Favorable investments - one of the main factors
affecting the increase in profitability of the enterprise. *
The basis of this technique of investment analysis is the classic option, the most common in the world, estimating the forecast of change cash streams generated by an investment project. The difference of this technique is to bind to the Russian tax system and complication associated with inflation and highly changing economic conditions (variable barrier rates).
Under favorable investmentsThe investments made by competent specialists are meant, taking into account all significant financial and non-financial factors. Why it is impossible to say simple: effective or profitable investments, often investments are uncomplicable - mandatory, and in this case it is important to make the choice of the least costly. There are situations where the most profitable option for the company is not the most profitable project, and a project that has less profitability, but large profits in absolute values \u200b\u200b(an investment option is a choice of one investment project from several, and a lot of capital for investing). Why can not be said - the relevant theories of investment analysis, often, except for financial considerations, important For selection, starting from production, technological, organizational, logistics and ending with environmental factors.
For maximum effect, investment analysis should be carried out with regard to.
The main task of the investment analysis to calculate the effectiveness of the investment project and evaluate its risks. In other words, the optimal choice is made in two parameters: efficiency and risk.
In classical investment analysis, you can select three types of mathematical models that define the parameters:
amount (NV, NPV, MNPV),
profitability (NRR, IRR, MIRR, MIRR (bar),
yield index (DPI) and
Payback period (Payback, TS-payback, duration)
cash flows generated by an investment project.
Model number 1. The model includes only cash flows (CF and I). NV and payback parameters are determined.
Model number 2. The model includes cash flows and a barrier rate (CF, I and RBar). The parameters of IRR, NPV, DPI, NRR, duration, TC-payback and MIRR (bar) are determined. This model adds accounting for changing the cost of money in time (with the help of RBar).
Model number 3. The model includes cash flows, a barrier rate and reinvestment level (CF, I, RBar and Rraniin). The parameters MIRR, MNPV and MNRR are determined. Adhesions, except for accounting for changes in the cost of money in time, accounting for the rate of reinvestment yields (using Rinin).
Calculations according to the type I model were carried out to a wide introduction of computing equipment, for a rough estimate of investment projects. For example, if NV
Calculations according to the type III model are carried out quite rarely due to the insufficient development of software and the lack of estimates (afterwards analysis) and forecasts of reinvestment levels for companies. Also affects the lack of experience. Because The forecast of the parameters of the investment project calculated by the III model is the most accurate, then in the future this type of calculations will take a worthy place in the practice of investment analysis.
The investment analysis process includes the following steps:
1. Drawing up a list of alternative investments.
2. Preparation for each alternative to cash flow forecast.
3. Data forecast for calculation and calculation of barrier rates (RBar).
4. Data forecast for calculating and calculating the level of reinvestment (Rreene).
5. Calculation for each period of pure cash flow.
6. Calculation of the parameters of the investment project (the current value of cash flows NPV, IRR, MIRR, DPI, etc.).
7. Sensitivity analysis and evaluation of high-quality factors.
8. Evaluation and comparison of alternative investments.
9. Analysis of liquidity and solvency changes (is done for relatively large projects).
10. Postinvestment analysis.
11. Investment factor analysis (as needed).
The first four points should occupy approximately 85% of the analysis of the investment project.
1. Drawing up a list of alternative investment
The largest and most common mistake in the choice of an investment project is to consider not all possible investment options. .
Possible solutions to the problem:
1. Replacing new (modern and / or more productive) equipment;
2. Replacing similar equipment;
3. Transfer under the subcontract;
4. Not to do anything;
5. Stop production.
2. Preparation for each alternative to cash flow forecast
Investment analysis takes into account only incremental cash flows, that is, the result of changes in income and costs after taxation due to the implementation of the investment project. Any cost or income, the volumes of which remain unchanged before and after the implementation of the investment project are not taken into account.
The form for calculation corresponds to Table 2.1 (cash flows) " Methodical recommendations No. VK 477 ... "(p. 12). Table 2.1 Universal, so some rows are painted in more detail and newly introduced, taking into account the specifics of the equipment change.
Depending on the attraction scheme money:
- ;
- ;
- .
To predict cash flows, a forecast of tax surroundings and inflation is needed:
- VAT;
- income tax;
- property tax;
- the refinancing rate of the Central Bank of the Russian Federation;
- inflation rate;
- If necessary, other taxes are taken into account (for example, transport tax, one social tax, tax on the possibility of accidents, etc.).
Note number 1. More information about this in the help file to the demo version of the program.
Note number 2. Detailing cash flow forecast does not increase significantly its accuracy.
3. Data forecast for calculation and calculation of barrier rates
For companies working in countries with low or constant inflation, stable legislation, having a permanent level of reinvestment and a permanent level of risk or cost of capital, the use of variables does not have a practical meaning (in this case, the unreliability of the forecast of cash flows and the amount of rates significantly exceeds the difference rates).
A situation is possible when the calculation on the above options is done for past (nearest) periods and then extrapolation is carried out:
- ;
- ;
- .
