Summary
This research seeks to materialize the main indications of the economic and social development strategy established in Cuba and approved at the VI Congress of the Communist Party of Cuba (PCC), to eradicate spontaneity, improvisation, superficiality, and non-compliance with plans, the lack of depth in the feasibility studies and the lack of comprehensiveness when undertaking an investment.
Its objective is to evaluate the financial economic feasibility of the investment project "7 ha of semi-protected crops" of the Agricultural Company "Máximo Gómez Báez".
To fulfill this purpose, a bibliographic review is carried out that contributes to the preparation of said research. A procedure was established that, through steps, constitutes a guide to assess the financial economic feasibility of the investment project studied, integrating analysis tools and methods that allowed achieving the research objectives. An analysis of the costs associated with this project and the future benefits is also carried out to demonstrate whether the investment project will be financially economically feasible.
Abstract
This diploma work is an effort by the authors to help materialize the main indications for the country's development strategy adopted at the Sixth Congress of the PCC, to eradicate spontaneity, improvisation, superficiality, failure plans The lack of depth in the feasibility studies and the lack of integrity in undertaking an investment.
Its objective evaluate financial economic feasibility of the investment project «7 ha of semi-protected crops» Agricultural Business Máximo Gómez Báez.
To fulfill this purpose a literature review contributes to the development of such research is conducted. Through a process of steps, is a guide to assess the economic and financial feasibility of investment projects were established, the tools and methods of analysis that allowed achieving the objectives of the research are also presented. An analysis of the costs associated with this project and future profits is also performed to show whether the investment project will be economically feasible and financially.
Introduction
The economic growth of a country depends to a large extent on technological development, the efficient use of resources, the productive use of the labor force and the realization of investment projects, socially and economically more profitable.
From the above, it follows, then, the need to develop and apply procedures that allow the formulation and evaluation of investment projects as an instrument to make decisions about their acceptance.
The evaluation of investment projects is a topic of great interest and importance, since through this process the advantages and disadvantages of allocating resources to a specific initiative are evaluated qualitatively and quantitatively. Investment project analysis is a method of presenting the best use of society's scarce resources. It depends on the correct evaluation of an investment project that its execution contributes to the medium or long-term development of a specific company and in general of the economy of a country.
The central objective of the feasibility study of an investment project is based on the need that each investment to be undertaken is duly based and documented, where the technical, environmental and financial economic solutions are the most advantageous for the country. On the other hand, it must guarantee that the plans for the execution and putting into operation of the investment respond to the real needs of the national economy.
That is why it is necessary to carry out feasibility studies to increase the economic development of those countries in the process of improving their economy.
In this sense, the municipality of Perico, belonging to the Matanzas province in Cuba, and making use of its designation, in conjunction with other municipalities in the country, to develop a pilot experience that achieves sustainable development, the Ministry of Economy and Planning (MEP) together with the Ministry of Agriculture (MINAGRI), chose the Agricultural Company "Máximo Gómez Báez" from a set of 10 companies in the country, because it has a total area of 14,492.29 hectares (ha), of which there are arable 5448.9 ha and livestock 8287.9 ha. Of the total cultivable areas, 1,722.28 ha have irrigation. It has highly qualified personnel due to its proximity to the Varadero Tourist Center.
Even though this company was selected to develop the investment project of 7 ha of semi-protected crops, it has not developed its financial economic feasibility study, so it is not aware of the possible benefits or losses that this investment project may generate in the future. This is precisely the problematic situation studied by the research presented.
In this direction, the general objective of the research is: to evaluate the financial economic feasibility of the investment project "7 ha of semi-protected crops" of the Agricultural Company "Máximo Gómez Báez".
Development
Procedure for evaluating the financial economic feasibility of investment projects.
This procedure is conceived to have a tool that allows evaluating the financial economic feasibility of an investment project. It is shown in figure 1.
Figure 1. Procedure for evaluating the financial economic feasibility of investment projects.
Procedure for evaluating the financial economic feasibility of investment projects.
Source: self made.
