates the expected profitability of the project and, therefore, the maximum relative level of costs that may be associated with this project. For example, if the project is fully financed by a commercial bank loan, the value of IRR shows the upper limit of the allowable l

Discount payback period (DPP)Discount payback period (DPP) • Discount payback period (DPP) – determines the recovery of the investment required for the period of time over which the investment will pay off discounted income derived from the project. • Under the payback period refers the length of time. During which the sum of discounted future income will be equal to the amount of money invested in the initial period of time.) ( 0   DCF I DPP • The Formula is as follows: www.ARXIV.UZ

Task 5 . An enterprise considers the feasibility of acquiring a new production line :  the cost of the line is 10 CU.; period - 5 years;  amortization on equipment is calculated on a straight-line depreciation method ;  liquidation value at the end of operation will supposedly 15 % of the cost of the production line;  costs of liquidation is 6% of the liquidation value . Possible annual sales respectively : 6.8 , 7.5, 8.4 , 8.0 , 6.4 CU. Costs for production (without amortization) in the 1st year of operation line 3.4 CU., followed by annual growth of 3%. Income tax rate - 24%. Financial and economic position of the enterprise is that the profitability of the advanced capital is 22 % , the "price" of capital - 19% . Management of the company does not intend to implement project

Pay-back period (PP)Pay-back period (PP) • Pay-back period (PP) – determines the recovery of the investment required for the period of time over which the investment will pay off income derived from the project. More precisely, under the payback period refers the length of time. CF I PP 0  • There are two approaches to the calculation of PP: • 1. If cash receipts over the years are equal, then the amount of the initial investment divided to the annual income: • 2. If cash receipts over the years are different, the payback period is defined as the cumulative value with increasing amount until it reaches the value of the initial investment. www.ARXIV.UZ

ConclusionConclusion • Thus, the methods of evaluation of investment projects are widely used in their comprehensive examination of how bank employees and other members of the investment activity. The first group of methods can serve as a basic tool for the analysis, the indicators are complementary and can be used for comparative purposes, but their use requires knowledge and skills in the field of project work, calculations require large computing, but reflect the real picture of the investment project. • The second group of methods is characterized by the simplicity of calculations, saving time and money on expensive software products, and their drawbacks are - lack of consideration of the time value of money and the impossibility of making a final decision to invest only based on them.

Thank you for your attention! www.ARXIV.UZ

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