Summary
The present work was carried out in a Cuban state company in the province of Villa Clara, Cuba, based on the proposal of its managers who wished to carry out the evaluation of an R&D area as an investment project carried out by they, from the economic-financial perspective and where the feasibility of said R + D + i project was analyzed. In this work, economic and financial tools were used that allowed evaluating the feasibility of the project carried out by the entity, tools known as the VAN, PERD and TIR were used, which allowed demonstrating the non-feasibility of the project.
Introduction
In Cuba, the economic and financial feasibility studies of investments have achieved considerable importance due to the scarcity of both material and monetary resources, it is a necessity to define where they are used and at the same time yield enough to recover what is invested over time. short and that produce benefits that revert in society.
In a Cuban entity with state capital, located in the province of Villa Clara, its administrative council considered its particularities and pointed out that the creation of an adequate space to guarantee the implementation and development with systematic effectiveness of strategic management of innovation and technology, created a direction within the possibilities offered by the country's business improvement to dedicate itself to those functions and for this reason they called it as the direction of Research, Development and Innovation (R + D + i).
The R&D department is made up of seven higher-level specialists who generally fulfill a group of specific professional competences related to the activity that each one carries out.
Organizational Chart of the Organizational Structure of R + D + i
Figure # 1 Organizational Chart of the R + D + i Organizational Structure
Source: self made.
This area was conceived as an independent direction to give strengths to the company and position it as one of the vanguard with respect to other entities of the same sector in the province and in Cuba, contributing to the minimization of costs, reduction of working times used in carrying out projects, studying and developing programs, software and other intangible technologies to introduce them to the company and commercialize them.
In correspondence with the above, the cost of this investment and its possible contributions were not valued in the entity. Long-term benefits were estimated, but based on qualitative indicators, with the quantitative analysis completely omitted, there is no financial accounting system that defines how to record the ideas and expenses of research and development of new products and technologies.
Development
General theoretical criteria on the activities and objectives of the R&D areas
After characterizing this area, we proceeded to review the bibliography that would provide the theoretical elements in order to meet the objective set of evaluating the R & D & I area as an Investment project.
The challenges of the present, oblige companies to achieve high-quality projects based on customers, in this sense (Bautista, 2006) reflected that accelerated development in science and technology, the capacity achieved by man, the policies of organizing projects and the advancement of information and communication technologies (ICT) have created the necessary conditions for the application of the Integrated Project Management (DIP).
In correspondence with the above, it also considered that the R&D process is present in one way or another in all production and / or service companies, needing adaptations to its own characteristics, commonly called tailored suit meaning its driving motor for the generalizations of inventions and innovations that make it possible to maintain the image, competitiveness and excellence in organizations.
For Bautista, R&D is a process of science and technology in which a set of areas of the functional structure participate that requires, making use of the project, a harmonious development between technologies, resources and integral management systems for comply with the objectives set, within the time limits set, within the budget and with the required quality.
It refers that, to determine what is necessary to do, it must go through a process of collective evaluation, participation of experts, selection of the project manager and his team and the integration of areas, (Economics, Computing, among others). To achieve this purpose, it is necessary to integrate into the project the strategic, quality, cost, accounting and logistics management supported by ICT.
(Pavón and Hidalgo, 1997), based on the consideration that innovation is oriented to the development of products or processes for commercial purposes, stated that the execution of these projects has a high degree of uncertainty and risk associated with its different phases. To minimize it, it is necessary to take into account such critical aspects as, deviations from the planned schedule, use of suitable materials, adjustment of the design to the production possibilities to reduce costs, organization of R&D, and marketing strategies.
The referenced authors considered that a fact that must be taken into account in any company is that the treatment of expenses incurred in R&D is an investment that seeks profitability, highlighting that from this point of view they can be classified into:
- Replacement investments, aimed at substituting equipment for certain aging processes or products. Modernization investments to improve business productivity. Innovation investments, aimed at the development of new products or processes and in which category investments in R&D may be included. Investments expansion, aimed at increasing productive capacity.Strategic investments, which may be defensive in nature such as those seeking vertical integration in the entity or offensive seeking to establish a subsidiary abroad.Investments of a social nature, for the improvement in working conditions.Investments of public interest.
All these investments have a single objective that is summarized in the search for improvement in business profitability, where the characteristics that the decision to invest has to be deduced are found here: integration of said decision in the general policies of the company, rigorous calculation of profitability and recognition of the risk involved in any decision to invest.