Step 1. Presentation of the background
Starting in the 1990s, the development process that had been running since the triumph of the Revolution was paralyzed in Cuba, the internal market was so affected that as a consequence all productive activity was abruptly depressed and more noticeable. in the territories that were not prepared to face this crisis. One of the most affected sectors was agriculture, as it is one of the most vulnerable and contributed with its contribution to the country's export, this falling on the lowest rungs in history, in turn causing an increase in food imports where products were going through a notable increase in their prices.That is why it is vitally important today to carry out investment projects in the agricultural sector that contribute not only to economic but also social development so that there is balance in society.
Current financial and economic situation of the company
The company's sales have a positive trend, although in 2009 they decreased by 5% compared to 2008. A similar situation occurred in 2010 with a 1.68% decrease in the sales level of the previous year, but This situation changes from the years 2011, 2012 and 2013, where sales increases of 138.93%, 163.58% and 101.27% respectively were registered in relation to the previous years.
Regarding the behavior of profits. The company recorded a loss of 559,161.00 Total Currency (MT) in 2008, from 2009 to 2011 had profits of 39,827.00 MT, 5,098.00 MT, 115,796.00 MT, respectively, but in 2012 the company had a large loss of $ 3979619.00 compared to the previous year. In 2013 it had profits of 773 994.00 MT.
For the years studied, the company did not have financial balance because it did not meet the three necessary conditions, although its situation improved from year to year.
- In 2012, the company had no solvency because for each peso of total liabilities it only had 0.95 pesos of total assets, insufficient to cover all of its obligations. Already in 2013, this situation improved since, for each peso of total liabilities, there were 1.27 pesos of total assets, which indicates that it was able to pay its obligations with its assets. In 2012, the company had no liquidity, because for every current liabilities weight had only 0.91 current assets pesos. This situation was unfavorable because it did not have the ability to pay in the short term. The analysis of working capital shows this; This was negative since current liabilities were greater than current assets by 574.88 MT. However, in 2013 it closed with 1.07 pesos of general liquidity, which was favorable for the company,since for each peso of current liabilities there were 1.07 pesos of current assets, covering all its short-term debts. Working capital was positive this year with a value of 333.32 MT, which implies that current assets were greater than current liabilities. The debt ratio in 2012 of 105.34% indicates that total debt exceeded total assets, while in 2013 it was 78.4% higher than the acceptable range, indicating that the company does not have stability between external financing and own financing, although in relation to the previous year this indicator decreased in 26.30%.which implies that current assets were greater than current liabilities. The debt ratio in 2012 of 105.34% indicates that the total debt exceeded total assets, while in 2013 it was 78.4% higher than the acceptable range, which indicates that the company does not have stability between external financing and own financing, although in relation to the previous year this indicator decreased by 26.30%.which implies that current assets were greater than current liabilities. The debt ratio in 2012 of 105.34% indicates that the total debt exceeded total assets, while in 2013 it was 78.4% higher than the acceptable range, which indicates that the company does not have stability between external financing and own financing, although in relation to the previous year this indicator decreased by 26.30%.
The financial-economic situation of the company from 2008 to 2013 is not favorable, because even when a certain recovery is observed in 2013, the financial-economic indicators do not show a consolidated situation. Some of the reasons that have influenced these results are: the effect of sustained rains that caused sowing of crops, low yields, lack of technological packages, fuels and fertilizers, even marketing problems. These reasons justify the need to propose ways of solution through the formulation and evaluation of the investment project that is characterized below.
Characterization of the investment project "7 ha of semi-protected crops" of the Agricultural Company "Máximo Gómez Báez".
Scope and objective of the project.
It will be held in the Máximo Gómez locality of the Perico municipality, in the Matanzas province, with a production capacity of 7 ha of vegetables.
The objective pursued by the investment project is to increase the levels of vegetable production from the implementation of an investment process of advanced agricultural technologies that allows covering the demand of the Varadero tourist pole and the self-sufficiency of the territory.
In this investment project, 2015 is considered as year 0 of the useful life of the investment project and ends in 2024, that is, it has a useful life of 9 years.
Conceptualization of semi-protected crops in urban agriculture.
Semi-protected crops belong to urban agriculture, which is one of the oldest and most traditional practices that exist in the world, especially in the regions of Asia and Europe where there is increasing urbanization.
