Project sustainability assessment (risk identification, project break-even level)

The stability of the project, its response to a variety of disturbing influences, can be considered as an indicator of the project's protection from the impact of various kinds of risks. Analysis of project stability allows to estimate the area of ​​possible deviations of the actual development of the project from the predicted one. We can say that the project is sustainable if the deviations do not go beyond certain limits. Depending on the factors influencing the project, internal and external sustainability are distinguished.

Internal sustainability of the project - such predicted values ​​of benefits and costs and the corresponding indicators of the state of the enterprise implementing the project, which ensure a consistently high result of the project operation. The achievement of internal stability is based on the principle of the possibility of actively responding to changes in internal and external factors.

The external sustainability of the project is determined by the stability of the economic environment in which it is carried out, and the ability of the project to influence environment(in the broadest sense of the word). It is clear that the impact can only be significant for large-scale projects. Internal and external resilience determines overall resilience investment project, which is embodied in the movement of cash flows, ensuring a constant excess of the risk The purpose of risk analysis is to provide the necessary information for making decisions on the appropriateness of participation in the project and provide for measures to protect against possible financial losses.

As a rule, risk analysis is carried out in the following sequence:

At the first stage, internal and external factors that increase or decrease a specific type of risk.

At the second stage, the analysis of the identified factors is carried out.

At the third stage, a specific type of risk is assessed from a financial point of view based on two approaches:

Determining the financial solvency (liquidity) of the project;

Determining the economic feasibility of participating in the project (the effectiveness of investing financial resources).

At the fourth stage, an acceptable level of risk is established.

At the fifth stage, the analysis of individual operations is carried out according to the selected level of risk.

If a positive decision is made to participate in the project under consideration, at the sixth stage a set of measures to reduce the risk is developed.

All factors influencing the change in the degree of risk can be divided into two groups:

objective - factors that do not directly depend on the company itself (for example, inflation, competition, political and economic crises, ecology, taxes, etc.).

subjective - factors that are directly related to a given company and directly dependent on the effectiveness of its management and organization (for example, production potential, technical equipment, level of subject and technological specialization, labor organization, level of labor productivity, etc.)

Along with calculating the break-even levels, to assess the sustainability of the project, it is possible to evaluate the break-even boundaries for other project parameters - the maximum price levels for products and basic raw materials, the maximum share of sales without prepayment, the maximum shares of compensatory products and the share of the investor in profitable products (for projects implemented by on the basis of production sharing agreements), etc. For such calculations, it is necessary to take into account the impact of changes in the corresponding parameter on different components of cash receipts and expenditures. The closeness of the design values ​​of the parameters to the break-even boundaries may indicate the insufficient stability of the project at the corresponding step.

Break-even boundaries can also be determined for each project participant (the criterion for reaching the boundary is the net profit of this participant turning to zero). To do this, it is necessary to determine how the income and expenses of this participant change when the values ​​of the parameter for which the boundary values ​​are determined change.

The stability of an investment project with possible changes in the implementation conditions can be assessed based on the results of commercial efficiency calculations for the base scenario of its implementation by analyzing cash flows. Included cash flows are calculated for all types of activities, taking into account the conditions for granting and repaying loans. For an aggregated assessment of the sustainability of the project, indicators of the internal rate of return and the index of return on discounted costs are often used.

The project is considered sustainable if the IRR value is sufficiently high (at least 25-30%), if the discount rate is not higher than 15%, no loans at real rates (exceeding the IRR) are expected, and the discounted cost return index exceeds 1.2. Project sustainability condition: at each step of the billing period, the amount of the accumulated balance cash flow from all activities (cumulative effect) and financial reserves should be a positive number. It is advisable that it be at least 5% of the sum of net operating costs and investment costs at a particular calculation step. The degree of stability of the project to possible fluctuations in the conditions of implementation can be assessed using indicators of the break-even boundaries and limit values ​​of such project parameters as production volume, price of manufactured products, etc. Such indicators are used only to characterize the impact of a possible change in project indicators on its efficiency and financial feasibility. The break-even limit of a project parameter for a certain calculation step is set using a coefficient to the value of this parameter at a given step, using which net profit in the project (at this step) is zero. The break-even level (critical break-even point) is determined for the project as a whole.