4. Data forecast for calculating and calculating the level of reinvestment
For the possibility of applying the 3rd model, the data forecast is made for the calculation (data forecast and calculation procedure). As in the forecast of barrier rates, you can use the trend extrapolator.
5. Calculation of pure cash flow for each period
For the financing option at the expense of own funds and options, due to the loan, it is necessary to produce.
For the financing scheme, at the expense of the loan besides this is done.
Depending on the selected in 2 p. Schemes:
- the procedure for calculating the cash flow (;
- The procedure for calculating the cash flow (.
6. Calculation of the parameters of the investment project
It is better to have a little investment project indicators, but these indicators should be designed with a high degree of reliability and fully cover the main characteristics of the investment project.
Table with brief characteristics of parameters for which an investment analysis is conducted.
Determined |
Characterizes |
disadvantages |
Criterion Lemet |
|
Model number 1 F (only CF and I) |
||||
The time that the investment ensures sufficient money receipts to compensate for investment spending. |
financial risk |
|
||
The sum of all predicted cash flows. |
least accurately, the effectiveness of investment in absolute values, without taking into account the time value of money |
1. Not taken into account a change in the cost of money in time, |
NV\u003e \u003d 0 | |
Model №2 F (CF, I and RBar) |
||||
The time that the investment ensures sufficient money revenues to compensate for investment spending, while takes into account the temporary cost of money. |
financial risk, more precisely than ordinary payback |
1. The amount of cash flows after the payback point is not determined, |
||
The sum of the current values \u200b\u200bof all predicted, taking into account the barrier bet (discount rate), cash flows. |
effective investment in absolute values, in current cost |
|
NPV\u003e \u003d 0 | |
The ratio of the sum of all discounted cash flows (income from investment) to discounted investment consumption. |
efficiency (profitability) Investments in relative values |
1. It is not clearly meant that the funds received as a result of the project are invested at RBar rack, |
Dpi\u003e \u003d 1.0 | |
least accurately, investment efficiency, in relative values |
|
IRR\u003e |
||
| , years LRIS |
The weighted average life cycle of the investment project. |
financial risk | 1. Does not take into account the size of the investment, |
D -\u003e min |
The rate of return on the basis of the ratio of the net current value (NPV) DP and the amount of cash outlines. |
pure investment efficiency, in relative values |
1. The level of reinvestment is not taken into account, |
Nrr\u003e \u003d 0 | |
Adjusted with the barrier rate internal rate of profitability |
investment efficiency, in relative values |
1. The level of reinvestment is not taken into account, |
Mirr (bar) |
|
Recalculation of net current value in the equivalent of annuity |
effective investment in absolute values \u200b\u200bwith recalculation by 1 period (or year) |
1. Does not take into account the size of the investment, |
||
The sum of the future values \u200b\u200bof all predicted, taking into account the barrier bet (discount rates), cash flows. |
efficiency of investment in absolute values, in the future value |
1. Does not take into account the size of the investment, |
||
Model №3 F (CF, I, RBar and Rrein) |
||||
The sum of the current values \u200b\u200bof all predicted, taking into account the barrier bet and the level of reinvestment, cash flows. |
most accurate, investment efficiency in absolute values |
1. Does not take into account the size of the investment. |
MnPV\u003e \u003d 0 | |
Adjusted taking into account the barrier rate and reinvestment rate of the internal rate of profitability. |
most accurate, efficiency (profitability) investment, in relative values |
1. It is calculated only when the flow of cash exceeds their outflow, |
Mirr\u003e R Bar EF. |
|
The rate of return on the basis of the relationship of the modified net current value (MNPV) DP and the amount of cash outlines. |
most accurately, clean investment efficiency, in relative values |
Does not show the result of the investment in the absolute value. |
MnRR\u003e \u003d 0 | |
F (CF) is a function, with a dependency of the CF variable parameter;
CF - cash flow;
I - investment costs (cash outflow);
RBar - barrier rate;
R bar EF -;
RREINV - reinvestment level.
OS - for the correct comparison of two investments, they must have the same investment period.
OR - for the correct comparison of the two investments, they must have the same amount of investment costs.
LRIS - any validity of the investment and size.
If a high degree of reliability is known for the forecast of the barrier bet and the level of reinvestment, then the effectiveness of the project is most accurately characterized by the MIRR indicator. If there are no IRR data rates. If there is only a barrier bet, then DPI.
NPV C Modif NPV is similar.
7. Analysis of sensitivity and assessment of qualitative factors
An important point when evaluating the effectiveness of investment projects is an analysis of the sensitivity of the criteria for the change in the most significant factors: the level of interest rates, the rate of inflation, the estimated period of the project's life cycle, the frequency of obtaining income, etc. This will determine the most risky project parameters, which matters when justifying the investment solution.
8. Evaluation and comparison of alternative investment
Depending on the task, the parameters characterizing the investment project are selected, and then the choice of optimal (optimal) projects is compared.
In general, each payment flow must be compared with the best alternative, in terms of efficiency and risk.
Manage a large number of investment projects is more difficult than several large.
In analytical conclusion, words need to be expressed that it is impossible to describe numbers.
