International investment projects assessment and its activities are growing rapidly, requiring businesses to increasingly sophisticated tools, knowledge and experience.

Assessing the attractiveness of investment projects in this process is becoming increasingly important, helping businesses make the right decisions.

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Methods and approaches to assessing the attractiveness of investment projects

In the context of investment consulting, international investment projects assessment has quantitative and qualitative aspects.

This depends, among other things, on the objectives of the investor, which may be expressed, for example, in obtaining the maximum possible income or the strategic expansion of the business and the conquest of new markets.

The criteria and methods used today in investment consulting are well developed and widely used in practice.

Despite the extensive financial tools, there is currently no unified decision-making system in investment engineering.

Different projects are evaluated by different teams based on specific methods, indicators and criteria, taking into account the specific sector and the interests of the project participants.

The use of advanced methods for international investment projects assessment involves the use of many formulas and criteria.

For example, when evaluating financing models for long-term projects, it is necessary to take into account the change in the cost of financial resources over time, possible scenarios for attracting resources, their legal regulation, etc.

At the same time, specialists in the field of investment consulting need to choose one of the best options based on the specific conditions of the project.

The financial literature indicates that any financing mechanism is based on the financial model of an investment project, which should be built with a thorough analysis of all factors affecting a particular project.

The model constructed in this way allows not only to calculate the result with the given forecast parameters and draw up financial reports, but also to choose the most suitable investment schemes and sources of financing in accordance with the established criteria and the wishes of investors.

Multi-criteria assessment of the effectiveness of investment projects

Financial methods for evaluating projects, including NPV and IRR methods, are aimed at calculating the financial effects from the implementation of an investment project.

The decision criteria based on them allow answering the question of whether the investment being assessed is financially beneficial for the participants. However, modern project performance analysis cannot focus solely on the financial effects of a project as measured by the cash flows it generates.

Traditional cost-benefit methods only provide information about the cost-effectiveness of a project in financial terms, so they do not include any non-financial benefits or losses (eg environmental or social).

They also do not take into account the external impacts of the project on other stakeholders. In fact, financial methods represent a major simplification compared to integrated methods.

The implementation of a large investment project (especially at the international level) can have negative consequences for the enterprise in unexpected areas of activity that the project does not directly affect. In other words, the project may disrupt other aspects of the company’s (region’s) activities, despite the fact that the project itself formally remains financially profitable.

A comprehensive analysis that takes into account the impact of the project both on other investments and on the ongoing activities of the participants is not possible using isolated methods of financial analysis. These shortcomings of the traditional financial approach to assessing the attractiveness of investment projects encourage researchers to look for new approaches based on both financial and non-financial criteria (multi-criteria approach).

In practice, the use of multi-criteria methods for international investment projects assessment is associated with certain methodological difficulties, such as:

• Choosing the right set of non-financial criteria. The choice of criteria for evaluating the attractiveness of a project should be comprehensive, taking into account organizational, financial, marketing, technical, resource and other aspects.

• Assigning adequate weight to all evaluation criteria. The problem of ranking is to assign a certain “weight” to the criteria objectively and reasonably, in accordance with their real value for a particular project.

• The procedure associated with making an investment decision based on one or more investment criteria that are significant for the participants.

So, multi-criteria methods take into account not only financial, but also other significant factors, including economic and social factors. It is more appropriate to use an integrated approach, since the term “profitability” is usually associated with an assessment of a financial nature.

Theoretically, two ways are possible.

Firstly, the assessment of the attractiveness of an investment project is made on the basis of a number of criteria, but the final investment decision is made on the basis of one chosen criterion, which is considered the main one.

Secondly, the assessment is carried out on the basis of several criteria with different “weights”, and then the decision will require a more complex approach.

Experts in the field of investment engineering and consulting can help the client understand the intricacies of analysis and evaluation, choosing the decision-making model for a particular sector, business and project.

Considering the scale of potential financial, reputational and other losses, cooperation with specialized teams seems justified, especially for large international investments.