The assessment of the expected effect of the project, taking into account the quantitative parameters of uncertainty, is carried out in the presence of more detailed information about various scenarios for its implementation. In this case, the probabilities of the scenarios implementation and the values ​​of key indicators for each of the scenarios should be known. Under such conditions, it is possible to calculate a general indicator of the project's effectiveness - the expected integral effect (expected discounted income, NPV). Such an assessment can be made both with and without taking into account the project financing scheme. The purpose of the project financing scheme is to evaluate the possible parameters financial support project. It is designed to ensure the financial feasibility of the project and the effectiveness (positive NPV) of participation in it.

For the selected scenario, real inflows and outflows are determined for each step of the billing period Money and summary performance indicators. According to scenarios that emergencies additional costs are taken into account. When calculating the NPV for each scenario, the discount rate is assumed to be risk-free. The initial information about the uncertainty factors is again presented in the form of probabilities of individual scenarios or intervals of change of these probabilities. Thus, an approximate list of acceptable (following from the available information) probability distributions of project performance indicators is established.

Violation of the conditions of project feasibility is considered as a necessary prerequisite for terminating the project. At the same time, losses and incomes of project participants associated with the termination of its implementation are taken into account. The risk of project unfeasibility is expressed through the total probability of scenarios under which the conditions of its financial feasibility are violated.

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Monte Carlo Simulation

This method combines sensitivity analysis and probability distribution analysis of input variables. It requires the use of special software.

Using the method involves several stages. First, the probability distribution of the initial variables is set, let's assume revenues, costs and discount rates, as in our case. As a rule, continuous distributions are used, completely defined by a small number of parameters, for example, the arithmetic mean and standard deviation, as in the case of a normal distribution, or the upper and lower limits, as well as the most probable value in the case of a triangular distribution, etc.

After that, the simulation program randomly selects the value of each input variable, taking into account its probability distribution, and calculates NPV project for this option. Project managers specify the number of options to be evaluated (for example, 500 times). This will give 500 random values NPV, on the basis of which it is possible to calculate the expected values E(NPV), standard deviation σNPV and general rule estimate the probability of finding values NPV projects within certain boundaries.

Despite the certain visibility of sensitivity analysis, the method of scenarios, as well as simulation modeling, it should be borne in mind that after the completion of all computational procedures, these methods do not provide clear criteria for making a decision on the project. The analysis ends with the calculation of the expected values E(NPV) of the project and obtaining the distribution of random values NPV around the expected value. However, the methods do not provide a mechanism by which it was possible to determine how adequate the return of the project is, the measure of which is E(NPV), investment risk, estimated by the value σ ΝΡV. In other words, having received quantitative assessments of the risks of the project, the investor must ultimately make a decision on the feasibility of implementing the project.

Analysis of the limit level of stability

Limit indicators characterize the degree of stability of the project in relation to possible changes in the conditions for its implementation. One of the most important indicators of this type is break even, the meaning of which is to determine the minimum (critical) level of output at which the project (a specific project participant) does not yet incur losses, i.e. revenue is equal to the total cost of production. In other words, the break-even point is characterized by the fact that the volume of sales is equal to the volume of production, and the proceeds from the sale of products coincide with the total production costs.

When calculating the break-even point, it is assumed that production costs can be divided into conditionally constant (not changing when the volume of production changes) and conditionally variable, associated with a direct relationship with the volume of production. The breakeven point is determined by the formula

where IN EP - break-even point of production; A.F.C.- average fixed costs per unit of production; R– product price; AVC- medium variable costs per unit of production.

A project is considered sustainable if IN EP< 0,7 после освоения проектных мощностей. Если IN EP → 1, then it is considered that the project has insufficient resistance to fluctuations in demand at this stage.

If we examine the dependency IN EP from values A.F.C. And AVC, it can be seen that as the proportion of averages increases fixed costs A.F.C. in product price value IN EP increases with a fading rate. This means that with the growth of fixed costs (rent, utility bills, salaries for top managers, etc.), the sustainability of the project decreases.

