The purpose of an investment project is to generate profitability, wealth and value, to a great extent the success or failure of a project depends on its evaluation, that is to say the valuation of human, technological, material and financial resources; That is why the importance of a well-structured and evaluated project that indicates the correct allocation of resources, comparing the purchasing value of the future currency and determining the equilibrium point to know its profitability.
The following points are essential to evaluate a project:
1. Initial investment.
It is the amount that must be available to start a business, in other words, the amount of money with which the necessary resources will be obtained to keep the business running, waiting for the return of enough money in a given period of time. This initial investment comprises assets, costs and expenses.
2. Estimated income.
Through a market study or available data, annual sales and revenues can be estimated taking into account inflation and desired growth.
3. Fixed and variable costs.
It is important to consider all the necessary fixed and variable costs that a project must face. Variable costs are those directly attributed to the production process (raw material, direct labor, maintenance, packaging, etc.). On the other hand, costs that do not vary according to the level of production are considered fixed costs (sales manager, expenses of office, secretaries, etc.) The greater the number of data considered, the greater the accuracy in estimating costs.
4. The financing act:
It consists of obtaining funds to create and develop a business project. It is important to consider the debt capacity and insolvency risk; that the company has the capacity to meet periodic payments without compromising its short-term solvency or loss of the guarantees provided.
Based on the income statement, we can determine the debt ratio that measures the relationship between the amount of a company's own funds and the debts it has in the medium and long term, that is, the ability it has to cover such debts with your own capital.
Debt ratio = Liabilities / Equity
The optimal value is between 0.4 and 0.6. When it is greater than 0.6, it indicates that the volume of debts is excessive and increases the risk of insolvency; if it is less than 0.4, it may indicate that the company has excess capital of its own.
It must be taken into account that the interest and commissions for this financing will demand a higher return; the higher the financing percentage, the higher the discount rate, so all possible alternatives must be considered.
Some financial products are:
- LoanCreditMicro creditsPure leaseFinancial leaseFinancial invoicing
5. Profit and cash flow.
Net profit is the result of deducting all costs and expenses from the profits obtained. Estimation with a minimum margin of error will guarantee certainty in net profit since a project will not be successful if its costs are high and it is not capable of delivering profitability. reasonable.
The cash flow is the variation of the inflows and outflows of money and serves as an indicator of the liquidity of the bone company, its capacity to generate cash.
Taking into account the forecast of sales and costs we can determine the profits and cash flow in the following way:
Estimated Profit and Cash Flow
6. Balance point.
Break-even point is that point of the activity in which the total income is exactly equivalent to the total costs; it is the point of the activity in which there is no profit or loss. This point can be determined for units as for monetary values using the following formulas:
Balance Point - Formula
7. Financial evaluation.
Net Present Value (NPV). Money in the future tends to have less value due to the inflation factor because it reduces purchasing power. The net present value is the value equivalent to today's money of future years, the purpose is to compare the value of the initial investment (present) with the minimum required return (future). We can define as an acceptance criterion that any investment that obtains a positive net present value will create an increase in the value and wealth of the investor, but instead any investment that fails to achieve a positive NPV could subtract value.
Internal rate of return (IRR). With this indicator we can find a single rate or return on the project, an investment must be accepted if the IRR exceeds the required return, otherwise it must be rejected.
Profitability index (IR). It shows the ability of the company to generate profits; measures the amount by which investment increases in relation to each monetary unit.
Investment payback period (PRI). Calculate the time to receive the initial investment back. That is, the time necessary to reach the point of equilibrium where you do not win or lose.
Bibliography
- COSS BU, Raul. Analysis and evaluation of investment projects, second edition Mexico. Limusa 2005GITMAN, LAWRENCE J. and ZUTTER, CHAD J. Principles of financial administration Twelfth edition PEARSON EDUCACIÓN, Mexico, 2012MARCIAL CÓRDOBA PADILLA. Formulation and evaluation of projects. Second edition ECOE EDICIONES 2016
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Author:
María Guadalupe Jiménez Meyo