9. Analysis of liquidity and solvency changes
The accuracy of such forecasts (profit-loss account and balance sheet), in modern Russian conditions, is so low that it does not have a practical sense to calculate long-term forecasts, except for analyzing liquidity changes in initial periods.
Make a truly reliable forecast of OPU and BW for more than 2 years, the task is far from trivial: too many random and independent factors affect these indicators.
To justify the receipt of loans and financing under the leasing scheme, it is better to indicate that no major changes for the period of the project is not foreseen: i.e. Taking additional loans, etc. or describe possible changes.
Data forecast and calculation for.
10. Postinvestment analysis
Allows you to analyze errors and shortcomings and thereby improve the assessment of follow-up investment projects. Increases analytics qualification.
11. Investment factor analysis
Factor investment analysis is applied to determine the degree of influence of the investment project on the main performance indicators of the enterprise and includes the calculation of the following indicators:
- - characterizes the profitability of investment on an increase in gross production production;
- - characterizes the profitability of the investment to reduce costs;
- - characterizes the profitability of the investment to reduce labor costs for the production of a unit of products;
- - similar to the previous one, but with recalculation to reduce the number of personnel;
- - characterizes the profitability of an investment on increasing profits;
- - an estimate of increasing profits from the project by the action of additional investments;
- - Evaluation of a decline in the payback period of the project by the action of additional investments;
- - Assessment of such factors as the volume of products manufactured, the idle rate, the costs, the number of employees and labor costs for the corresponding indicators.
It is necessary to study the dynamics of these indicators, the implementation of the plan, carry out an inter-farm comparative analysis, to determine the influence of factors and develop measures to increase (decrease) their level.
The main direction of increasing investment efficiency is the complexity of their use. This means that with the help of additional investments, the enterprise must achieve optimal relations between the main and current funds, active and passive part, power and working machines, etc.
Literature
Holt N. Robert, Barnes B. Seth. It was this book that was based on the above methodology and program.
Software implementation will be implemented in Altair Investment Analysis 2.XX.
* In the old version of the technique there was a "competent investment", at the time of writing, many years ago, judging by the examples of investment projects on the Internet, it was in my opinion, relevant, despite the fact that it was not talking about inanimate objects. The idea was to shift the perception of the technique in the direction of understanding the economic sense of calculations.
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Investment analysis
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Fundamentals of Investment Analysis
Infusion of large funds in a business or project is always a risky business. Investments are designed for several years, and any error can lead to money losses. To prevent this, companies attract competent specialists who analyze the feasibility and effectiveness of investments.
If you want to get fundamental knowledge in the field of investment analysis, be sure to go through this course. It is designed on the basis of the rich experience of the teacher - a specialist in the field of investment analysis with 18 years of experience in large industrial holdings. In addition, it takes into account requirements professional Standard "Specialist in Financial Consultation" of the Ministry of Labor and Society of the Russian Federation.
In class you:
- get acquakence S. modern technologies financial mathematics, calculation of discount rates;
- learn how to use various types of investment projects to solve the economic tasks of your company;
- increase your management skills.
The course includes solving a set of tasks for each module (thematic block). At the end of occupations, students will check their knowledge during Brain Ring, divided by teams.
Course audience: listeners who want to receive initial knowledge and expand the horizons in the field of investment analysis; financial consulting specialist; investment project specialist; Financial consultant-intern; Junior financial consultant; specialist (tutor) on financial education; broker; commercial agent; Broker (financial).
Listeners who have higher or secondary vocational education are issued a certificate of improving the qualification of the Center.
Want to start understanding investment analysis? Sign up for the course!
Financial instruments designed during securitization transactions are especially mortgage securities (MVS), the coverage of which makes loans to individuals - there are unique requirements for investment analysis. These securities post tasks before investors who are not known in other markets and which are simultaneously the source of new opportunities, and a source of serious difficulties. The main problem stems from a combination of difficulties to struggle the transaction with the unpredictability of human behavior.
With a purely academic point of view, the coating can be considered as a bullet pool, each of which includes some combination embedded Options (Embedded Options). The market value and dynamics of repayment of these loans can be calculated on the basis of the assumption about the optimal execution of the built-in options. Further, the results of calculations for individual loans can be summed in order to assess the market value and other major characteristics of the issued valuable papers. To estimate the cost of the security, it will only be necessary to study the documentation on loans underlying the transaction (coating) in order to determine the contractual obligations of each particular borrower.
Unfortunately, in practice, this procedure does not work. The behavior of the borrower is the result of the interaction of a set of factors, some of which are not so easy to describe. Mortgage loans are provided by real estate, and for many borrowers, this property is the main place of residence and the most valuable part of the property. The decision of the borrower about when and in what form it can perform its option (on early repayment of the loan) 1, is determined by the set of factors, and not only with clean mathematics. That is why in many cases securities manufactured during securitization are marked by the human factor (Warm-Blooded Securities), when the dynamics of human life is intertwined with the mechanisms of financial markets.