The pressure exerted by competition has led companies to face a costly and unending cycle of new product development, increased diversity of orders and demand for greater innovative effort. It is obligatory to apply project selection techniques that make it possible to identify the possible benefits, although normally those derived from the application of new technologies cannot always be valued in strictly economic terms. The attention to these two aspects (economic and non-economic) has given rise to misinterpretations regarding the use of evaluation methods to be applied.
Methods and techniques used in evaluating investment projects
The methods and techniques used in the evaluation of investment projects are those that allow us to really know the feasibility of said actions or claims. According to (Barrios, 2008), for investment analysis it is necessary to rigorously select the qualitative and quantitative methods to be used in a way that strengthens the decision-making process.
As defined (Sánchez, 2006) in his work, the quantitative valuation methods of investments are classified as static and dynamic.
Static: they are those that do not consider the value of money over time when evaluating an investment. They are less reliable than dynamic ones, since money is known to be a dynamic element that undergoes changes depending on environmental situations. Among the best known static methods are: absolute rate of return, relative rate of return, simple payback period, and the minimum cost criterion.
Dynamic: are those methods that consider the value of money over time when evaluating an investment and making a decision. They are the most used today and among the most used are: the Net Present Value (NPV), the Internal Rate of Return (IRR), and the Discounted Recovery Period (PERD) among others.
According to (Lezama, 2008), the NPV explained, (Net Present Value) as the present value of the set of cash flows derived from an investment, discounted at the required rate of return of the same, at the time of disbursement of the investment, less this initial investment, also valued at that time. The rule is to accept any investment whose net present value is greater than zero.
According to the finance website of the Central University of Las Villas, the NPV is expressed as follows.
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The NPV despite being a very complete decision criterion also has its disadvantages which are: that it is highly sensitive to the required return on investment (r). The choice of r conditions the order of the project; if r tends to be high, then: the initial investment (I0) tends to be low; as well as operating and maintenance costs tend to be high. On the other hand, if r tends to be low, the effect would be vice versa to the previous one. Besides that it is difficult to select r; however the NPV depends on r.
According to (Sánchez, 2006), the NPV is the decision criterion par excellence since it meets the following rules: to achieve an optimal decision it will have four characteristics (the net present value criterion is the only one that meets them): account all the cash flows of the investment, will discount the cash flows at the opportunity cost of the appropriate capital, which will be established by the market. It will also select from all mutually exclusive projects the one that maximizes the wealth of the shareholders and also allows managers to consider each project independently from the others.
(Barca, 1998), clearly defined the Discounted Recovery Period (PERD) explaining that it evaluates the number of years that the company needs to recover its original investment, unlike the simple Recovery Period, the PERD takes future cash flows and brings them to the present at a certain discount rate. It offers as advantages that the time in which the investment is recovered can be determined exactly and it is easily calculated. Its main disadvantage is that it does not consider the cash flows generated after the recovery period and thus discards useful projects.
(Brealey and Myers, 2000) simply defined the Internal Rate of Return (IRR) as described below.
Internal Rate of Return (IRR) or Discounted Flow Rate of Return (FTD): as the discount rate that makes the NPV = 0.
So:
Internal Rate of Return (IRR) or Discounted Rate of Return (FTD)
Normally the IRR calculation is a trial and error process until the IRR is zero. Although it is worth noting that through Microsoft Excel in the financial functions, calculations can be performed automatically and thus avoid possible errors.
Criteria for acceptance:
It is to accept any investment project whose opportunity cost of capital is less than the IRR.
If KTIR then the project is accepted.
If K = IRR then one is indifferent to the realization or not of the project. VAN equals 0.
If KTIR then the project is rejected.
In different bibliographies consulted, the criterion is reiterated that the IRR presents different difficulties or disadvantages, among which are the following:
- The calculation process is cumbersome. Hypothesis of reinvestment of intermediate cash flows. Existence of several or no IRRs for certain investment projects. It can lead to errors in mutually exclusive projects.
This criterion (IRR) is the second most used after NPV and well used can be very useful, since it tells us when a project is profitable or not. When the IRR and the NPV conflict, the decision criteria to be used must be accepted by the NPV as this is the most complete of all the decision criteria. It is worth noting that to make a good decision it is better to combine these two methods using the advantages offered by each of them and thus the right decision will be obtained on a certain investment project.