Financial analysis of the effectiveness of investment projects

Large capital investments usually require the attraction of borrowed resources, since few companies have enough free funds that can be frozen for a long-term project with a high risk and uncertainty.

In addition, the cost of internal financial resources may be significantly higher compared to loans.

The high cost of internal resources can be explained by the lost profit from a more profitable alternative allocation of capital. Since the lost profit is difficult to determine for the conditions of the real sector, the company’s own resources can be considered “cheap” up to a certain limit.

Financial analysis of the effectiveness of projects, taking into account borrowed capital, should be carried out as part of a comprehensive assessment of the attractiveness of investment projects. It should be taken into account that the decrease in the weighted average cost of capital has a positive effect on the efficiency of the adopted project.

The discounted flow of expenses for servicing borrowed capital is determined by the following formula, increasing over time:

С_t – the amount of borrowed funds attracted at the beginning of the t period;
T_r – the total period of project implementation from drawings to the start of operation;
t – the period or step of discounting the flow of project costs;
r – the discount rate.

Finance teams should be aware that even during the operational phase there are significant capital costs that must also be taken into account during International investment projects assessment.

The discounted income flow is calculated by the following formula:

P_t – the net profit of the project for t period;
A_t – depreciation charges for the corresponding period;
Т_o – the expected lifetime of the facility.

It should also be taken into account that the discount rates in the respective calculations will differ. The reason for this is the time gap. Expenses are usually incurred by project participants at the beginning of the investment period, and financial results are calculated at the end of the period.

Given the above formulas, the net present value is calculated as follows:

The payback period of investment projects is calculated as follows:

PI_t – the index of profitability of this investment project.

An important indicator for assessing the attractiveness of investment projects is the margin of financial stability, which is defined as the ratio of retained earnings to gross profit from sales. It characterizes the company’s ability to attract the resources for the development of production.

The metrics used in equity performance analyzes are intended for operating companies and projects.

The following criteria are generally recommended to justify investment decisions:

• Dividends that can be received by project participants for the entire forecast period, taking into account the stage of engineering design, construction, commissioning of the facility and reaching the design capacity.

• Relative change in the cost of equity capital on debt, due to the influence of various external and internal factors.

Another important issue in international investment projects assessment and attractiveness of a project is the search for the optimal ratio of equity and debt capital required for the implementation of the project. This ratio is determined by the technical and economic characteristics of the project and the specific investment scenario. A decrease in the share of equity capital automatically leads to an increase in external borrowing.

The assessment of the potential profitability of capital investments is carried out on the basis of a set of two dozen financial indicators, the role of which varies depending on the industry, the specific purpose of the project and other factors.

The main criteria for the profitability of capital investments are:

• Return on equity, which is mathematically determined by the ratio of the company’s net income to the amount of assets, expressed as a percentage.

• Gross margin, which allows you to determine the amount of profit available to cover mandatory payments, as well as to trace the interaction of market factors such as price, production volume or demand for the project.

• The profitability of products sold is determined by the ratio of net profit to the cost of products sold; this indicator shows the income received per unit of product sold.

• The asset turnover ratio is determined by the ratio of the cost of products sold to the price of assets; it shows how effectively existing assets are used to increase sales.

A serious obstacle hindering the investment activity of a business may be limited access to financial resources.

This point is important to consider for specialists involved in investment design.

Limited access to capital requires companies to adopt a special strategy to ensure development in the face of limited resources and even forces them to abandon projects with a positive outlook.

There are three possible scenarios of limited financial resources:

• Relative limitation (short-term or long-term): funds not invested in the considered set of investment projects can be invested in another area with an acceptable return.

• An absolute limitation only exists when, at any given time, a company either does not have access to the necessary resources, regardless of interest rates, or is unwilling to invest more than a certain amount of funds.

A professional international investment projects assessment using advanced methods helps a business to answer the question of the viability of an investment and rationally use the available funds.

In the real sector, this problem deserves high priority, given the scale of potential losses resulting from poor decision making.

If you are in need of investment advisory, financial modeling or project management services, please contact the GATE LINK CAPITAL LP representative.

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