In this work the elements that allow to carry out a proposal for the development of a procedure that will evaluate the economic feasibility of the investment process in the production of pressed concrete posts are exposed.
For this, we have fundamentally followed (Gitman Albert, L. 1990. Fundamentals of financial administration. Volume I), where the steps, analysis tools and techniques to achieve the proposed objective of the research are defined.
Description of the procedure to evaluate the economic feasibility of the investment process.
1. Research analysis tools.
Theoretical elements of the procedure.
They allow explaining the facts and delving into the fundamental relationships and qualities of the processes involved in the system. (Rodríguez Sandías, A. 2001. Analysis and evaluation of projects. Department of Financial Economics. University of Santiago de Cuba.), Applying:
For this, we have fundamentally followed (Gitman Albert, L. 1990. Fundamentals of financial administration. Volume I), where the steps, analysis tools and techniques to achieve the proposed objective of the research are defined.
Analysis is an intellectual operation that makes it possible to mentally decompose a complex whole into its parts and qualities, allowing the mental division of the whole into its multiple relationships and components; while synthesis is the inverse operation, which mentally establishes the union between the parts, previously analyzed, making it possible to discover relationships and general characteristics between the elements of reality.
Analysis and synthesis do not exist independently of each other. In reality, the analysis is produced through synthesis, in which the analysis of the elements of the problem situation is carried out by relating them to each other and linking them to the problem as a whole. In turn, the synthesis is produced on the basis of the results previously obtained from the analysis, which are supported by two fundamental techniques: technical and market study, and financial study.
This was revealed in the analysis of the recommended bibliography on the subject and the synthesis of the aspects consulted, which was useful and above all, for the elaboration of the theoretical framework and to characterize the object of study.
Induction - deduction.
They are two theoretical methods of fundamental importance for research.
Induction can be defined as a form of reasoning through which one passes from the knowledge of particular things to a more general knowledge that reflects what is common in individual phenomena. A great value is that it establishes generalizations based on the study of singular phenomena, which enables it to play an essential role in the process of empirical confirmation of the hypothesis.
Deduction is a form of reasoning, which is passed from general knowledge to that of a lower level of generality. It starts from principles, laws and axioms that reflect the general, stable, necessary and fundamental relationships between objects and phenomena of reality, because deductive reasoning takes as its premise the knowledge of the general, to understand the particular.
At a certain point in the research, one or the other method may predominate, depending on the characteristics of the task being carried out by the researcher. Induction and deduction complement each other in the process of developing scientific knowledge.
In induction there are aspects that allowed to go from the general to the particular, and the deduction of the elements found during the research process, which was necessary to interpret the relationship between them, making possible the empirical conformation of the hypothesis.
Abstract- concrete.
It allows to highlight stable and necessary properties, relationships, qualities, regularities to understand all the concepts of a given valuation.
Empirical methods:
Through these, the researcher is in direct contact with his study object, in a practical way, where he will try to collect as many data as possible to achieve the research objectives. They in scientific research fulfill certain functions:
Knowledge (description of the facts or phenomena and their categorization).
Validation of other methods (convergent validity), given by the degree of similarity of the results of the application of one method in relation to the results of the application of another.
Prognostic (predictive validity), referring to the ability of a method to
predict or predict the future behavior of a phenomenon; of course, the
prediction depends on the depth of the investigation. Being able to do it is one of the most important achievements of the investigative process and to reach it you have to go a long way of progress and setbacks.
Of transformation (possibility of the method to modify the characteristics of the phenomenon), only when the researcher manages to know and direct in some way the transformation of the fact or phenomenon that he is investigating.
Given that many factors vary greatly with respect to time and are very complex, it is necessary to create and use them, since they allow addressing these problems with an adequate level of reliability and validity.
An empirical method is said to be reliable if, when applied at different times to a sample from a certain universe or population, similar results are obtained. (Berry Colver, M. 1999. Research in companies. Confrontation of French and American experiences on research in management, in economic reality, No. 165. Buenos Aires, IADE: 125-143).
On the other hand, it is valid when it measures or evaluates what it tries to measure or evaluate.