Choosing the right approach
Over the years, participants in the securities market unsuccessfully tried to find a perfect model that would allow the analysis of absolutely all investment solutions. They hoped to detect a universal method using which one could simply enter data on all the securities marketing into the computer and receive an optimal solution on the monitor screen. Such a model has somehow had to take into account all possible risks and the likely results of market behavior of securities. Next, this ideal model was to analyze the current state of the securities portfolios of all investors, desired financial results And find those papers, investments in which would bring the best result. The model was supposed to take into account historical information and predict the future. The consequence of the use of such a perfect model would be the formation of an optimal investment portfolio.
It is good or bad, but this model does not exist. Not that analysts did not try to build it. Some believed that the method was ideal, which is based on computer modeling of the price, calculated based on the value of the built-in options (spread with an option, Option-Adjusted Spread, OAS). Since the OAS models consider hundreds of options for future development of events, analysts believed that this method would be able to give an unequivocal answer to the question of what kind of valuable paper should be purchased. Nevertheless, even the OAS model with its wide possibilities for modeling future behavior is not able to provide investors of clear investment recommendations (without using other models). Analysis conducted on its basis - if it is made qualified - can answer the question of which of the securities in this moment The market is underestimated, but it cannot suggest which one is most suitable for a portfolio of a particular investor.
Some participants in the securities market appealed to classical optimization methods, but as a result, they found a black box. Optimization methods involve the task of a certain target function and a set of restrictions, on the basis of which the characteristics of such a security that maximize the target function is calculated. Although the use of optimization methods often leads to good results when solving simple tasks Optimization of the investment portfolio, however, with more complex tasks, it rather indicates the fallacy of the initial assumptions and assumptions, rather than gives realistic recommendations for investors.
Taking into account the complexity of finding optimal investment solutions and many existing methods of analysis, the investor turns out to be difficult to determine which of these methods should be used. Our answer may seem unsatisfactory if you are looking for an immediate solution, but nevertheless it sounds like this: Choose that analysis method that matches your goals and the degree of complexity of the tools in which you are going to invest. Several examples will best understand our point of view.
Obviously, investment objectives are important to determine the depth of analysis. For example, if you have identified the desired level of profitability and an average term, it is these characteristics of a potential investment tool must determine the minimum requirements for your analysis. The complexity of the requirements of the requirements may increase significantly if from you as from the portfolio manager will require an assessment of the investment tool based on the frequency of the income received and market value investment portfolio. In addition, the controls are increasingly require such a portfolio management, in which the maximum accurate compliance of the risk structure of assets and liabilities is achieved. For example, many insurance tools contain built-in options, and investment portfolios should be structured in such a way as to compensate for the risks associated with these options.
The complexity of assets also affects the depth of analysis. Suppose you analyze two corporate bonds having AA rating. Both of them have a period of repayment of 5 years, are tools without the right of early repayment with the payment of the nominal at repayment. In order to determine which of them is cheaper, it is necessary to calculate their profitability, and also make sure that both bonds have the same credit quality. If both bonds have an equal coupon, it is enough just to compare their prices. Analysis of general income scenarios or the OAS model will not be able to change the analysis results.
However, if you attempt to compare the certificate issued by the Agency with the right repayment law (CALLABLE AGENCY BOND) with a mortgage-valuable CMO type, the analysis of the yield of these securities will not give you complete information about their comparative market price. Conducting a correct comparison of the market behavior of these two types of securities will require some kind of optional analysis. Moreover, the optional analysis may be quite complicated, since the methods used to evaluate certificates issued by agencies with the right of early repayment and for the CM, as a rule, are not always compatible. Table 3.1 shows several examples of a consistently complicated comparative analysis different types valuable papers.
In addition, even if it manages to determine what the Security Paper issued by the Agency is cheaper than the SMO, the investor can still make a decision in favor of purchasing precisely the SMO, since the behavior of this security under certain circumstances is more responsible for its investment preferences. For example, it can be interested in obtaining maximum yield subject to stable interest rates or if early returns (prepayments) compensate for the risks associated with other securities in the portfolio.
| Securrative Paper (Bond) | In comparison with the other security (Bond) | Features of comparison |
| Corporate bond with high credit rating without early repayment | The same market, one-time repayment, equal terms of circulation, equal coupon rates | |
| Corporate bond with high credit rating without early repayment | Corporate bond with high credit rating without early repayment | Different maturity time, coupon rate, issuer activities |
| MBS Pass-Through | MBS Pass-Through | |
| Corporate bond with early repayment | MBS Pass-Through | The right of early repayment, i.e. early return (prepayments), the same markets |
| SMO INVERSE FLOOTER (with back variable) | MBS Pass-Through | Leveraged Inverse Floater (Leveraged Inverse Floater), the same markets |
| ARM + IO (mortgage securities providing the right to receive interest payments that generate a coating consisting of mortgage loans with a variable interest rate) | PERPETUAL FLOOTER (perpetual securities with a variable interest rate) | The presence of a leverage (leveraged), various markets |
It may seem that the most reliable is the use of the most complex type of analysis in order to account for all risks associated with specific securities, and ensure the compliance of the goals and investment directions. This approach looks tempting, but there are serious dangers in it. The more difficult analysis, the greater the number of prerequisites and assumptions have to do. When it comes to the results of such an analysis, many assumptions remain unknown to those responsible for making decisions. Therefore, it turns out to be almost impossible to evaluate how changes in assumptions may affect the final result. The slightest adjustment of the original parcels used in the analysis may cause significant changes to the investment decision. Consequently, we recommend whether it is possible to use the most simple analytical models, provided that they take into account all the risks arising.
