An example of an investment project with calculations of its effectiveness

What it is

An investment project is a well-founded step-by-step program for implementing an idea. It states:

• justification of the feasibility of investments, importance for society;
• business payback time;
• the required amount of funds.

This is not just mathematical calculations. The investment project describes specific ways to achieve results. Design and estimate documentation is often used as an attachment.

The main goals of the business plan for the investment project

Objectives of the investment project:

1. For a production investment business plan, prove the need to invest finance at each stage of the technological process.
2. When the investment business plan is commercial, the focus is on net income in trading operations (from goods, finished products to services and property rights). Therefore, the goal is to provide the most detailed description of actions that will lead to maximum profit in real conditions.
3. If the business plan is research or scientific and technical, the goal is to show all stages of development, implementation, and operation of the innovation process, to justify every ruble of invested funds.
4. The purpose of the financial investment project is to develop measures to preserve and increase capital in the securities and derivatives market.
5. The goal of a social investment business plan is to achieve benefits for society in the fields of healthcare, culture, education, sports, etc.
6. The purpose of environmental projects:

• improving environmental performance of production;
• reducing the toxic impact on the environment;
• commissioning of environmental facilities.

Example of objectives of an investment business plan

An investment business project is a combination of legal and financial documentation reflecting the economic benefits of investments in a specific object. The investment concept must contain design and estimate documents, as well as a detailed action plan for the expenditure of funds. Often, developers use an example of an innovative project with calculations and, using it as a basis, create their own.

When developing an investment project, you need to perform certain activities:

• Justify your business idea.
• Explore an example of the project's potential to realize all the invested funds.
• Develop and approve project documents.
• Conclude all necessary agreements.
• Provide the project with finances and resources.
• Commission the facility and launch the production cycle.

Any example of an investment business has several features. They are important for the investor and must be well developed. The most significant among them are :

• Example of cost estimation. Any investment plan can be presented in the form of a specific amount of money.
• Payback. During the implementation of the business plan, it is important to recover all costs.
• Time cycle. Profit can only be made after a certain amount of time has passed.
• An example of a project idea should be expressed as concisely as possible, in a maximum of five sentences.

Classification

Investment projects are:

1. Depending on the direction - production, scientific and technical, commercial, financial, environmental, social.
2. According to the degree of mutual influence - independent, alternative, complementary.
3. By implementation time - short-term (up to a year), medium-term (up to three years), long-term (over three years).
4. According to the scale of implementation - global, national economic, large-scale, local.
5. According to the time structure of cash flow, investment projects are divided into ordinary (first investments, then return on invested funds) or extraordinary investment projects (investments and cash flows in random order).

Example of a contribution: content and structure

To assess the effectiveness of an example of an investment idea, as well as its significance, it is necessary to develop a business plan. It should reflect the attractiveness of the project, consider examples of implementation, difficulties in implementation, as well as solutions to problematic situations. The information contained in the business plan should be presented as clearly, competently and reliably as possible.

It is undesirable to overload the text with technical terms and details. Descriptive phrases should be replaced with numbers, and information should be systematized using tables with graphs. The structure of a business plan may differ depending on the example of a specific project and is not regulated by regulations.

There are several important content elements that it is advisable to include in the descriptive part.:

• Title page. Contains the name of the document, information about the creators, and also indicates the place and time of its creation.
• Table of contents. The main sections with corresponding pages are listed.
• Summary. Contains information about the enterprise and its scope of activity. Here, as an example, the main goals and advantages of the investment plan are noted. If it has shortcomings, then it is important to note how to eliminate them. This part of the plan should be brief in order to attract the attention of potential investors in a short time.
• An example of a description of the enterprise and its products. The chapter is intended to cover the status of the entire industry as well as the specific company developing the project.
• Disclosure of the investment concept. As an example, goal setting and advantages are indicated, as well as data on the volume, competitiveness and specifications of the products planned for release are given. You should also indicate examples of the main stages of implementing the project.
• Research and analysis of the market situation. Investors are offered materials that contain information about the product’s place in the market and the structure of the target audience.
• Example of a marketing plan. Contains a description of the methods by which it is planned to achieve the required sales volume.
• Production plan. Here it is necessary to justify examples of the production capabilities of an investment idea for the production of high-quality products in the required volumes within a specified time frame.
• Examples of potential risk assessment and insurance. This paragraph talks about expected problems during the implementation of the project and possible ways to overcome difficulties.
• Finplan. The section gives examples of assessing the economic potential of a company and allows you to plan its activities from a financial perspective.
• Organizational plan. Contains a description of the organizational structure of the enterprise with details of divisions.
• Conclusions. The final paragraph, in which the final results for the project are presented from an investment perspective and its essence.