2. Methodological sequences for the development of the investigation.
The evaluation of the project idea is key, since questions must be answered in this process, such as:
- Is there a guarantee of technology success?
- Is it appropriate and recommended by environmental standards?
- Are there financing possibilities?
- Is there capacity for sustainability in the base unit and in the market?
There is not only talk about the technology to be used, but also about which management methods should be applied in the implementation of the project, how the supplies will be guaranteed, the relations with the client, what can be the sources of financing that will be used to cover the investment costs and the initial working capital, what quality control systems should and can be used and what preparation should human resources receive to implement the project.
The team of experts or specialists, for its part, will be in charge of sustaining direct communication to seek technical, commercial, financial and productive feasibility criteria for the entity. (Sánchez Izquierdo, R. 2003. Doctoral Thesis in Economic Sciences. Social economic approach to the evaluation of investment projects).
The relative costs, on the other hand, must correspond to the qualitative level of the income that the entity expects to obtain and will have two expressions, depending on whether it is used for the economic-financial evaluation or for its inclusion in the economy plan.
The cost of the investment includes the value of technical documentation, construction and assembly, supplies, acquisition of patents, equipment and machinery, expenses of raw materials, materials and workforce to carry out technological tests before start-up, capital initial work, marketing expenses and others, necessary for its preparation, execution, testing and commissioning. (Nogueira Rivera, D. 2001. Ways to improve production logistics). For its inclusion in the plan, the cost of studying this investment will be broken down by its technological structure, according to its characteristics, in the components:
- Teams. It includes the value of all equipment and machinery of national or imported production, regardless of whether or not they require assembly work and including freight and insurance costs for ground transportation to the work area.
- Construction and assembly. It includes the works that are carried out in the already existing facilities and includes the demolition of works or parts thereof necessary in the construction works. It also includes the set of operations aimed at locating, fixing and coupling technological equipment with its accessories; and at the same time it considers works related to the equipment that is mounted such as, electrical installations, water supplies; isolation; as well as painting of equipment and pipes.
- Other expenses. This component will include the rest of the investment expenses that are not classified in those previously explained (equipment and construction and assembly), such as: raw materials, materials and workforce to carry out the technological tests before start-up.; those related to the administration, while the investment is not finished; those of the technical documentation and other necessary economic technical studies, research, technical services and projects and those of instruments and tools necessary for the initial authorization of the investment.
Steps for applying the procedure to be evaluated.
Step I: Characterization of the object of study.
Define core questions that support the aptitude of the object of study for its analysis. Therefore, it is proposed to locate it in a context of social and productive development, delving into the establishment of its reason for being, which is embodied in its mission, vision, and corporate purpose.
Step II: Techniques and methods for the feasibility study.
Once the object of study has been identified, the problem that generates the research interest is identified.
Technical and market study. It allows knowing the establishment of contractual relationships for project, construction and supply work, as well as the size and composition of current market demand, in order to estimate the degree of market penetration that can be achieved.
In any market economy system, to develop its functions, it relies on the free play of supply and demand and is concerned, as can be inferred from its name, in the operation of the market. (Amago Fernández, S. 2000. Logistics and geographic marketing. Iberoamerican Institute of
Logistics. Marge Designe Editors, Barcelona, Intermodal Logistics Center).
Its mechanism answers the three fundamental questions that every economic system asks itself: what to produce? How to produce? And for whom is it produced?
When talking about the market, you are simultaneously thinking about the game of supply and demand. The interaction of both determines prices, these being the signals that guide the allocation of resources, those that fulfill two fundamental missions, that of providing information and that of providing incentives to the different agents, so that, acting in their own interest, they make that the whole system works efficiently. Although it is conceivable to design an economy that responds to a pure market model when making fundamental decisions in the face of a certain type of economic problem.
A market is a social institution in which goods and services, as well as productive factors, are freely exchanged. (Changes and strategies facing a new productive paradigm. Work presented at the seminar on State reform, administrative reform and training in provincial public administrations, organized by INAP and UNNE. 1996. Havana).
In the determination of the price, the buyers and the sellers agree on the price of a good in such a way that the exchange of determined quantities of that good for a determined quantity of money will take place. By setting prices for all goods, the market allows the coordination of buyers and sellers.