The consequence of the rule of compliance of the depth of analysis to the goals of investing and the complexity of the tools used is the following circumstance. The judgment of the manager always plays an important role in the investment process. In this book, we do not give recipes of how to avoid the need for such judgments. On the contrary, we would like to warn managers about the importance of this issue and offer them a number of ways that can help them in making these complex decisions.
Types of investors
There are many different types of investors, each of which is characterized by special investment preferences and goals. Nevertheless, they can all be combined into three main categories in accordance with the criterion of investment goals: arbitration speculation (TRADING), obtaining interest margin(Net Interest Spread) or obtaining cumulative income (Total Return). Investors can evaluate risks using various methods and types of investment analysis. In practice, the majority of investors cannot be attributed to any one specific category: when investing, they simultaneously pursue a lot of goals.
Arbitrator Speculator (trader)it sets himself a relatively simple goal: buy investment tools at a low price and sell them at a higher. This type Investors seeks to conduct purchase and sale transactions in short periods of time. The longer the trading position of the speculator remains open, the higher the risks, so it tries to minimize the time period between buying and selling. Arbitration speculators have two main sources of income. First, they benefit from their status of the Permanent Member of Trade ("Market Makeer"), earning on spreads. The price on which the company is ready to buy a valuable paper called price demand (BID). The price for which she is ready to sell (offer for sale) securious paper - price OFFERS (ASK). The difference between them is called the difference between the price of supply and demand (Bid-Ask Spread). This difference (spread), multiplied by the volume of transactions committed by the company, forms the company's profit as a market meker.
The arbitration speculators seek to benefit due to the rejection of market prices for investment tools from the optimal (fair) value. They acquire those securities for which, in their opinion, the remaining market participants will be ready to pay a higher price. Arbitration speculators use their position of active participants in many markets in order to identify such capabilities and use them. Securitization is one of the tools that these companies can use to profit from price differences. From time to time, the arbitration speculators discover that the structuring of some assets and securitization allows them to help out the assets for these assets a higher price.
In addition, arbitration speculators seek to reduce risks by hedging. Perfect hedging, from the point of view of the trader, is a simple sale of a position that eliminates all sorts of risks. But not all positions can be closed immediately at the best price. The trader must be assessed whether hedging is indeed reduced the risk of a specific position. Most speculators (traders) on the market for fixed return tools are hedged with risks associated with possible changes in the levels of profitability, i.e., with the risk of duration changes (Duration Risk) of their position. Traders can also strive to reduce industry risks (Sector Risks) of the investment portfolio by "short" sales of instruments in their portfolio.
Traders call arbitration The strategy when certain assets are purchased at a low price, and then sold at a higher price, or structured after the acquisition and resell with profits. Although this term has several values \u200b\u200bin the economic and financial theory, traders use it in the widest value to designate any opportunity to receive income. Often, arbitration speculators cannot quickly implement all elements of the hedging strategy, experiencing a lack of necessary tools. Such situations can hardly be attributed to this arbitration, and in many cases they led to significant investors' losses, especially when market conditions have changed rapidly.
Companies working in Wall Street and with major trading units that conduct brokerage and dealer operations are typical arbitrator speculators (traders). At the same time, there are many other companies that can also work as traders. Mortgage banks that give loans mainly with the purpose of their subsequent resale in the secondary market, in essence, are traders: they provide loans to individual borrowers and then sell them in the form of securities. Some investment institutions, such as hedge funds, seeking to increase the turnover of assets and the use of short-term opportunities associated with the relative price change in investment instruments, can also be attributed to traders.
Receiving Investors interest marginThey seek to achieve a stable source of income in the form of a difference between income, which belongs to their assets, and expenses related to payments for obligations. The size of the arising difference must be sufficient to provide an acceptable profitability of equity in accordance with the selected strategy. Banks and other deposit institutions are typical representatives of this category of investors.
A typical bank uses funds placed on his deposits (deposits) to provide loans to various categories of borrowers. The difference between interest on loans paid by borrowers, and expenses related to interest payments to the deposit holders is called the interest margin. Supervisory authorities require a bank to maintain a certain amount of equity, corresponding to the total level of risk of assets with which it has. In general, banks assess profitability investment strategies Based on the calculation of the profitability of assets, which is equal to the ratio of the percentage margin to total assets, or profitability of capital, which equals the ratio of interest margin to share capital. An important element Investment management is to ensure the balance between the risks of a certain strategy and the value of its own (joint-stock) capital. Reducing the share of equity and an increase in the share of borrowed funds not only increases capital profitability, but also leads to risk risk.