Routes that were used to calculate the financial profitability of the R + D + i Department of the Cuban state company Villa Clara.
After having defined in previous paragraphs the best-known tool to evaluate investment projects and analyze their feasibility from a financial point of view. The following tools were used: The VAN, PERD and TIR that allowed evaluating the results obtained from the R + D + I project, these tools were applied to analyze their past activities and also to analyze future forecasts for said area.
Due to the fact that at the beginning or start-up of the project the company did not carry out a feasibility analysis of said investment, due to the lack of knowledge of the tools to do so, such as those mentioned above. They only focused on performing qualitative analyzes and the impacts of the innovations made, defined them as: High, Medium and Low.
Information was collected that allowed calculating tools such as VAN, PERD and TIR, carrying out the following steps:
Recognition of Expenses
- The expense involved in setting up the R + D + i department was identified to recognize it as an initial investment. The main expense recognized in this area is related to salary, as a result of the fact that it has hired seventeen specialists for operation of the same, the wages collected by the employees over time were searched and the sum that came from this was used as operating expenses for the analysis of the NPV.The next expense that was considered was the depreciation of the equipment of the premises, which he could easily find in the economic area.
Identification of Income
- The income generated by said area, as a result of which it was not counted on its start-up date, a study was made of the savings generated by the implementation of the innovations carried out by the department, in terms of time saved in the realization work, saving materials in the execution of projects and increasing the number of projects developed, by performing their work more quickly and efficiently. Said savings were produced by the introduction of sofwares in the productive areas of the entity, among which stand out the Tupres, Volcán and other similar ones that were introduced in them. It should be noted that other income generated by the area was the sale of two programs IT to other entities in the country, interested in these. Which were the Tupres and Volcán.Because this investment was executed with its own capital, the interest rate of the National Bank of Cuba of 7% was chosen to lend in national currency in the medium and long term when it lends money to state entities. Identifying it as a cost of Opportunity that the organization has by not having to pay interest for not using the bank loan.
After having identified the expenses and income generated by the R & D & i area of the company throughout its operation, the calculation of the aforementioned tools was then carried out. Which allowed to reach the following conclusions.
Conclusions
- The financial economic evaluation of an R&D area was carried out, considering it as an Investment Project in a Cuban state company. Which showed that after applying financial tools such as PER, TIR AND EL VAN, it was decreed that it was not feasible to start up. due to the disassociation of this from the accounting area, which is why it only recorded expenses and not the goods or assets that were produced, since it was considered an administrative cost center. It is impossible for the accounting area to assess the viability of having the R & D & I area working or not. Which estimated that it should be kept in accounting as an independent cost center.Absence of an accountant dedicated to analyzing the economic results of said area, since all the workers that make it up had a technical profile, which made it impossible to carry out the financial efficiency analysis. The profound lack of knowledge of financial analysis tools such as the VAN, PERD and TIR, which made the financial analysis of said investment impossible and only focused on qualitative tools.
Bibliographic references
- BARCA, G. 1998. Project Evaluation. 3rd Edition. BARRIOS, GY 2008. Quantitative Methods for Project Evaluation. Monograph for the Diploma in Project Evaluation and Training, Faculty of Economic Sciences ed. Villa Clara, Cuba: "Marta Abreu" Central University of Las Villas de Cuba. BAUTISTA, J. 2006. R&D Project Management. Master in Science and Innovation Management: Faculty of Chemistry and Pharmacy, "Marta Abreu" Central University of Las Villas. BREALEY, RA & MYERS, SC 2000. Determination of cash flows. “Fundamentos de Financiación Empresarial.LEZAMA, O. 2008. Economic and financial evaluation of projects. Ciudad Guayana: www.Monografias.com..PAVÓN, J. & HIDALGO, A. 1997. VI-Methodologies for the evaluation of technological innovation projects. In: PAVÓN, J. & HIDALGO, A.(eds.) «MANAGEMENT AND INNOVATION. A strategic approach ». Madrid Spain: Ediciones Pirámide, Polytechnic University of Madrid. SANCHEZ, IR 2006. Project Evaluation. Monograph, Master's Program in Business Administration and Financial Accounting Management ed. Villa Clara, Cuba: “Marta Abreu” Central University of Las Villas.