In the case of the technical study, it consists of analyzing and proposing different project alternatives to produce the desired good, verifying the technical feasibility of each of the alternatives. It comprises the following aspects:
Identification of the products. The aim is to identify the products, both those that are obtained in a stable manner and those that are obtained in a lower volume and / or less frequency, detailing their fundamental technical specifications.
Demand and supply. It refers to the quantification and projection of the future demand for a product; being necessary to determine the data referring to the volume and composition by product of past and current demand, as well as indicating the origin of the information used and the procedures used in the projections. (Kotler Amstrong, P. 1996. Customer satisfaction with quality and marketing Prentice Hall, Mexico).
For the application of this statement, historical series and statistics will be taken into account.
To achieve this objective, it is proposed to show the demand of the main national consumers and demonstrate their behavior with respect to supply, where their annual demand will be determined by product, as well as a historical series of the behavior of the sale of products will be prepared.
Price of the products. It is an important factor that influences the volume of sales and the income from such sales, it is the price of the product, which must be well founded so as not to make projections that lead to misrepresenting the results.
The bases for setting prices must consider the costs of production and the structure of the market, as well as the policy of the state based on the plans of the national economy.
The elements necessary for the evaluation of the purchase and sale prices will be presented with the description of each of the products and their corresponding unit of measurement in the period analyzed.
Commercialization. It is necessary to make an evaluation of the commercialization of all products, through the existing mechanisms, which must be explained.
It is important to consider the specific promotion mechanisms, as well as the particular conditions under which products are supplied to customers.
Capacity of the project. It is about evaluating the initial and average capacity of the productions, as well as the processing capacity, influencing the way in which the required means of transportation and lifting are conceived; reason why an analysis is made based on the installed and used capacity of the project, and the results that are developed in the following points are summarized.
Installed capacity. In it, it is necessary to specify according to the characteristics of the products, the volumes that must be collected and processed. For this analysis, it is proposed to determine the initial capacity and full capacity of the product that can be collected and processed, through the percentage of each of them with respect to the total, as well as analyzing in the current year analyzed and the last projected year for the study the daily and annual amount.
Used capacity. The capacity utilization percentages of a project depend on the annual growth determined by the increases in the company's recovery process, where the percentage of the capacity used in the year will be analyzed, from the current year analyzed to the last projected year. with the objective of determining the average percentage of capacity used per year.
Production and sales compliance. Detailed information on the productive yields obtained with the project must be provided. A production report will be prepared that will determine the real annual volumes by products; as well as drawing up a sales report based on the production plans set forth above and the prices determined, in which, as in the production plan, the projected volumes will be determined.
Process and technology. With the determination of the scope of the project it is required to expose the fundamental operational and technical characteristics of its productive base, where the required technological processes, the type and quantity of equipment and machinery and other aspects that contribute to achieving the objective are determined. (Orozco Silva, E. 2004. Business strategy).
In the description of the production process, the necessary steps must be explained by products, ranging from initial coordination with suppliers to the completion of the sale.
Existing machinery, equipment and tools. In this one, it is necessary to carry out an evaluation of the existing machinery, equipment and tools, detailing their characteristics, technical condition and level of obsolescence.
A brief description of the characteristics of the means to be acquired must be made, as well as the cost they would represent. For this, the following should be followed:
Description of the technological equipment, machinery and means to be acquired necessary for the proper functioning of the production process; description of the facilities necessary for the production process; personnel requirement and cost (structure and workforce) of the production process.
Financial study. This constitutes the step where the magnitude of the benefits obtained with the execution of the project outweigh the costs and expenses incurred.The profitability analysis will be based on updated and financial methods, where financing for the project must be available on that will be in correspondence with the magnitude of the required capital. (Sánchez García, I. 2005. Financial evaluation of investment projects. University of Guayaquil. Ecuador).
Financing sources. It is essential that the study contains a financial analysis. The reason is that a prerequisite and fundamental for the formulation, analysis and decision-making in the investment, is to have sufficient financial resources, both for its execution until its start-up and for working capital. (initial and that corresponding to the increases that occur during the useful life of the project). For the estimation of financial needs, the analysis is based on offers and other information from possible suppliers, as well as on financial statements, mainly in a Statement of Net Income and in a forecast of liquidity analysis.