Although banks are the most common representatives of the category of investors focused on obtaining a percentage margin, theoretically any investor attracting borrowed funds To acquire assets and preserving open positions for a sufficiently long period, implements a similar strategy. Therefore, it should carefully assess the amount of the credit shoulder and the level of risk. COLLATERIZED-BOND OBLIGATIONS (CBO) or Colladeralized-Debt Obligations (CDO) type are tools that have become the result of investors who adhere to this strategy.
Managing, adhered by the receipt strategy cumulative incomeThey strive to surpass the set of some comparative (reference) indicators (Benchmarks) in the amount of annual income on the invested capital. In general, the indicator of cumulative income reflects the total income and changes in the market value of investment instruments for a certain period. The classic investor focused on the cumulative income is the managing pension fund. Many mutual investment funds It also proceeds from the strategy for maximizing cumulative income. It is believed that investment companies focused on aggregate income are usually not used by the "credit shoulder", since they do not resort to borrowing in the implementation of their investment strategy.
Companies in this strategy usually compare the results of their activities with the results of other players that have similar investment goals or with indexes A certain set of securities. Lehman Brothers Investment Banks, Salomon Brothers (now part of Citigroup) and Merrill Lynch are the main providers of information on fixed-income securities indices (Dow Jones, Standard & Poor's and NASDAQ indices are the main indicators describing the state of affairs in the US stock market). The Lipper Analytic Services service, which currently belongs to Reuters, is the main source of comparative data on the levels of profitability, which show various controls. MorningStar is considered the leader in the market information about the profitability of mutual funds.
Since the results of management in the securities market, calculated on the basis of the criterion of the cumulative income are usually compared with the indicators of the profitability of other assets, the level of risk of such investments is assessed by comparing the structure of the existing investment portfolio with the structure of the index that is considered reference for this investment company. The managers are trying to find such tools that allow you to show higher results compared to the reference, and try not to take over the excessive risks associated with the possibility of reducing the profitability of the acquired investment tools below the reference index.
Many portfolios of insurance companies are estimated on the basis of the criterion of aggregate income, although the insurance companies as a whole should more adhere to the interest margin strategy. Nevertheless, a wide range of obligations and uncertainty associated with insurance policy payments make the dynamics of the amounts of interest spreads for such companies too cumbersome. Since the analysis of cumulative income includes an assessment of the impact of changes in both the profitability and prices of the relevant financial instruments, it is widely used for integrated investment analysis.
Analysis of securities
There are many methods for analyzing securities manufactured during securitization and structuring process. Each type of securities and a portfolio strategy require their analytical method. In this book, we use an approach that allows us to consider various methods. This approach consists of four stages, which are given in Table. 3.2.
The four phases under consideration suggest research methodology, coatings (collateral), structures and investment results. At the study of the methodology, a set of possible states of the market as a whole, capable of providing an impact on the results of the analysis. In other words, we create many possible scenarios. At the stage of the analysis of the coating (collateral), the characteristics of a particular pool of assets are considered, especially in terms of early returns, losses and other aspects that can affect the flow of payments. When considering the structure, the amount of securities payments is calculated for each scenario, taking into account early repayments, losses and other estimates, including the features of the structures used in the issuance of specific types of securities, as well as other significant factors. Finally, when evaluating the result, calculations required to summarize data on the flow of payments are carried out.
Differences in analyzing methods reflect differences in choosing options on each of these four stages. A relatively simple analysis method - the calculation of the MBS profitability is described in Chapter 8. A more complex analysis that takes into account the cost of embedded options (OAS) is as applied to the MBS in chapter 13. Both analytical methods (as well as in other cases reviewed in the book) include The four stages listed above. Despite the fact that the analysis process for clarity is divided into four stages, they are all closely related to each other. For example, the choice of methodology depends on how the possible set of results is. The coating analysis involves the knowledge of the results obtained at the stage of setting the methodology, and, in turn, defines some key components of the structure.
Methodology
At the method of defining methodology, the basic parameters of the future analysis are set. The types of risks are determined. This stage is the most important, and at the same time its importance is often underestimated. The main goal is to determine the set of factors reflecting the results of the market behavior of the securities that must be included in the analysis. The importance of this phase is that it sets the boundaries of the analysis. Factors not taken into account here are not included in the analysis at later stages.
Due to the complexity of securitization and structuring processes, the analysis of securities requires accounting for a plurality of factors. Unfortunately, methods are too often acceptable for analyzing certain financial instruments and processes, blindly transferred to all other tools and processes excluding the peculiarities of the latter. Thus, the results of MBS market behavior must be correlated with the situation in the housing market; The fate of the debt tool provided by the right to commercial real estatemay depend on retail sales, and the results of behavior in the securities market provided by the receipts on credit cards are from the number of bankruptcies of individuals. The underestimation of the impact of the changing economic situation can lead to the fact that the analysis will not take into account potential investment risks.