But a satisfactory IN EP does not yet guarantee a positive value NPV the project being evaluated.

Break-even analysis allows you to determine the required volume of sales, providing coverage of costs and obtaining the necessary profit, as well as to assess the dependence of the company's profit on price changes, variable and fixed costs. The break-even analysis method is usually used when introducing into production new products, modernization of production facilities, creation of a new enterprise.

The advantages of this method should, first of all, include ease of use and visibility when planning profits. However, it should be noted that this method has significant limitations. In particular, it must be assumed that:

• the volume of production is equal to the volume of sales;
• fixed costs are the same for any volume of production;
• variable costs change in proportion to the volume of production;
• the price does not change during the period for which the break-even point is determined;
• the price of a unit of production and the cost of a unit of resources remain constant;
• in the case of calculating the break-even point for several types of products, the ratio between the volumes of manufactured products should remain unchanged.

The calculation of the break-even point becomes more complicated when evaluating a project that results in the production of several types of products: it must be taken into account that they have different prices and variable costs and, therefore, their contributions to cover differ. total costs. In this case, the break-even point depends on the share of each product in the mixed sales volume.

The method of calculating the break-even point becomes much more complicated if, with a change in production volumes, the value of costs changes non-linearly.

Measures to reduce the risk of an investment project

After all the risks in the investment project have been identified and their analysis has been carried out, it is necessary to give recommendations on how to reduce risks by project stages. The main principle of the mechanism to reduce investment risk consists in the complexity of its impact and economic feasibility. The main measures to reduce investment risk in the face of uncertain economic results include the following.

• 1. Redistribution of risk between the participants of the investment project.
• 2. Creation of reserve funds (for each stage of the investment project) to cover unforeseen expenses.
• 3. Reducing risks in financing an investment project - achieving a positive balance of accumulated money at each calculation step.
• 4. Collateral for invested financial resources.
• 5. Insurance - the transfer of certain risks to an insurance company.
• 6. System of guarantees - obtaining guarantees from the state, bank, investment company, etc.
• 7. Getting more information.

Analysis of emerging investment risks and skillful use of risk mitigation methods allow project participants to achieve their goals.

The effectiveness of investments is evaluated by a fairly large number of indicators. They are used by experts. For investors, a few of them are usually enough to make an investment decision. Below is the required list.

This indicator gives the investor information about what absolute value he will receive money for the whole.

To calculate it, you need to know the nature of the cash flows that the investment will generate and how they will change over time.

In the chart below, we can see how the total cash flow changes. The first phase of the investment, labeled "Pre-Production Period" in the graph, can be considered a one-time investment if it is made within one year. Or maybe as a process over time from a year or more. In this case, the calculation of the net present value of investments should take into account the changing cost of investments in the investment project, that is, it should be calculated with discounting at the discount rate r, which is determined based on the criteria chosen by the investor. The main criteria for choosing a discount rate can be called:

• cost of capital of the invested object;
• credit rate of banks in the financial environment;
• industry average return on capital for the invested object;
• profitability of financial instruments in the stock market;
• internal norm profitability.

Cash inflows to the invested object in the form of cash receipts NV are calculated as follows:

• CIt - investment for the entire life cycle of the project;
• CFt - cash receipts for the entire life cycle of the project;
• n - investment life cycle.

Here, cash receipts for the entire investment cycle does not include cash flows from operating activities and financial activities They are taken into account in the process of implementing the investment process.

For net present value calculations, cash flows are discounted at a rate of r.

The calculation of the net present value of the project at the preliminary stage of investment is carried out according to the formula:

• ICt - in the period from i=0 to T;
• CFt - cash flow from investments in the t-year;
• n is the duration of the investment life cycle;
• r - discount rate.

If investments are made at once, then the formula takes the form:

where ICo is the initial investment.

To simplify NPV calculations, the quotient of division

called the discount factor and, their values, for different r, are summarized in special tables, where you can easily determine the required coefficient for given conditions. These tabulated values ​​are easy to find on the Internet.

