2. Analysis of efficiency of capital investments

Efficiency of investments into fixed assets depends on a set of factors among which the major are: return of investments, payback period of investments, inflation, profitability of investments for the entire period and on the separate periods. Stability of receipt of funds from investments, existence of other, more effective directions of capital investments (financial assets, currency transactions and other).

The investment which is carried out in the form of capital investments or financial investments, is the most difficult problem of financial planning and demands the careful analysis. Decisions in this area demand from the enterprise on themselves long-term obligations therefore it is necessary to rely on careful forecasting and detailed estimates of future probable conditions which are necessary for providing the economic profit justifying estimated investment expenses.

In the analysis of investment expenses need of a reasoning out of several alternatives is essentially important. The economic calculations connected with justification of investment decisions have to be based on projects and forecasts of the income and expenses. It is impossible to give in to temptation to extrapolate earlier being available conditions. Careful forecasting of probable opportunities is necessary.

The feasibility study on investments has to proceed (in that measure in what it is possible) from estimates of relative sensitivity of result to changes of such concrete parameters, as the price of a product, costs of raw materials, etc. The economic justifications connected with investment projects, inevitably face the solution of the following main questions:

• What additional funds be required to carry out the chosen alternative?

• What additional revenues will be created besides and over the already existing?

• What expenses will be added or eliminated on the basis of the made decision?

From the point of view of complexity of an economic justification all investment projects can be divided into two categories. The first category is the projects providing replacement of the worn-out or outdated equipment at release of profitable production. There is a possibility of the positive decision without detailed study, on condition of further expediency of production of similar production or application of technological process. Expenses which will be incurred by the enterprise, will be compensated by profit growth. It is possible to refer the so-called compelled investment projects which execution is obligatory during the work in this market to the same category. In such drafts of the requirement to standard of profitability are absent. It is possible to refer those projects which assume increase in production of already made production and expansion of a sales market or transition to release of new production and development of the new market to the second category of projects. These cornerstone at the heart of which estimates of increase in demand and production offer are, often demand adoption of the global concept of development and enterprise functioning as are often connected with considerable costs of rather big time interval, and, therefore, assume highly skilled processing of the presented data.

From the financial point of view the invested project unites two independent processes:

1) creation of production and other object;

2) consecutive receiving profit.

The specified processes proceed consistently or in parallel. In the latter case it is supposed that return from investments begins even until completion of process of investments. Both processes can have different distribution in time and it is especially important from the point of view of changes of cost of money in time.

The question of the sizes of demanded investments from the point of view of financial planning is reduced to the analysis and an assessment of economic appeal of the investment project.

To take out judgment about economic appeal of this investment project, it is necessary to coordinate among themselves three basic elements: the size of investments (investments) of the capital, working inflow of cash (or arrived) for the vital term of the project, i.e. the period of time during which it is supposed to get profit. Evolution of development of methods of the analysis applied to these purposes, gives the chance of a choice, both simple decisions, and more difficult, taking into account the advanced concepts of an assessment.

Methods of an assessment of capital investments

To simple methods of an assessment of economic appeal of the investment project carry: payback period of investments, profitability of capital investments, average profitability during project life, a minimum of the given expenses.

The payback period of investments pays off as the relation of the sum of capital investments to the size of annual profit. The number of the years necessary for compensation of initial expenses is result of such calculation.

Payback period not the best indicator of an assessment of profitability of option of capital investments. The main shortcoming it that payback is rather tolerant to duration of economic life of the project. Speed of compensation of money in this case tells nothing about profitability of the project.

Other lack of criterion of payback is its inapplicability to the projects having various distributions of inflow of money by years. The project, being characterized increasing or going-down inflows of money, won't be estimated properly.

Therefore, the criterion of payback has to be used carefully. Comparable estimates can be received only when comparing alternative warrants of the investments having identical term of life and identical structure of inflow of money. Otherwise application of criterion has to be accompanied by the additional analysis and calculations.

The return to a payback period is the indicator profitability of capital investments, that is initial expenses. This criterion possesses the same shortcomings, as a payback period as it also doesn't consider the term of life of the investment project. Profitability of alternative projects can be identical, and the period of life to differ for the one, two, five and more years. The third simple criterion of an economic justification of the investment project is the criterion of average profitability of the project. This criterion already considers the term of life of the investment project, though very much approximately.

Now the international practice of justification of investment projects uses the following generalizing indicators, allowing to prepare and estimate the decision on expediency (inexpediency) of investment of capital and the sizes of demanded investments:

- Net current value;

- Profitability;

- Internal and limit of profitability (efficiency);

- Period of return of capital investments (payback period);

- Maximum monetary outflow;

- Profitability point.