Currently, there is no talk of agriculture but this variant is taken into account as one of the main alternatives for food production in cities. There are several factors that have contributed to awakening a growing interest in this modality in recent years, among which we can mention:
- Growing urbanization of developing countries Deterioration of living conditions of the urban poor Population wars and natural disasters that disturb food supplies from rural areas Environmental degradation Lack of resources causing food shortages Greater movement in favor of agricultural sustainability.
Taking into account the previous elements, urban agriculture is considered as a possible solution and sustainable alternative of agricultural production in modern times (FAO, 1996).
Future demand of the population and tourism
According to the analysis carried out by the direction of the planning of the economy of the territory, the demand for vegetables (includes protected and semi-protected) of the population tends to decrease due to migratory factors and it is expected that this will be fully satisfied throughout life. useful of the project, because it does not present high levels of growth due to the above.
The future demand for tourism will have an annual growth of 5% according to the study of the comprehensive development program of the Perico municipality, carried out by the Perico Municipal Administration Council (CAM). The semi-protected crops that will be most in demand in tourism will be: col 2274.8 Ton, lettuce 1222.7 Ton, Swiss chard 1327.5 Ton and carrot 1076.2 Ton. These four products, which constitute 24% of the total, will represent 77% of future tourism demand. The satisfaction of this demand will increase until reaching 81.45% in 2024; therefore, it cannot be fully satisfied.
Future offer to the population and tourism
From the first year and until the end of the program, a gradual increase in the supply of the product is expected, due to the growth in the sowing and irrigated areas and the improvement in crop yields, influenced by planned investments and the necessary supplies.
The comprehensive analysis of demand and supply allows us to identify that the total demand of the population and tourism, which will amount to 64,153.7 Ton, will be less than the total supply of 118,959.5 Ton. This surplus of 54,805.8 Ton will be sent to other destinations that may be: other provinces or exports.
Step 2. Determination of the variables for the economic and financial study
The production forecast for the years of the investment project's useful life will be the first variable to take into account, since it will forecast sales and operating costs.
The projected production levels of semi-protected crops, from year 1 to year 4 will increase until reaching the maximum installed capacity in year 5 and remains constant until year 9. To reach these estimated production levels, an investment that can contribute to fulfill these production plans.
The other variables to take into account for the economic and financial study are: total costs (total production costs and investment cost), sources of financing (internal and external) and the net cash flow.
Assumption: the exchange rate of the CUP and the CUC is one by one; their sum is the total currency (MT).
1. Total costs
Total costs are made up of production costs and total investment costs.
to. Total production costs.
Total production costs are calculated by adding operating costs, depreciation and financial expenses.
To determine the operating costs, the cost price per vegetable was taken into account, information provided by the company.
Assumption: cost prices will remain constant over time.
This cost price was multiplied by the level of production. This cost price includes direct and indirect costs. Does not include the contribution to social security or the labor force tax (these influence the result of the period as an expense) as established in Law No. 113/2012 of the Tax System for the agricultural sector set forth in the opinion of the MEP.
For the calculation of depreciation, Resolution No. 471/2012 of the Ministry of Finance and Prices (MFP) was taken into account, where the depreciation rates for each type of fixed asset are established.
Details for determining financial expenses are presented below; These were taken into account in the total cost of production.
Production costs tend to grow as production levels increase until the year 2024, although from the year 2020 where the maximum installed capacity is reached, these costs will grow but to a lesser extent.
b. Fixed capital
The fixed capital will be $ 1249900.00 MT (930800.00 CUP and 319100.00 CUC) and will be made up of the following accounts: the fixed investment of 1229600.00 MT (915100.00 CUP and 314500.00 CUC) and previous production expenses of 20,300.00MT (15,700.00 CUP and 4,600.00 CUC).
Graph 1.1. Behavior of production costs in MT.
Behavior of production costs in MT.
Source: self made.
c. Net working or turnover capital (working capital).
To determine the working capital and its increase from one period to another, the accounts that compose it were calculated, based on the following assumptions:
The accounts receivable cycle will be 35 days.
It means that it is estimated that the company takes an average of 35 days to collect from its clients. This is assumed taking into account the historical behavior of the collection cycle indicator.
The cycle of stocks is equal to the average of the cycles of the items that compose them as: raw materials and materials 30 days, production in process 90 days, finished production 10 days and spare parts 90 days.
Stock = (30 + 90 + 10 + 90) / 4 = 55 days.
The payment cycle will be 40 days.