Indicator at the preliminary stage of investment:

• serves as a criterion for the expediency of investing in a given invested object,
• an estimated indicator when choosing options;
• an absolute indicator of the future return on investment.

At the same time, the indicator, when it is equal to 0, shows the marginal level of profitability at the lower limit, reflected by the chosen discount rate r. If they do not pay off, but if, the investment will bring the investor an increase in his capital. Obviously, the choice of discount rate affects the final result when deciding on investments.

The higher the efficiency of the operating capital into which investments are directed, the smaller the capital gain will be, all other things being equal. In other words, it is expedient to make highly efficient investment projects in highly efficient production.

For example:

• 1 investment object with a cost of capital at the level of 25%;
• 2 investment object at the level of 15%;
• Investment life - 3 years;
• The size of the initial investment is 60 million rubles;
• The industry average profitability of enterprises in this industry is 14%.

Income from investments:

1. For 1 object:
2. For 2 objects: 1 year - 27 million rubles; 2nd year - 33 million rubles; 3 year 35 million rubles.

For 1 object, the discount rate of 14% is unacceptable, since the investment project will reduce the cost of its capital, so it may not be lower than 25%. Calculate NPV at this discount rate: NPV = -60 + 27/1.25 + 33/1.5625 + 35/1.953 = -60 + 21.6 + 21.12 + 18.14 = 0.86.

For 2 objects: NPV \u003d -60 + 27 / 1.15 + 33 / 1.322 + 35 / 1.52 \u003d -60 + 23.47 + 24.96 + 23.02 \u003d 11.45.

The example shows that the same project for enterprises with different discount rates can be unprofitable and profitable. To eliminate the ambiguity of such assessments, relative indicators of the effectiveness of investment projects come to the rescue.

Discounted investment project profitability index

The discounted yield index is the ratio of all investment income, discounted at the rate of raising capital in investments over the life cycle of the project, to the size of all investments, also discounted by the time of these investments. The profitability index is designated as DPI (Discounted Profitability Index) and the formula for its calculation looks like this:

It is also obvious that the discounted index of return on investment must be greater than 0.

Return on investment index

For small investment objects with a implementation period of about a year or more, a simplified formula for the investment return index is used, which looks like this:

where ICo is the initial investment.

So for the previous example we get:

For 1 object = 60.86 / 60 = 1.014.

For 2 objects = 71.45/60 = 1.19.

In this case, the yield index confirms that object 2 is more profitable than object 1. The investor will prefer object 2, although the cost of capital of the investment object for object 1 is significantly higher and financial stability also higher.

Internal rate of return of an investment project

The internal rate of return is widely used in the evaluation of investment projects and in their analysis, it is designated IRR (Internal rate of return) . The mathematical expression for the internal rate of return looks like this:

IRR = r, with NPV = 0, or in more detail:

• CFt - cash flow from investments in the t-th year;
• ICt - investment flow in the t-th year;
• n is the life of the project.

That is, if income and investment are equal, the resulting rate is the lower limit of the rate of return at which investment is not advisable. If the resulting IRR is below the weighted average return on capital of the investee, the project should be abandoned.

In addition, the resulting internal rate of return can serve as a discount rate for cash flows in the calculation of indicators for evaluating investment projects.

When comparing several investment options, IRR serves as a selection criterion for a more effective option. The IRR indicator is expressed as a percentage, therefore, as a relative indicator, it is used to compare even projects of different sizes and with different life cycles.

The indicator is calculated by the method of successive approximation. The NPV(r) function is non-linear because the denominator in the above equation has a power function. Therefore, r close to NPV = 0 is determined, and r is selected in this range, at which the equation NPV = 0 is satisfied.

The graph below shows what it looks like:

There is a value of NPV≥0, on the graph and a value of NPV≤0, on the graph.

This calculation shows 25.88% for option 1, which means that the project must provide such an average rate of return for the entire life of the project, and since IRR> r, which we took equal to 25%, the project is realizable.

