Problem of evaluating the efficiency of investment projects in the Russian economy

UDC 336.051
Publication date: 29.05.2020
International Journal of Professional Science №5-2020

Problem of evaluating the efficiency of investment projects in the Russian economy

Gurskay U.
Slavyanov A.

1. Researcher, Central Economics and Mathematics Institute RAS
2. Candidate of Economics, Associate Professor of the Department –
Bauman Moscow State Technical University
Abstract: The paper analyzes the widely used methods for assessing the effectiveness of investment projects. Performance evaluation is carried out in order to identify the most investment-attractive projects using static and dynamic methods. The main task for participants in the investment process is the correct choice of method. Based on the analysis of project effectiveness, a strategy is formed for all participants in the investment process, including the investor, customer and company management. Along with commercial effectiveness, an assessment of the public and budgetary effectiveness of the project is carried out. Adequate and comprehensive assessment of project effectiveness allows you to rationally distribute resources among the stages of the innovation cycle. Static valuation methods are mainly used in a stable economic system. In the work, various approaches and methods of risk analysis of the project are studied. Based on the analysis, the authors conclude that for the Russian economy it is rational to use dynamic methods. An important role in the decision to invest in a project should be played by the structure and time distribution of the invested capital.
Keywords: efficiency, innovative project, project risks, investments, discounting, dynamic and static valuation methods.

Introduction In the new market conditions, close attention is paid to the problem of economic efficiency. It reflects the impact of the investment project implementation process on the external environment for the project and takes into account the ratio of results and costs of the investment project, which are not directly related to the financial interests of the project participants and can be quantified. Currently, there are many different methods for evaluating a project that can give opposing results and influence the decision to finance a project. In this regard, there is the problem of choosing the most appropriate method for assessing the effectiveness of each project. In addition, there is a problem in the terminology of this field.

Materials and Methods The terms “profitability” and “efficiency” characterize the effectiveness of the use of funds to achieve goals [1]. Efficiency is usually understood as the ratio of the result to the costs necessary to achieve this result:

E = P / C                                                                                                                    (1)

where P is the result; With — the costs of obtaining the result.

The difference between result and cost is an indicator of the economic effect.

E = P — C                                                                                                                    (2)

The above formulas express absolute effectiveness. When calculating the absolute efficiency indicator, the full values ​​of costs and results are applied.

The comparative effectiveness indicator is calculated using the values ​​of excess (decrease) in the results and costs of the compared projects. Comparative Efficiency Index (EC):

E_с = ∆Р / ∆С,                                                                                                         (3)

where ∆Р and ∆С are additional results and costs for the compared projects [2].

The effectiveness of the project depends on the goal of the participants in the investment process and can be of the following types:

from the point of view of the investor, the return on invested capital is measured by the ratio of the received income from the issuance of a loan or interest deducted from the dividend;

from the point of view of the customer — return in the form of additional profit from the project;

from the point of view of company management — additional income in the form of wage growth [3].

The effectiveness of the project as a whole is evaluated to determine its potential attractiveness for potential participants and to search for sources of financing. This type of effectiveness includes:

social (socio-economic) project effectiveness;

budget efficiency;

commercial effectiveness of the project.

Social performance indicators take into account the socio-economic consequences of implementing IP for society as a whole. Budget efficiency is defined as the growth of tax and other revenues to budget and extra-budgetary funds from the implementation of the project.

Indicators of commercial effectiveness take into account the financial consequences of the implementation of IP for the participant implementing it; it is assumed that it produces all the costs necessary for the implementation of the project and uses all its results [4].

The project performance indicators as a whole characterize from an economic point of view technical, technological and organizational design decisions.

Results Methods for assessing the effectiveness of investments In modern Russia, Western European countries and the United States in the practice of investment calculations, static and dynamic methods for assessing the effectiveness of investments have received the greatest use [5]. The description of static calculation methods appeared in German literature in 1936, and dynamic methods became known since 1944 [6]. However, the widespread practical application of these methods began in the second half of the twentieth century. The features of static methods are as follows:

  • do not take into account the time factor, in other words, does not take into account the change in the value expression of income and expenses;
  • methods are limited to considering only one period, usually a year or a quarter, although the investment process, as a rule, is several years;
  • methods are aimed at «isolated» consideration of alternative project options;
  • the method operates with economic categories: costs, revenues, profits, profitability [7].