The most important component of economic conjuncture that affects the majority of fixed income investments is the interest rate. Interest rates are direct impact on the results and level of risk of investment in securities with a high rating without early repayment. On securities with the right of early repayment, such as MBS and other structured tools, the interest rate is affected by indirectly through the dependence of the flow of payments on securities from interest rates. The definition of the market value of the investment tool and the associated risks in this case is a complex process.
When analyzing the dynamics of interest rates, various assumptions are possible - from the simplest when it is assumed that the interest rate will remain unchanged during the entire period of the period, to dynamic models, when it is assumed that the interest rate varies linearly for 12 months, and the nature of each change is calculated in according to the probability determined by the current volatility of interest rates; And, finally, to the most difficult, when interest rates are determined within the framework of a two-factor model of a stochastic process, in which the distribution of interest rates has a logon character, has the ability to "return to the average value" and meets the absence of arbitration (TWO Factor, Log-Normal, MEAN-REVERTING PROCESS Which Satisfies A NO-Arbitrage Condition), and the variance and covariaration values \u200b\u200bused in modeling are based on empirical data.
The interest rate is not the only factor affecting the results of the market behavior of securities. As in securities, taking into account the human factor, these complex financial instruments experience the impact of all the circumstances that affect the behavior of finite borrowers. Changes in personal life (wedding, divorce, the birth of children, the death of loved ones) affect housing rights and affect the solvency of the borrower. Since the securitization transaction covers many individual loans, the behavior of one individual borrower cannot significantly affect investor solutions. However, the actions taken as a whole, individual borrowers will determine the market behavior of securities. That is why analysts specializing in the analysis of such securities carefully study economic data related to the labor markets and real estate, as well as other economic and demographic statistics.
One of the main difficulties of this analysis is that these "changeable" characteristics relating to the coverage and market behavior of securities should be considered in the context of permissions about the dynamics of interest rates. It is not enough to conclude that the growth of unemployment leads to a decrease in the frequency of early returns. It is also necessary to determine exactly how the unemployment rate changes with this change in the interest rate.
The choice of methodology also provides for the choice of a financial and theoretical model. As a rule, the analysis of securities with fixed income is carried out within the framework of the comparative analytical method and involves a comparison of market prices of two or more types of securities. Some analytical instruments are more suitable for comparative analysis of securities with various investment characteristics. There is a developed theory that connects the dynamics of interest rates with the frequency of execution of options (the frequency of early returns). Various analysis methods have a greater or less compatibility with the provisions of this theory. But even in cases where analysts identified the theory applied, they can choose various methods of its use, which may differ in the analysis mechanisms, and results. In more detail, the financial theory of interest rates is discussed in chapters 7 and 12.
Coating
Deciding with a specific approach and initial assumptions (assumptions) relative to general economic scenarios, investors are able to predict the characteristics and expected coating behavior (provision). The purpose of the analysis is to identify the factors affecting the flow rate, which generates coverage, as well as to fulfill obligations on the issued securities. Such factors (assumptions) are usually associated with the form of specific indicators characterizing the market behavior of assets (for example, the annual interest rate), or to the form of completed models, which are based on data on the coverage and economic indicators to build a monthly prognosis of security behavior. With this analysis, the emphasis is usually done on early returns and credit conditions.
Early returns take place when the borrower decides to realize its right (optional) on early repayment of the loan. Contractual conditions of the majority credit products provide borrowers the right to produce early repayment of the principal debt at any time; Other, on the contrary, provide penalties in the event of early repayment of debt or other restrictions established in loan agreements. Unlike corporate bonds, temporary schedules of early consumer loans are usually projected based on the analysis of statistical data obtained over a long period, and not based on optimizing the timing of payment obligations, since borrowers often face unforeseen expenses, the terms and size of which It is impossible to appreciate theoretically.
The credit assessment is, first of all, assessing the probability of delay in returning or non-fulfillment of obligations (default), as well as the size of the loss arising. Usually loans for which delaying payments are considered overdue (Delinquent). The quality of overdue debts is measured by the number of days that have passed from the date of the payment period. Overdue debt with a period of more than 60 or 90 days is considered doubtful (Seriously delinquent). For some credit products, overdue debts are recognized default of the borrower. The fact of default means the beginning of the procedure for compensation for damages. The servic company (SERVICER) may try to pay losses by concluding a new agreement or by adding recovery on the debtor's property. (Foreclosure). The difference between the amount of the non-refundable debt and the amount of compensation (less judicial expenditures) Called summit of losses (Severity of the Loss).
Assumptions regarding the frequency of early returns and their temporary graphics, as well as fulfillment of loan obligations are usually based on the statistical analysis of historical data. Approbation and assessment of the reliability of such assumptions is a key element in choosing (designing) securitization structure and predicting market behavior of manufactured securities. Each type of coating (collateral) requires independent and comprehensive analysis of the specified characteristics.
Structure
Stage development Stage is the kernel of the analytical process. At the same time, the flow of payments on securities is calculated. The basis of the calculation is the assumptions about the future economic situation (methodology), estimates obtained at the stage of coating analysis (security), as well as the features of loan agreements included in the coverage, and legal design securitization transactions. The results obtained at the next step are usually a generalization of all the characteristics of payments flows carried out in one way or another. Calculating the flow of payments from a theoretical point of view is a fairly trivial task, but in many cases it is the most time consuming.