It means that the company will take an average of 40 days to pay its suppliers, generating an adequate relationship with the collection cycle.
The cash cycle will be 50 days.
It means that on average the number of days that on average elapse from disbursement to the entry of cash is 50 days, taking into account a stock cycle of 55 days, a collection cycle of 35 days and a payment cycle of 40 days.
Current assets will increase from 2016 to 2020 and from this year it will remain constant until the end of the project's useful life. Current liabilities will also grow, although to a lesser extent than current assets.
The working capital will be favorable for all the years of the project's useful life, since its current assets will be greater than its current liabilities, which means that it will have the ability to pay to meet its short-term obligations. Although from 2020 it will remain constant until 2024. The increase in working capital will be equal to 715366.83 MT, which is the working capital necessary to start operations.
Graph 1.2. Working Capital Accounts.
Working Capital Accounts.
Source: self made.
d. Unforeseen
The contingencies were not taken into account when the pre-feasibility study of this investment project was prepared, but the authors of this research work consider that they should be included, because they are a reserve fund that can be used to cover possible omissions and price increases.
These contingencies must be 19644.49 MT (148814.86 CUP, 47630.09 CUC), a figure that constitutes 10% of fixed capital plus the increase in working capital.
Assumption: the investment will be made in a single year: 2015 (year 0).
Therefore, from all the calculations made, the total cost of the investment will be 2161793.51 MT (524128.27 CUC and 1637664.74 CUP).
2. Sources of financing
The investment project will be financed through a bank loan of 2161793.51 MT, an amount that corresponds to the total cost of the investment. The conditions established for its return are: interest rate of 7%, to be paid through the progressive amortization system, for 9 years. The total interest paid at the end of the useful life of the project will be 734452.27 MT, with a fixed annual fee of 362030.72 MT.
3. Cash flows for calculating updated profitability indicators
To calculate the cash flow, the net profit of the useful life years of the investment project was taken from the statement of financial performance and accumulated depreciation is added.
The projected gross sales were calculated by multiplying the projected production levels by the sale prices of each of the products.
Assumption: the sale price does not vary over time.
In 2015 and 2016 sales will be the same with a value of 1006933.68 MT, in 2017 they will double. In 2018 they will be 3549761.83 MT and from 2019 they will remain constant until 2023 with a balance of 4563918.26 MT.
The vertical analysis carried out between sales and the other items that make up the Statement of Financial Performance, showed that operating costs will represent 41.65% of sales, and depreciation will represent 7.07%, financial expenses 2, 71%, taxes 17% and available profit 31.57% of sales respectively
Cash flows will be positive for all the years of the investment project's useful life, because the cash inflows are greater than the outflows, which shows the liquidity of the project in the 9 years.
Step 3. Analysis of feasibility evaluation indicators of investment projects.
After calculating the cash flows, the Microsoft Excel tool was used to proceed with the application of the financial and economic evaluation methods to the investment project studied: VAN, TIR, PRD and ICB. The capital cost (k) to be used is 7%, which coincides with the interest rate, since the only source of financing is a bank loan.
Table 1.1. Results of the indicator analysis.
Results of the indicator analysis.
Source: self made.
Analysis of Net Present Value (NPV)
The NPV showed a positive value of 1,360,508.93MT. This means that the sum of the updated net cash flows for each year of the project's useful life of 3522,302.44 MT will be higher than the initial investment of 2161793.51 MT that would be made in year 0.
The determined NPV expresses that the investment project will generate considerable profitability and that the planned net cash flows will be sufficient to cover the initial investment required to reach the estimated production level.
Analysis of the Internal Rate of Return (IRR)
The IRR calculated by the NPV profile (figure 1.3) is equal to 17.00% and is greater than 7% of the capital cost of the investment project. For any IRR greater than the cost of capital, the project will have future benefits, as explained in Chapter II.
Graph 1.3. NPV profile of the investment project 7 ha of semi-protected crops.
NPV profile of the investment project 7 ha of semi-protected crops.
Source: self made.
The IRR indicates which is the highest discount rate that the studied investment project can bear so that it does not generate losses once its planning horizon is over. In this sense, the highest rate of return that the investment project "7 ha of semi-protected crops" can accept is 17%; that is, when the discount rate is above this value, then the investment will generate a loss.