Static methods most often include:

  • calculation and comparison of costs and results;
  • calculation and comparison of profits;
  • calculation and comparison of profitability levels;
  • calculation and comparison of static payback periods (depreciation period).

We should also mention the method of calculating and comparing the standard hour, but it found application only in assessing investment alternatives for replacing equipment or expanding capacities.

Dynamic methods have the following features:

  • unlike static methods, dynamic methods take into account the time factor;
  • involve calculations for the entire duration of the investment project;
  • it is assumed that the flows of payments for the investment object can be fully identified and accounted for;
  • methods operate with the following financial categories: receipts, payments, Cash Flow [8].

The main dynamic methods for calculating investment efficiency include:

  • reduced cash flow (NPV) method;
  • method of internal rate of return (IRR);
  • annuity method [9].

Consider the main methods of analysis of the economic efficiency of innovative projects. We highlight their advantages and disadvantages.

Calculation of a simple investment payback period. Determining the period necessary for an investment to pay for itself. If the income from the project is distributed evenly over the years, then the payback period of investments is determined by dividing the amount of investment costs by the amount of annual income. In the case of uneven income, the payback period is determined by directly calculating the number of years during which the income will reimburse the investment costs of the project, that is, income will be equal to expenses.

The calculation of the discounted payback period of investments consists in estimating the time required for the amount of discounted cash flows to cover the amount of discounted investment costs.

The estimated rate of return reflects the effectiveness of investments in the form of a percentage of cash receipts to the amount of initial investments.

Maximum cash outflow (Cash Outflow) Also called the need for financing (FN) — this is the maximum value of the absolute value of the negative accumulated balance from investment and operating activities. The value of FN shows the minimum amount of external financing of the project necessary to ensure its financial feasibility. Therefore, FN is also called risk capital.

Net Present Income Method (NPV — method) The calculation is carried out by comparing all input cash flows with the current value of output flows due to capital investments for the implementation of the project. The difference between the first and second is pure modern meaning, the value of which determines the decision-making rule. The decision on financing the project is made if the NPV is greater than or equal to zero. For several alternative projects, the project that has a greater positive NPV value is accepted.

The Profitability Index (PI) is calculated as the ratio of the amount of discounted cash flow items from operating activities to the absolute value of the discounted amount of cash flow items from investment activities. PI equals NPV to cumulative discounted investment

The Internal Rate of Return (IRR) shows the maximum allowable relative level of expenses that may be associated with a given project. For example, if the project is fully funded by a commercial bank loan, then the IRR value indicates the upper limit of the acceptable level of the bank interest rate, the excess of which makes the project unprofitable. If the IRR value is higher or equal to the cost of capital, then the project is accepted, if the IRR value is less than the cost of capital, then the project is rejected

Maximum cash outflow with discount (the need for financing, taking into account the DFN discount)

The maximum value of the absolute value of the negative accumulated discounted balance from investment and operating activities. The value of DFN shows the minimum discounted amount of external (in relation to the project) financing of the project necessary to ensure its financial feasibility

Duration method is used if there are several alternative projects with the same NPV, IRR values. When choosing the final investment option, the duration of the investment is taken into account. The key to this technique is not how long each investment takes.

Discussionion Table 1 presents the advantages and disadvantages of the above methods.

Table 1

Characteristic features of economic calculation methods effectiveness

methods Benefits Disadvantages
Payment simple term

return on investment

Accurately signals the degree of riskiness of the project. The longer the period needed to return the invested amounts, the greater the likelihood of adverse events.

Ease of calculation

Does not account for cash receipts after the payback period. The method is difficult to use when comparing alternatives, as it does not account for return on invested capital.