The objective of this study is to analyze the available financing alternatives, in order to select the most appropriate one, demonstrating that the source is accessible and that its possibilities are related to the real characteristics of the project.
The funds for the financing of an investment project can be basically for the state budget, bank credit and own resources (own or social capital) of the investing entity derived from the depreciation and sale of idle assets.
The following possibilities can be presented as sources of external credits:
- Bank credit or loan capital. Corresponds to medium and long-term monetary loans, which can be of national or foreign origin and are requested from bank sources or in the capital market. These sources will evaluate the request and grant it based on certain financial conditions, if the requirements of the entity making the loan are met. Commercial credits, which are generally transaction type. There are other financial modalities that today are promoted by the banking authorities and other financial institutions that can also be analyzed.
-State credits. They are those that are granted to the State by foreign institutions and international organizations to undertake investments and that it directly assigns to a state entity responsible for its execution and exploitation. In this case, bilateral or multilateral agreements are included.
Other possible sources of financing external to the entity: There may be expressly projects of state interest. Of these, financing will be made through the central box and the reserve.
Evaluation criteria. The economic-financial evaluation of a project, made according to criteria that compare the flows of benefits and costs, allows determining whether it is convenient to carry out a project, whether or not it is profitable and if it is convenient, it is appropriate to carry it out at that time or it may be postponed. home, in addition to providing elements to decide the most suitable plant size.
In the presence of various investment alternatives, evaluation is a useful means of establishing an order of priority among them, selecting the most profitable projects and ruling out those that are not.
Market, technical and economic studies provide the necessary information to estimate the expected income and cost flows that will occur during the life of a project in each of the possible alternatives.
The comparison of these benefit and cost flows has to be attributable to the project. In deciding on its execution, past flows and existing investments should not be taken into account.
That is why, in the evaluation stage, it corresponds to define:
-The base situation or "situation without project", in order to compare it with each of the alternatives of the proposed project.
-The identification and monetary valuation of the different elements that represent benefits and costs attributable to the project being analyzed.
In evaluating investment projects to decide whether or not to undertake it, not only must its costs and benefits be identified, quantified and valued, but also evaluation criteria are required to select the most profitable investment opportunities and therefore more convenient.
The most frequently applied project evaluation criteria consist of precisely comparing income flows with cost flows, classifying them into two general categories, which are the techniques for analyzing the return on investment (with and without financing) and techniques for financial analysis.
Updated methods such as net present value (NPV) and internal rate of return (IRR) belong to the first category and liquidity analyzes to the second.
Net Present Value (NPV). It measures in current money the degree of greater wealth that the investor will have in the future if he undertakes the project. It is defined as the updated value of the flow of net income obtained during the economic useful life of the project from the determination per year of cash inflows and outflows, from the time the first investment expense is incurred during the process until the completion of the years of operation or operation of the investment.
These annual balances that can be positive or negative and that are produced at different times, it is not valid to compare them directly because the monetary unit, whatever it may be, within a certain number of years will not have the same value as at the present time, it will be less since its purchasing power is reduced given the inflationary effect. That is why, to compare a monetary unit at different times, the balances are updated at the zero moment of the investment; in the year in which the first expense is incurred in the execution of the project, using an update rate or discount rate that is fixed by default and that homogenizes the balances that have been obtained at different times, reducing them to a common unit.
For the calculation of this rate, the existing interest rate on long-term loans in the capital market is generally used and it must reflect the opportunity cost of capital that expresses the guarantee of a minimum return on capital required of the project. In other words, a rate similar to that which would be obtained in any other investment alternative with the same risk or simply depositing it in a bank at a fixed annual interest rate. It is convenient to specify the same with financial organizations. If the invested capital is borrowed, the update rate must be higher than the interest rate on the loan.
The value at the present time (year zero) of the flow of net income obtained for the life years of the project is calculated from:
In which: - First cash flow or disbursement (investment).
C0: Investment (initial disbursement).