Discounted Recovery Period Analysis (PRD)
The Discounted Recovery Period states that the planned disbursement for the investment of 2161793.51 MT will be recovered in a period of 5 years and 11 months. From this moment on, the investment will begin to generate its first benefits for the company (figure 1.4).
Graph 1.4. Discounted recovery period.
Discounted recovery period.
Source: self made.
Cost Benefit Index (ICB) Analysis
The Cost-Benefit Ratio yielded a result of 1.63 MT; that is, for each initial disbursement peso, the company will obtain 1.63 pesos of updated net cash flow and meets the acceptance criteria (B / C> 1).
In general, it can be affirmed that the investment project "7 ha of semi-protected crops" of the Agricultural Company "Máximo Gómez Báez" is feasible, since: it will achieve a future benefit of 1360508.93 MT, the initial investment will be recovered in 5 years and 11 months, it will generate a profit of 1.63 MT pesos for each peso invested and its internal rate of return will be 17% higher than the capital cost of the investment.
Step 4. Risk analysis.
After evaluating the investment with the previous methods, the risk associated with the use of the resources necessary to develop the investment project is analyzed with the sensitivity analysis, answering the following question: what would happen to the indicators of the project evaluation? investment that is studied, if it increases or decreases the Net Cash Flow (FNE), the cost of the initial investment and the cost of capital? Assumption: these variables experience a variation of ± 20%.
ü Sensitivity analysis of investment indicators for the variation of FNE by ± 20%.
If the FNE were increased by 20%, the NPV would remain positive with a value of 2,064,969.42 MT and the IRR of 21.21% would remain higher than the cost of capital. For each initial investment peso, the company would obtain 1.96 MT of updated net cash flow and the discounted recovery period would be 5 years and 4 months.
If the FNE decreases by 20%, the NPV, although it decreases in relation to the base NPV, remains positive with a value of 656,048.44 MT and the IRR would be 12.22%, above the cost of capital, which is 7 %. The project would recover in 7 years and 1 month and the benefit on the initial investment would be 1.30 MT.
ü Sensitivity analysis of the investment indicators for the variation of the initial investment by ± 20%.
If the investment cost increases by 20%, the NPV would decrease in relation to the base NPV but it will continue to be positive with an amount of 1056896.86 MT. The IRR will be 13.93% favorable for the company because it would be greater than the cost of capital. For each initial investment peso, 1.41 MT of updated FNE would be obtained and the investment would recover in 6 years and 8 months.
If the investment cost decreases by 20%, the NPV would be 1,664,121.00 MT and would increase compared to the base NPV. The IRR would be 21.02%, would generate a return of 1.96 MT for each peso invested and would recover in 5 years and 5 months.
Sensitivity analysis of investment indicators for the variation of the cost of capital by ± 20%.
If the cost of capital increases by 20%, the investment project would have future benefits of 1,110,931.89 MT, would have a cost-benefit ratio of 1.51 MT and would recover in 6 years and 3 months.
If the cost of capital decreases by 20%, the investment project would have future benefits of 1,635,955.88 MT, a return of 1.76 MT for each peso invested and would recover in 5 years and 9 months. The IRR in both cases would remain at 17%, since the FNE would remain constant as well as the cost of the initial investment.
For all the previously analyzed, it is concluded that the NPV is more sensitive to the variation that the FNE may have; therefore, great care must be taken with them, since a minimum error in the estimation and even more so, in the results of said variable when executing the investment, can cause large variations in the NPV.
Conclusions
The results demonstrate that the investment project "7 ha of semi-protected crops" of the Agricultural Company of Máximo Gómez Báez, is feasible from the economic-financial point of view. The development of this project would contribute to the increase in the production of these vegetables, to local development, import substitution, to the self-sufficiency of the province, would help to increase employment and increase the satisfaction of the offer of semi-protected crops in the Varadero Tourist Pole..
If this investment project is developed, the company could obtain a future profit of 1,360,508.93 MT, with an IRR of 17% greater than the cost of capital. In addition, for each peso invested, you could obtain 1.63 pesos of updated FNE and the investment would recover in 5 years and 11 months. Although they should be careful with changes that could affect the FNE, since the sensitivity study carried out showed that the NPV is more sensitive to variations in this variable.
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