The indicator of net current value represents a difference of the cumulative income from realization of production, the project calculated during realization, and all types of the expenses summarized for the same period, taking into account time factor (i.e. with discounting of the income occurring at different times and expenses).

Justification of this method is that if total value of cash flows equally to zero, receipts from the project suffice only on return of the invested capital and receiving the minimum demanded level of profitability on this capital. If this total value positively, so the project provides more receipts, than it is necessary for service of a debt and payments of a minimum level of the income to founders and investors of the company. It is natural that in case of existence of several mutually exclusive projects, other things being equal, that follows, the indicator of net which current value is higher.

The internal limit of profitability (efficiency) is defined analytically, as such threshold value of profitability which provides equality to zero integrated effect calculated for economic term of life of investments. In practice most often this indicator is search of various threshold values of profitability. The project considers profitable if the internal effectiveness ratio isn't lower than reference threshold value.

Internal limit of profitability – such rate of discount at which the modern cost of all receipts from the project is equal to the modern cost of expenses for it. this method represents ranging of investment offers by use of concept of a limit of profitability of investments in enterprise assets

In effect, the rate of discount determined by the IRR method, represents a maximum level of cost attracted for implementation of the project of sources of financing at which the project remains profitable, assuming or full reinvestment of all received from implementation of the project of free money on a rate, IRR, or their use on repayment of debt of the project is equal. if the internal limit of profitability exceeds the cost of investments made in implementation of this project, the project can be recommended for implementation, otherwise implementation of the project is considered inexpedient. At the same time IRR value for this project can be treated as the bottom guaranteed level of profitability of the invested expenses as if it, taking into account risk of implementation of this project, exceeds the average cost of the capital in this sector of investment activity, the project also can be recommended for implementation.

The maximum monetary rest is the greatest negative value of the net current value calculated by the accruing result. This indicator reflects the necessary amount of financing of the project and has to be coordinated to sources of a covering of all expenses. It is reflected in the table of cash flows and can be allocated on graphics of a financial profile of the project.

The technique of an assessment of efficiency of investment projects includes some stages.

At the first stage comparison of an indicator of the general profitability of investment projects with average percent of the bank credit is made. The purpose of such comparison – search of the alternative, more favorable directions of capital investments. If settlement profitability of the investment project is lower than average percent of the bank credit, the project has to be rejected as it is more favorable to put simply money in bank under percent.

At the second stage comparison of profitability of investment projects with average rate of inflation in the country is carried out. The purpose of such comparison – minimization of losses of money from inflation. If rates of inflation are higher than profitability of the project, the enterprise capital to depreciate eventually and won't be reproduced. Return from the investment project has to be above average rates of inflation.

At the third stage comparison of projects on the volume of demanded investments is made. The purpose of such comparison – minimization of requirement for the credits, a choice of less capital-intensive option of investments.

At the fourth stage comparison of projects on payback periods is carried out. The purpose of such comparison – an option choice with the minimum payback period. The earlier investment expenses of the enterprise will pay off, the it is more at it than chances on next production expansion, increase of overall effectiveness of economic activity. The payback period of the investment project calculates taking into account time factor by division of the sum of investments into the size of annual profit on the project.

At the fifth stage the assessment of stability annual (monthly, quarter) receipts from implementation of the project is carried out. The criterion of an assessment at this stage is ambiguous. The investor the accelerated (slowed-down) process of receiving from investments by the beginning or by the end of the period of return can interest as process of return evenly distributed by years according to the project, and.

At the sixth stage comparison of the general profitability of investment projects without time factor, i.e. discounting of the income is carried out. The purpose of such comparison – a choice of the most profitable project without correction on temporary indicators. It is possible if the term of the project is small or the general state of the economy stable, steady.

At the seventh stage comparison of the general profitability of projects taking into account time factor is carried out. Future receipts and income are given to the prices of an initial stage, i.e. the capital of future period is reflected in the current (initial) cost.

For an example it is possible to consider two options of comparison of financial investments:

Example 1. Comparison of two options of realization of the same production.

Indicators	Symbols	Option 1	Option 2
sales volume	N	100	100
Prime cost	C	90	80
Capital investments	F	60	80
Profit	P	10	20
The given expenses	Z=C+F*RF	102	96
Payback period	T=F/P	6	5

In a reviewed example of the best option 2, as is at its use the given expenses minimum. To use criterion of a payback period in this case there is no need as at identical sales volumes its value is always proportional to the given expenses.

At financial investments instead of standard profitability the size of average loan bank percent is used. If received dividends there is more than this percent, the decision is considered effective. Otherwise it is more expedient to store means on deposit accounts in banks.