When making a decision to participate in an investment project, an investor or Bank needs to evaluate the main indicators of the project. These indicators include the performance of the investment project (IRR, NPV, PBP, DPBP, PI), as well as the amount of funding required and the cost of the investment project. However, if the method of determining the performance indicators of investment projects is well established and is used quite actively, then the indicator “cost of an investment project” is most often used on an intuitive level. This indicator reflects the absolute amount of costs required for the construction, launch and exit of an investment project for self-financing. The use of this indicator by investment specialists, company management, shareholders and investors is predetermined by the need for participants in the investment process to present the project’s capacity in terms of capital. Any Bank considering investment projects for the possibility of crediting them, through project financing or investment lending, imposes a mandatory condition for investing the minimum threshold share of the project cost (usually from 20%) of the project initiator. However, it is not clear what is meant by the project cost and what costs are included in this definition. This indicator is used either on an intuitive basis, or on the basis of our own development of the methodology for calculating this indicator, since there are no developed methods in the Russian scientific literature on investment.
First of all, it is necessary to give a precise definition of this indicator. The author offers the following definition. The cost of an investment project is the forecast or actual value of the total investment, current and other costs for research, design, construction, launch and exit of a single investment project for self-financing.
Based on this definition, we can identify the main principles of the methodology for assessing the cost of an investment project (hereinafter referred to as CIP or CIP):
Completeness-the methodology should take into account all investment, current and other costs of a single investment project before entering self-financing;
The structure of the m & a indicator-the methodology should allow you to identify and determine the list and amount of costs, as well as the list and amount of sources of financing for the investment project;
Verifiability-the methodology should include an objective way to assess the correctness of its compilation;
Balance-the methodology should be presented on the basis of the organization’s balance sheet and contain assets (costs, cash, etc.) and liabilities (sources of financing). The total cost and cash balance at the end of the m & a evaluation period should correspond to the total amount of funding sources;
Separate accounting of the investment project-the methodology should take into account the separate accounting of the investment project from the activities of the organization or other investment projects;
Practical applicability-the methodology should be applied in the practice of financial and economic planning and control of the investment project.
Based on the definition of m & a, the main principles of the m & a evaluation methodology and the practice of investment project management, the author of the article developed the following methodology for estimating the cost of an investment project.
The cost of an investment project is determined by the following formula:
CIP = L + M + N + O + P + Q + R, (1)
where CIP is the cost of the investment project;
L-permanent assets, excluding funds acquired through leasing. In this cost item, you must consider:
construction and installation works, including General contractor services, technical and design supervision,
purchased buildings, structures, land plots,
machinery and equipment, including delivery, customs duties, engineering and commissioning,
measuring and regulating devices and devices,
computer equipment, office equipment,
means of transport,
production and household inventory,
working, productive and breeding cattle,
other types of tangible fixed assets.
M — pre-investment costs. In this cost item, you must consider:
development of the construction organization project and estimate documentation,
salary and deductions of the project team before the start of the investment phase of the project,
registration and acquisition of copyright rights,
market valuation of a trademark or brand.
N-lease payments with an advance payment (taken into account before the project is self-financed);
O-deferred expenses (taken into account before the project is self-financed);
P — interest on loans (taken into account before the project is self-financed);
Q-increase in net working capital (taken into account before the project is self-financed);
R-covering cash gaps in operational activities (taken into account before the project is self-financed). In this article, you must consider the costs:
insurance of collateral items,
salary and deductions of the project team during the investment phase of the project,
In this case, the calculation of Q:
Q = S – T, (2)
where S — D of normalized current assets, T-D of normalized current liabilities
S = SU + SV + SW + SX + SY + SZ, (3)
where SU is the change in inventories of raw materials; SV — change the amount of unfinished products; SW — change volume of stocks of finished products; SX — changing amount of receivables; SY is the change in the volume of advances to suppliers; SZ — the volume change of the VAT as an asset;
T = TU + TV + TW + TX, (4)
where TU — change in the amount of accounts payable; TV-change in the amount of customer advances; TW – change in debt to staff; TX-change in debt to the budget (including VAT (as a liability), duties and excises, income tax and other payments).
In this case, the calculation of coverage of cash gaps in operational activities:
R = / RS-RT-RU-RV-RW|
If RS > RT + RU +RV + RW
To — R = 0 (5)
where RS — receipts without VAT and excise taxes; RT-operating expenses; RU-leasing payments; RV-commercial expenses; RW-tax payments.
It should be noted that leasing payments do not duplicate payments for equipment, since the economic nature of these operations is different. It is also important to note that the m & a methodology includes both cash flow indicators and changes in balance sheet items as part of the calculation of changes in net working capital. This is due to the fact that this method calculates investments in working capital accumulated total as the amount of necessary investments in its formation. In the case of calculating the cash flow to working capital by summing up the flows, we will get an inadequately inflated project cost due to the cyclical movement of capital in working capital.
It should be taken into account that this method of assessing m & a will be correct for industrial and commercial investment projects. For investment projects that are aimed at construction and further sale or receipt of rental income from built residential, commercial, office, shopping and entertainment and warehouse buildings and structures, the use of this method will not be completely correct due to the specifics of the project product, as well as the constancy of the amount of income received during the planning step.
Determining the methodology for evaluating the value of investment projects provides the company with a number of opportunities in the field of investment project management:
the ability to determine the cost of the project to determine the structure of financing by credit and financial institutions;
the possibility of implementing financial and economic control of the cost of the investment project (s).
Due to the fact that the investment phase, the investment cost of the project along with the deadlines of the investment phase are the key factors determining the future effectiveness of the investment project, the instrument for financial-economic control of investment project costs and the regulation of negative factors influencing the cost of projects is the most important in the company’s investment activities to the investment stage. This tool can be implemented on the basis of a report on the structure of investment expenditures and sources of funding for the forecast (current) and planned (based on the business plan that was used to make the decision to implement the investment project) m & a;
ability to assess the feasibility of participating in the project based on the m & a and the required amount of own funds;
ability to assess investment and financial risks due to changes in the volume or structure of funding sources, costs, and time gaps in the financing of an investment project;
the ability to set up management reports on investment projects in order to quickly and accurately provide information to financial and credit institutions and government agencies, as well as to assess and analyze the projected and actual payback of the investment project.
It is important to note that the developed methodology for estimating the cost of an investment project has confirmed in the practice of investment activity its compliance with the basic principles outlined above.