The investment project is the main document that determines whether investment capital is appropriate or not. In it the project is outlined consistently and step-by-step with its peculiarities, and also the financial data is presented related to its realization.
Classification of projects
According to the investment goals:
- projects with the purpose of increasing the volume of production;
- projects aimed at updating or expanding the product range;
- projects aimed at improving the quality of products produced / provided services;
- projects aimed at reducing the cost of production produced / delivered services;
- projects created to solve organizational, social, ecological and other problems.
According to the level of autonomy of implementation:
- investment projects, which depend on performance of other tasks of the enterprise (company) or projects.
- investment projects, which do not depend on performance of other tasks of the enterprise (company) or projects.
According to the terms of realization:
- short-term projects, with a period of execution being less than one year;
- medium-term projects, with a variable period of fulfillment between one and three years;
- long-term projects, with a period of implementation in more than three years.
According to investment resources:
- small investment projects (up to 100 thousand usd.);
- average investment projects (within the limits of 100 thousand – 1 million usd.);
- large investment projects (more than 1 million usd.).
According to the optimal financing scheme:
- investment projects provided with the help of internal finance;
- investment projects provided by means of a shareholder (initial or additional issue of shares);
- investment facilities provided by credit finance;
- investment projects, which include all or part of the financing methods above (mixed form of financing).
Variety of investment projects
Business has to deal with a rather large number of investment projects, depending on their characteristics and peculiarities. Significant differences are caused by the sphere (branch) of realization, production and resource scale, volume of financial resources, period of execution, etc. However, regardless of this, in the investment project there must be specified and conveyed the following four obligatory points:
- the settlement period (the term of realization of the project) – that is, the time during which the actions for fulfillment of the project are implemented;
- amount of expenses (net investment);
- estimated profit and benefits (net cash proceeds from the project’s execution);
- the liquidation cost (i.e. any release of finance at the end of the economic “life” of investments).
If you correctly analyze the interdependence of these four indicators, you can determine whether it is necessary to start realization of this project at all.
The initial stage of the analysis involves calculation of the time or period of the realization of the project.
It is necessary to proceed from the fact that investing in any project should be perceived as the unity of processes of investing resources and future income. These processes usually take place in different chronological frames (sequences).
Investment into real assets is usually observed an interval of investment processes.
Consistent and parallel flow of financial investment and income-earning processes can occur mainly when investing in financial assets. Also can occur at investment in technical re-equipment, reconstruction and scaling of already working enterprises. Undoubtedly, the turnover of investment resources, the possibility of quick management of working capital, liquidity of assets and the expediency of investment activity in general depends on the time sequence of capital investments and the profit gain.
The second stage of analysis of the investment project – determination of net investments – usually has two sides:
- the aggregate amount of the original cost based on the calculation;
- the value of any assets that are being released.
Their release is dictated by the decision to invest. In this issue, it is necessary to make an amendment to any changes in the amount of taxes paid. They, in turn, arise from the reporting of loss or profit from the sale of existing assets.
The third stage of analysis of the investment project is determination of net cash flow from investment. The net cash flow of the project is the dependence on the time of receipt of money and payments directed to the fulfillment of the project, and it is determined for the whole settlement period.
The fourth stage of analysis of the investment project is determination of liquidation value. Large-scale projects require significant capital investments. And only then will these expenses ensure the return of at least a part of these funds.
Determining the liquidation cost of the project allows the funds to be accounted for, that can be obtained from sale of the remaining equipment, as well as from the release of working capital, which is relevant to the project.
Structure of the business plan of the investment project
The business plan provides a full feature of the possibility of realization of the project. There is no hard-established form of business plan, but the document should specify:
- the economic essence of the project;
- resource (e.g. optimal staff), technical (material), technological and financial support;
- marketing activities;
- the level of reliability of the project and the action (measures) to improve it;
- providing financing.
The business plan thus has:
- to orient the managers of the whole vertical in the stages and forms of realization of the project;
- interested in participation in the project of counteragents from outside.
Methodological recommendations for the development of investment projects provided in the above-mentioned classification are distributed depending on their types.
Small investment projects, which the company can provide for financially at the expense of its own sources, can be justified by a short list of sections and indicators. For such a report (analysis) the following is enough: purpose of the project, its basic characteristics, necessary financial funds, efficiency indicators from the invested finances, as well as the algorithm (calendar plan) of performance.
If the financing of investment projects involves external sources, i.e. medium and large projects, then full analysis is carried out and full substantiation is made in accordance with national and international requirements. Such substantiation of projects is dictated by the logical structure, which has a standardized character in the countries with developed market economy. The difference from this “classic” structure depends only on the forms of real investments and branch peculiarities of the functioning of projects.