Cj: Cash or cash flow.
n: Useful life of the asset (referred period).
K Rate of return (opportunity cost or cost of capital).
Decision criteria. When the net present value is used for the acceptance or rejection decisions, it is the following: If they GO ≥0, accept the project; GO <0, reject the project. If the NPV is greater than or equal to zero, the company obtains a return equal to or greater than the required return or cost of capital.
Internal rate of return or return (IRR). It represents the overall profitability of the project and is the update or discount profitability at which the current value of the cash income stream is identical to the present value of the cash outflow. In other words, it is said that the IRR corresponds to the interest rate that makes the NPV of a project zero, canceling its profitability.
In this way it is possible to know to what level the discount rate can grow and even the project is still financially profitable.
Its calculation is similar to that used to calculate the NPV, estimating different update rates that bring the NPV as close as possible to zero from an iterative process, until the NPV is negative. The IRR will be between these two rates and the closer the approximation to zero, the greater the accuracy obtained, and the difference between the rates must be in a range of not more than ± 2% if a good approximation is to be achieved. The IRR is obtained by solving:
Where the K is equal to the IRR, when the NPV becomes 0.
Trial and error method.
In which: K1: Refresh rate at which the NPV is positive
NPV +: It is the closest positive value to or
K2: Refresh rate at which the NPV is negative
: Negative VAN module
Selection criteria. It will correspond to those projects that have a higher IRR and this should always be greater than or equal to the update rate that guarantees a minimum return on capital for the proposed investment.
The use of the IRR criterion has the advantage, for independent projects, of giving an image of profitability, resulting in a rate that makes it possible to compare projects. In the presence of capital shortages, the application of the IRR helps to choose the best profitable projects.
Average rate of return. Using the average rate of return is a fairly popular system for evaluating capital outlay projects.
The following is the most common definition of the average rate of return:
Average profit after tax: calculated by adding the expected profit after tax for each year of the project's life and dividing the result by the number of years.
Investment: Represents the total value of the investment.
Capital recovery period (PR). This indicator measures the number of years that will elapse from the start-up of the investment, to recover the capital invested in the project through its net profits, also considering depreciation and financial expenses. In other words, it is said to be the period between the start of exploitation until the first positive balance or period of recovery time of an investment is obtained. The actual period of recovery of capital or investment is determined by calculating exactly how long it takes to recover the net investment, that is, the company takes into account the moment in which each cash inflow is received (cash flows), evaluating them later to determine the real time of recovery of the Investment.
The payback period is used only as a supplement to the analysis of return on investment and basic indicators such as NPV and IRR. It is especially useful in high risk conditions, since the rapid recovery of capital is particularly important, since it is interesting to know how long it takes to recover the investment.
Cost / benefit ratio (RCB). Also known as the profitability index, it does not differ much from the NPV method. The only difference is the fact that the RCB calculates the present value of the relative return by the sum invested, while the present value system gives the difference between the present value of the cash inflows and the net investment. The cost / benefit ratio is defined by:
Yields by the sum invested:
Decision criteria. When B / C reasons are used to make acceptance or rejection decisions, it is as follows: If RCB ≥1, accept the project; RCB <1, reject the project. When the RCB is greater than or equal to 1, the VAN is greater than or equal to 0. Consequently, the VAN and RCB methods give the same solution for acceptance or rejection decisions.
Financial analysis.
- Solvency index.
An index of 2 is acceptable, but (Gitman Albert, L. 1986. Economic-financial study of an investment project) says that the exact determination of an acceptable index depends largely on the field in which the company operates, later pointing out that "The acceptability of a solvency index depends to a great extent on the way cash flows can be predicted."
It also considers that the solvency index of the company divided by 1, the resulting coefficient subtracted from 1 and multiplied by 100, represents the percentage in which the current assets of the company can be decreased without this making it impossible for it to meet its obligations to short term.
- Immediate liquidity or acid test.
This is similar to solvency with the exception that the first does not include inventory in current assets. For this, it is based on the fact that this item is the least liquid of the current assets. A value of 1 or higher is recommended for this index, as is the solvency index. This ratio is said to provide a better estimate of total liquidity only when the firm's inventory cannot readily be converted into cash. If the inventory is easily sold, the solvency ratio is the preferred measure of total liquidity.