If necessary, the business plan may have additional sections.

Content

The investment plan can be detailed, no less than 100 pages long, with appendices (project documentation, market valuation of real estate, etc.). Small projects are 10–15 pages.

For any investor, important points of the investment plan:

1. The scale of the facility's activities. This requires a complete analysis of financial and economic activities.
2. Personnel, raw materials and technical support.
3. The volume of invested funds and the break-even point of the investment project.
4. The volume of attracted capital (with additional calculation of loan repayment).
5. Minimizing possible risks.

Additionally, it is advisable to include forecasts in the investment project:

• inflation indicator;
• changes in exchange rates;
• price hikes;
• taxes, benefits, distribution of payments during the implementation of the investment project.

There are no strict requirements regarding what to include or not in an investment project. But the more fully the economic environment is reflected, the higher the attractiveness of the project.

Formal requirements for the plan

Approximate structure of an investment plan accepted in business practice:

• title page;
• summary;
• review of the economic state of the industry;
• finished product release plan;
• market analysis, marketing plan;
• organizational matters;
• risk, methods of minimization, insurance;
• financial plan;
• investment strategy;
• economic efficiency assessment;
• applications.

The main emphasis should be on the financial part of the investment project, giving a clear answer: when and how the invested funds will be returned.

Description

A resume is the very “lure”, the bait that lures an investor. This:

1. A short story about the essence of the project.
2. A brief but vivid description of the main points of the business plan (demand, forecast, project cost).
3. Conclusion (facts of the future success of the enterprise).

You need to try to write a description in such a way that there is no thought: “Ah... another dreamer,” but there is a desire to read and help with money.

Alternative implementation

The structure of the investment project can be designed differently. It is impossible to say that the option discussed above is the only correct one. As an alternative, the following can be suggested:

1. Company.
2. Its conceptual essence.
3. Capital investment plan (this also includes permitting and technical documentation, costs for deploying a support network, etc.).
4. Date of manufacture.
5. Implementation period.
6. Questions with materials and components.
7. Sales routes.
8. Personnel plan.
9. General costs.
10. Financing.

So which structure should you choose? It should directly depend on the specifics of the investment object itself, the scope of sales of its goods and services, that is, take into account factors that will affect the success of its implementation.

Stages

I admit, it takes some courage for a person far from business to do something outside of his comfort zone. So, the stages:

1. Preparation. Decide what industry you want to start a business in. You can do this while lying down. Along the way, remember all your friends and relatives who are good at mathematics.
2. Development stage. There are plenty of textbooks on “How to write a business plan” on the Internet. The main thing is to think through and calculate every step. Creating an investment plan encourages meticulousness and tediousness.
3. Implementation stage. We meet with bankers, suppliers, partners, sign documents.
4. Implementation stage. We are finally opening! Let's start working. We find out that almost everything written in the business plan is a blatant lie. We make adjustments and move on.

Evaluating the effectiveness of investment projects

It’s a common situation when out of 10 business projects, 1–2 succeed. The investor’s task is to choose from several investment plans that meet the criteria:

• feasible purely technically;
• does not contradict current legislation;
• meets environmental safety requirements;
• the most profitable (with the same net income, investment projects require different cash injections, and the risk is different).

Assessing the effectiveness of an investment project is based on a cash flow forecast using:

• net present value;
• profitability index;
• internal rate of return;
• payback.

Do not forget to include the inflation index and discount price of capital in your calculations - then the results will be more accurate.

Calculation of economic efficiency

A quick assessment of an investment project is provided by the PI profitability index. The formula is simple:

PI = NPV (+)/NPV (-) = (NPV + |IC|)/|IC|, where NPV is discounted income (with a plus) or costs (with a minus); |IC| – the amount of invested capital taking into account inflation. If:

• PI >1 – the project is profitable;
• PI<1 – the project is unprofitable;
• PI=0 – what was invested was returned.

The advantages of this method are speed and more accurate assessment. It never happens that money is allocated and it stays within the budget. Unforeseen expenses are bound to arise.

I will show the calculation of net discount value and economic efficiency assessment using an example.