For option 2, 18%, the weighted average cost of capital is 14%, and the industry average profitability of enterprises in the industry is 15%. and can be offered to an investor for sale.

The modified internal rate of return is necessary when calculating the effectiveness of investment projects in which the profit from it is annually reinvested at the rate of the cost of the total capital of the invested object. In this case, the formula becomes:

where:

• MIRR is the modified internal rate of return;
• d is the weighted average cost of capital;
• r - discount rate of cash inflows;
• CFt - cash inflows in the t-th year of the project life;
• ICt - investment cash flows in the t-th year of the project life;
• n is the life cycle of the project.

Both indicators have a common drawback: cash inflows from investment activities must be relevant, i.e. throughout the process incremental. In the event of flows with different signs, the calculation of indicators will not reflect the real picture.

Investment project evaluation indicators include several simple and visual indicators that are widely used by investors, and the most common among them is the payback period of investments.

Payback period of initial investment

This indicator tells the investor about the return period to him initial investment.

The general formula for calculating the payback period is as follows:

Where:

• PP - payback period of investments;
• Io - initial investment in the project;
• t is the period for calculating the payback period.

If it is possible to determine the average annual or average monthly income from invested funds, then: where CFcr is the average annual return on investment.

This indicator is simple and clear, but does not take into account the change in the value of money over time.

If this factor is included in the calculation of the payback indicator, then it will be called the payback period of the initial investment, calculated taking into account discounted cash flows (DPP):

• CFt - cash flow from investments in the t-th year;
• r - the rate of discounting cash receipts.

From a comparison of these formulas, it is obvious that always DPP > PP.

There is another disadvantage of these indicators: outside the payback periods, cash flows can change at different rates and with same terms payback amount of accumulated cash flow may be different.

In other words, one cannot rely on this indicator in the case of comparing investment options, a mandatory absolute assessment of the accumulated cash flow over the life cycle of the project is required.

If you look closely at the formula for calculating the investment ratio, it is easy to see that it is reciprocal payback period:

If - the residual (liquidation) value of investments in the project, determined by selling property and equipment after its completion.

CFcr is the average annual cash flow from the project over the life of the project. This is especially evident when If=0. Then there is no need to take it into account in the formula, and it takes the form:

RR - payback period of the project.

All the above indicators characterize investments from an economic point of view. The investor is also interested in indicators characterizing the degree of risk of the investment project. These indicators include probabilistic estimates of the achievement of the parameters laid down in the investment project. Risk indicators are characterized by the mathematical expectation of risky events in a given range. Risk events are determined by analyzing the characteristics of the investee, such as the return on its capital, the financial stability of the investee, the turnover of its assets and the liquidity of capital. Economic efficiency indicators, together with risk indicators, form project indicators. Based on them, the investor makes a decision on the expediency of investing in a particular project.

Limit indicators characterize the degree of stability of the project in relation to possible changes in the conditions for its implementation. The limit value of the parameter for the t-th year is the value at which the net profit from the project is zero.

The main indicator of this group in relation to real estate projects is the break-even point (TB) - the level of physical volume of sales over the estimated period of time, at which the proceeds from the sale of products coincide with production costs.

Break-even analysis is necessary to determine the degree of riskiness of the project and is the identification of the volume of services that the company must perform in order to cover its current costs. That is, the break-even point is the minimum volume of production that ensures equality of sales proceeds and costs at a given price level and cost.

The break-even analysis within the work is carried out in two directions: from the point of view of ensuring the complete break-even of operating activities and from the point of view of the complete break-even of the project (taking into account compliance with the loan repayment schedule). In the second option, the amount of payments on the loan is added to the amount of fixed costs.

To confirm the sustainability of the project, it is necessary that the value of the break-even point be less than the values ​​of the nominal volumes of production and sales. The farther from them the value of the break-even point (as a percentage), the more stable the project. The project is usually recognized as sustainable if the break-even point does not exceed 75% of the total production.

The input data for the break-even analysis is revenue from the provision of rental services, total variable costs and fixed costs.

Rice. 5 - Break-even analysis of operating activities

Table No. 8 - Break-even analysis of operating activities

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