Ignores the value of money over time

Discount calculation

the term

return on investment

Accounting for the time value of money. Since discounting reduces cash flow, the discounted payback period of a project is always higher than the simple payback period, calculated on the basis of the recorded value of cash income The discounted term, as well as the simple payback period of projects, is an indicator of liquidity, and not the profitability of projects. He also ignores the cash income received after the payback period of investment costs.
Estimated rate of return Simplicity in the calculation. This indicator focuses managers on those investment options that are directly related to the level of accounting income that interests shareholders first of all. Does not take into account the different value of cash over time. Ignores differences in the life cycle of the compared projects.

Is a relative indicator, does not reflect the scale of investment and their contribution to the real change in the value of the company.

Cash Outflow It is used in cases when it is difficult or impossible to calculate cash income. Does not take into account the time value of money
Net present value, NPV This indicator is additive in the temporal aspect, i.e., NPV of various projects can be summarized. This is a very important property that distinguishes this criterion from all the others and allows you to use it as the main one when analyzing the investment portfolio optimality. The method of net present value does not provide an answer to all questions related to the economic efficiency of investments. This method gives an answer only to the question whether the analyzed investment option contributes to the growth of the value of the company, but does not indicate the relative measure of such growth
Profitability Index, PI Accounting for the time value of money

The profitability index is convenient to use when choosing an investment project option from a number of alternative ones. The selection criterion is max. return on investment

Calculation difficulty


Internal rate of return (IRR) NPV and IRR are mutually reinforcing. If the NPV measures the mass of income received, then the IRR measures the project’s ability to generate income from each ruble of investment Calculation difficulty

The internal rate of return method is unreliable for ranking projects of various scales and with a different distribution of cash flows over time

Discounted financing need (DFN) Convenient for choosing an alternative that corresponds to a lower value of discounted costs Calculation difficulty
Duration The method allows to bring to a single standard the most diverse projects in terms of their characteristics (in terms of time, the number of payments in the period, methods for calculating the percentage due) Не может использоваться в качестве самостоятельного метода, только в комплексе с другими методами


Risk analysis An important role in assessing the economic efficiency of a project is played by a risk analysis to achieve the desired economic results and increase the likelihood of obtaining sustainable economic benefits from the project [11]. Management of these risks is not to minimize risks, but to take measures to reduce the likelihood of negative events and / or consequences from them. Risk management is a process that allows you to make decisions in advance to control risk-related events, optimizing success by minimizing threats and maximizing opportunities.

To date, there are many methods for assessing project risks. Distinguish between qualitative and quantitative methods. A qualitative risk assessment is the process of assessing the risk characteristics of individual projects — the likelihood of occurrence and impact that they will have in the project if they occur [12].

The task of quantitative risk analysis is to numerically assess the overall impact of risk on project objectives, such as costs and schedule. The results give an idea of ​​the likelihood of success of the project and are used to develop reserves for unforeseen circumstances [13]. Quantitative risk assessment methods:

  • three-point assessment — a method that uses optimistic, most likely and pessimistic values ​​to determine the best estimate.
  • decision tree analysis — a chart that shows the consequences of choosing an alternative.
  • Expected Cash Value (EMV) — A method used to determine contingencies for the budget and project schedule.
  • Monte Carlo analysis — a method that uses optimistic, most likely and pessimistic estimates to determine the total cost of the project and the timing of completion of the project.
  • sensitivity analysis — a method used to determine which risks have the greatest impact on a project [14].

At the present stage of development, investors have a wide range of tools for assessing the effectiveness of innovative projects. The main task for participants in the investment process is the correct choice of method. The most common methods in Russia are NPV and IRR. Although, in the developed countries of the EU and the USA, static and dynamic methods of assessment are used in equal proportions.

In our opinion, based on table 1, one of the most suitable methods for the domestic economy is the method of the index of return on discounted investments. It should be noted that none of the above methods alone is sufficient to adopt an innovative project. An important role in the decision to invest in a project should be played by the structure and distribution in time of the capital attracted for the project, as well as other forms, some of which lend themselves only to meaningful (rather than formal) accounting.

Despite the pros and cons of all the considered investment performance indicators, it is worth recognizing that they are interconnected and allow evaluating the effectiveness of investments from various angles, and therefore they should be considered in conjunction.


Работа подготовлена при финансовой поддержке РФФИ, проект № 20-010-00350.

The reported study was funded by RFBR, project number 20-010-00350


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