Additional conditions of the investment project:

• life time 3 years;
• inflation – 5%;
• discount rate – 8%.

NPV = (-700)/(1+0.05) 0.5 + 300/(1 +0.08) 0.5 +600/(1 +0.08) 1.5 + 400/(1 +0 .08) 2.5 = 470.12

PI = (470.12 +700)/700 = 1.67

PI indicator >1 – implementation of the investment project is profitable.

Of course, there is a special financial program for such calculations (FinExpert, etc.), but you can use the usual Excel.

Financial model of an investment project in Excel

Compiled for the projected payback period.

Main components:

• description of the macroeconomic environment (inflation rates, interest on taxes and fees, required rate of return);
• projected sales volume;
• projected costs for attracting and training personnel, renting space, purchasing raw materials, etc.;
• analysis of working capital, assets and fixed assets;
• sources of financing;
• risk analysis;
• forecast reports (payback, liquidity, solvency, financial stability, etc.).

For a project to be credible, all data must be confirmed. If an enterprise has several income items, then the forecast is prepared separately for each.

A financial model is a plan for reducing risks when investing. Detail and realism are a must. When drawing up a project in Microsoft Excel, follow the following rules:

• initial data, calculations and results are on different sheets;
• the calculation structure is logical and “transparent” (no hidden formulas, cells, cyclic links, limited number of array names);
• the columns correspond to each other;
• in one line – formulas of the same type.



Where to start compiling

I recommend practicing on a small object, but doing everything as carefully as possible: what if the result of the calculations (quick return on investment) requires immediate implementation! To begin with, we are looking for an area of ​​investment that is attractive to us (knowledge in this area is welcome).

I have a hobby: home-made sausages, boiled pork, and smoked products. Therefore, for my proposed business, I will need a mini-workshop or building that can be converted to meet business requirements.

I look through advertisements for commercial real estate for sale. I stop at 5 objects. Next I will calculate an individual business plan and choose the best one.

Deciding on the investment amount

Second stage: approximate estimate of the required amount. In my case it's:

• costs of purchasing (including registration) of a workshop;
• purchase of missing equipment, raw materials for the smokehouse (chips);
• costs of raw materials (meat, casing, twine, clips, molding mesh);
• costs for permitting documentation;
• fare;
• wage fund.

There is an important nuance here: the entire investment amount will not be needed at once. I break the receipt of funds into several stages.

We set investment terms

I expect to reach the break-even point in 2 years. But I have an ambitious plan. During this time, I plan to open a company store (optimal forecast). Or I’ll focus on contracts with distributors and direct deliveries to local restaurants.

Determining a comfortable level of risk

The Bank of Russia reduced the discount rate. And this indicates a decrease in the inflation rate. The market situation is favorable - it’s time for a novice investor to start.

I calculate 3 indicators of net present value for an optimal, real, pessimistic scenario (what if the product does not enter the market). I carry out statistical calculations (standard deviation, etc.), choose the optimal scenario.

Total:

• 5 real objects viewed;
• responses were received from the bank regarding the terms of the loan;
• results of the conversation with the owners - confirmation of installment payment (leasing);
• there is already a backbone of the company - smoking specialists;
• 5 investment projects have been calculated.

My choice: a workshop with refrigeration units and ovens. The smokehouse will have to be mounted separately. I will use borrowed funds.

Examples of investment plans

My friends became the owners of an electrode production plant. First there was an investment plan, for which the bank issued a loan with deferred payment (loans for business are considered on individual terms).

At the same time, the guys agreed with the owner of the plant on financial leasing (lease with the right to buy at the residual value). It took two years to become full owners.

Another example of a successful investment plan is natural dairy products. Full cycle:

• number of cows;
• mini-workshop;
• sales of products.

It is noteworthy that the money was issued by the state. A grant (free subsidy) was received for the investment project.

Another example. My good friends have opened a small hotel and are engaged in “green tourism”. Initially, they relied on authenticity. Household items from the 15th to 18th centuries were combined very successfully.

We placed our bets on daily master classes:

• how to milk a cow;
• how to make cheese;
• how to bake bread (they teach everything: from malt sourdough, hand grinding on a millstone to lighting the oven, planting a loaf);
• how to make pottery.

Add here hiking, horseback riding, round dancing around the fire, fishing, apiary. And people are coming. In the summer we organized a camp for children, and in the winter – a ski school. But we started with a half-abandoned house in the village, the money for the investment project was a bank loan.