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Lecture notes, cheat sheets
Investments. Investment project (lecture notes)
Directory / Lecture notes, cheat sheets Table of contents (expand) LECTURE № 4. Investment project 1. Types and life cycle of an investment project Investment project is a program of activities through which effective capital investments are made for profit. The variety of investment objects is quite large. They differ in duration and volume of financial resources, scale, etc. However, each investment project consists of four identical elements: 1) settlement period - the period of project implementation; 2) net investment - the amount of costs; 3) cash flow - net cash flow from activities; 4) liquidation value - the demand and extraction of capital at the end of the economic life of investments. The need to consider this project depends on the balance of these four elements. The necessary information, prepared in advance for making a decision, is the primary task of the investment project. Its main method is a mathematically constructed scheme of the consequences of making appropriate decisions. According to this scheme, we look at whether the volume of investments is sufficient for a given economic entity, especially the impact on its current and prospective financial condition. Before making management decisions, it is necessary to carry out the planning or design stage, which will end with the development of an investment project. The investment project contains a list of assessments and indicators of its effectiveness for the entire period of existence - from the initial stage of development to full completion. General information about the project should include: 1) the direction of the planned production, the composition of the products; 2) information on the location of production; 3) information about the features of the technology and the content of the consumed resources, the system for the sale of manufactured products. Such a project is accompanied by documentation approved in the prescribed manner by standards (norms and rules). The investment project is also accompanied by a description of actions consistently performed in practice in terms of the timing of the investment. This part of the documentation is a detailed business plan of the company with detailed characteristics of the project, justification of its duration, implementation features, sources and directions of cash flows, etc. Much attention is paid to justifying the financial feasibility of the project, cash receipts are also taken into account, including revenue from product sales. (works, services), non-operating income, losses, all types of company payments, including capital investments, liquidation costs at the project completion stage, costs for increasing working capital (including depreciation funds), production costs, tax payments, wages fee, etc. The project balance is the balance of cash flow for an investment project, estimated by the difference between the inflow and outflow of funds both at each time period of the investment project, and in general. Also, the design materials should contain all information about its characteristics, both technical and technological and organizational. Its participants (including shareholders, creditors) should be indicated and a preliminary assessment of the feasibility of the investment project should be given, necessarily taking into account uncertainty and potential risks. The moment of reduction may not coincide with the moment of the beginning of the countdown. In this case, discounting is understood as reduction to all points in time. You should also take into account the indirect impact of the investment project on the activities of the enterprise, for example: an increase in taxes paid with an increase in sales or transportation costs. There are also opposite cases: for example, an increase in depreciation when investing in fixed assets, which will certainly lead to a decrease in tax payments. Temporary principle is the ratio of cash flows to the time scale. To conduct an investment analysis of a project, it is important to know when certain cash payments or receipts will occur. Based on assumptions, this principle can be found in the calculation of the "payback period of the project". But a simple calculation of the payback period does not provide complete information about the attractiveness of the project. When an investor decides to build or purchase equipment, it becomes necessary to compare the capital costs that are to be made now with the income that will be brought in the future. In order to make such a comparison, the enterprise needs to know how much future income is estimated today and what their size will be in the future. These questions can be answered by applying the time concept of the value of money. When analyzing investment projects, integral values of non-synchronous costs and results are used. The compared indicators refer to different times, so the key problem is the problem of their comparability. In general, the disparity in the costs and results of any financial operation at different times is usually manifested in the fact that receiving income today is considered more preferable than generating income tomorrow, and spending today is less preferable than spending tomorrow. The proverb "time is money" corresponds to our time, therefore, convenient models and algorithms have been created to bring the amounts of income and expenses related to different time periods into a comparable form. All components of the investment project can be expressed in monetary terms. There are a number of cash flow values that describe the process of implementing an investment project. The cash flow of an investment project consists of the following main elements: 1) taxes; 2) proceeds from the sale of products; 3) production costs; 4) investment costs. After the completion of the investment period and the beginning of the operating period, the amount of cash flow, as a rule, becomes positive. 2. Development of an investment project The investment cycle begins long before the start of the activities envisaged by the project, and ends long after its completion. In this sense, the concept of "investment cycle" is much broader than the concepts of "project life cycle" and "investment cycle". There are two phases of the investment cycle. 1. Pre-investment phase. It cannot be determined exactly, only approximately. At this stage of the project, marketing research and the selection of suppliers of raw materials and equipment are developed. Negotiations are conducted with future suppliers, legal registration of the enterprise is carried out, contracts are drawn up, etc., at the end of the pre-investment phase a detailed business plan for the investment project must be presented. Investment is carried out during the investment phase. During the investment phase of the development of the project, actions are taken: such as the purchase of equipment, construction, etc., which require much higher costs and are irreversible. In subsequent phases, the project is not yet able to ensure its development at its own expense. At this stage, permanent assets of the enterprise are formed, expenses are incurred for staff development and advertising campaigns. 2. Operational phase - starts from the moment of activation of the main equipment, acquisition of real estate, etc. In this phase, the start-up of the enterprise, the production of products or the provision of services begins. The duration of this phase affects the overall characteristics of the project. The longer it is, the greater the total income. A common definition of the life of a project is the materiality of cash returns from the point of view of the project participant. It is necessary to conduct a banking examination to grant a loan. The duration of the life of the project will coincide with the maturity of the debt, the further fate of the investments of the lender will not be of interest. Author: Maltseva Yu.N. << Back: Foreign investment (Capital outflow. Types of foreign investment. Ways and measures to attract foreign investment) >> Forward: Methods of financing investment projects
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