- Cash ratio or available liquidity.
Focusing on the most liquid assets that the lack of cash should not matter if the company can borrow in the short term. (Gitman Albert, L. 1986. Foundations of financial administration. Volume I).
Regarding the advantages of this analysis, the justification provided for the topic for the wide use of the results offered for the reasons presented above is:
-They measure the degree to which the current assets cover the current liabilities, meaning more guarantee of payment the higher it is.
-They show the buffer that provides excess current assets over current liabilities against losses that may occur in the liquidation of current assets other than the treasury, evidencing a better situation for creditors the more substantial that buffer.
-They measure the short-term asset reserve above the current available obligations, as a margin of security, against uncertainties and emergencies it is available, as a margin of security, against uncertainties and emergencies to which the cash flows of a company, for example extraordinary losses.
- Economic profitability.
In which: RE: Economic profitability.
RV: Profitability of sales or net profit margin on sales.
RA: Rotation of assets, measured as net sales among total assets.
Economic profitability is a function of the net margin obtained from the results of the company's management and the degree of turnover of assets.
From this point of view, it can then be established that a company that is interested in increasing its economic profitability must work first with a view to increasing its sales or income as a common element for both indices and as a second aspect it should work on:
• The reduction of its expenses in order to obtain a greater profit for the period and thus show a high net margin index.
• Increase the turnover of your company assets that is expressed in the increase in the weight of sales by weight of assets, or what is the same, achieve an increase in sales with a lower volume of assets.
- Financial profit.
In which: RF: Financial profitability.
RV: Profitability of sales or net profit margin on sales.
RA: Rotation of assets, that is, net sales among total assets.
E: Indebtedness, measured as external financing among own financing.
With this calculation it is possible to diagnose the impact that the net profit receives for the interest accrued on the debts in the medium and long term, in addition to the taxes on profits. The Accounting and Finance Department must deepen the analysis of financial profitability, since when the desired values are not obtained, the company must not hesitate to recover capital, otherwise it would be incurring economic losses.
Step III: General evaluation of the project.
It achieves the purpose of having a portfolio of projects that, to the extent that there are available resources, prioritize the execution of the most viable and profitable ones, discarding those that are not.
The feasibility study is an integral part of the investment process and constitutes the culmination of the pre-investment studies and therefore of the formulation and preparation of a project, constituting the basis of the decision regarding its execution.
In this stage the results obtained in the calculations that require the determination of whether or not the investment is feasible will be explained in detail, as well as the recommendations that we consider pertinent in this regard. In this way, the problem to be solved is defined.
This is based on assumptions, forecasts and estimates, so the degree of preparation of the information and its reliability depends on the depth with which both technical and market studies and financial studies are carried out. At this stage, all aspects and variables that can improve the project, that is, optimize it, must be specified.
It may happen that from the result of the investigation a review of the study already carried out could be advised, that its initiation be postponed considering the optimal moment of start and even dismiss it.
Conclusions
Some of the specific considerations to be taken into account in an economic feasibility study of an investment process, the research analysis tools and the steps to follow for the application of the procedure to be evaluated have been raised.
This allowed a projection on the scope of expected achievements through a diagnosis of the state of the entity in the environment, therefore presenting the following conclusions:
The determination to undertake the feasibility of the investment project lies in a combination of technical-economic elements based on the creation of a group of experts or specialists and an analysis of the investment based on quantitative and qualitative criteria.
The investor, as responsible for preparing the investment execution schedules, will have the participation of the builder, designer and suppliers in each of the required development stages of the work until the successful completion of the work object.
It is necessary to make an analysis of the available financing alternatives, in order to select the most appropriate one, demonstrating that the proposed financing source is accessible and that its possibilities are related to the real characteristics of the project.
The economic-financial ratio allows evaluating investment based on quantitative and qualitative evaluation criteria of projects to make investment decisions, that is, the net present value (NPV), internal rate of return (IRR), and recovery period (PR), taking into account the value of money over time, so it becomes the discounted recovery period (PRD) and the cost / benefit ratio (RCB).
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