The process of computing begins with the assessment of basic assets, i.e. coatings. On its basis, the amount of securities payments, which will be released during securitization of the selected credit pool are determined. Pass-Through securities payments correspond to the payment flow that generates a loan pool. The cash flow generated by the structured securities is formed on the basis of cash flow on securities like Pass-Through. The flow of payments on the portfolio is defined as the amount of cash flows for each of the securities. The process of distribution of cash flow generated by the coating between different classes of securities is sometimes called waterfall (Waterfall)Since he describes how a single payment flow is divided between different tools.
The greatest complexity at this stage is the choice of the appropriate indicators describing the features of the behavior of securities. Each provided loan has unique characteristics that determine the dynamics of payments, and each securities is subject to a complex set of rules establishing the procedure for the distribution of incoming payments between different grades of securities. Another important consideration relating to this analysis phase concerns the definition of the required level of its detail. In some cases, complete information about each of the loans is inaccessible, so the analysis should be based on the weighted average indicators. In other cases, the most information is available. In this case, the analyst should find the right balance between the desire to maximize the accuracy of the estimates and additional costs associated with the increasing volume of computing.
results
The final stage is the analysis of the results obtained. At this stage, generalized indicators are determined based on cash flows and theoretical approaches (methodology). The purpose of determining generalized indicators is to help companies in the investment process. Analytical results, as a rule, give a fairly complete picture of income, cost and risks.
An assessment of income gives an idea of \u200b\u200ba temporary schedule of the future flow of payments and the amount of income. The determination of the cost allows you to answer the question of which of the papers are expected by the market expensive, and which are cheap? Although the higher quality of the estimated parameters gives more reliable forecasts of the future behavior of securities, all the estimates have made their strengths and weaknesses. Quantitative risk assessment allows us to conclude about the effectiveness of a particular investment, as well as compare each other the results of the market behavior of various investment instruments (Table 3.3).
|
Parameters |
Static |
Scenic |
Taking into account options |
|
Yield |
Cumulative Income (yield) |
Yield taking into account the value of the built-in options (OA-Yield) (rarely used parameter) |
|
|
Market price |
Spread profitable |
Profile income |
Spread taking into account the cost of options (OAS) |
|
Weighted average term to maturity Duration of payment flow |
Effective duration |
Duration taking into account the built-in options (OA-DURATION) Convection taking into account the built-in options (OA-CONVEXITY) |
For securities at risk of losses due to non-fulfillment of the coverage of obligations, there are indicators that help estimate credit risk. Partially magnitude of this risk Determined in the process of structuring when a credit rating is assigned to each class of securities. However, for evaluation credit risk From the point of view of the investor, additional analysis may be required.
The accuracy and usefulness of these indicators depends on how complex is the analytical process. At the final stage, only those factors that were included in the analysis at the very beginning are taken into account, i.e. at the method of choosing a methodology, further extended into a specific form when studying the coating, attached to a specific structure and, finally, are summarized in the form of generalized indicators upon receipt Result.
A variety of types of coverage, securitization structures and investment strategies causes the need for various analysis tools. Impact problems require applications in different ways And the depth of analysis. Despite the fact that analytical tools differ significantly in the degree of complexity of the calculations performed, according to the requirements for initial data and technical complexity, most of them include the same four stages of analysis associated with methodology, coating, structure and results.
The choice made on each of the stages determines the effectiveness of the tools used to solve specific problems. Each stage is closely connected with the rest. Good analytical tools are distinguished by comparable difficulty levels at all four stages. Complicated indicators based on simple assumptions or simplified assumptions can create a false impression of accuracy, while at the same time use of primitive indicators based on complex assumptions - empty waste of forces and time. Good analysis Requires full compliance of the method of solving the degree of complexity of the task.
Exercises
Exercise 3.1a.What is the short-term and long-term impact of an increase in the spread on the investment portfolio of three types of investors: the arbitrator speculator, the investor focused on the receipt of interest margin, and the investor implementing the strategy of cumulative income? Excel from the fact that an increase in the spread of the securities that are in the portfolios of investors have an impact on the cost of hedging tools for the arbitrator speculatory, the amount of obligations for an investor-oriented income and changes in the reference index for a market participant who adheres to the strategy Maximizing cumulative income.
Exercise 3.1b.If the company has additional funds to invest in some tool, what are the short-term and long-term consequences of an increase in spread?
Exercise 3.2.Consider the differences between different types of investors. What are the comparative advantages and disadvantages for each type of the two reflection methods below accounting reporting Financial Instruments: Accounting at market value, accounting for the cost of acquisition?
1 In the terminology of the Optional Market, the term "Return's Return" is synonymous with the term "Option Execution". - Note. Scientific ed.
The main purpose of the existence of any commercial structure is to receive income. One way to achieve this goal is to invest. Investing the means follows only after an investment analysis has been carried out. It allows you to establish the feasibility of the selected investment method.
What is investment analysis
Investment analysis (IA) is a set of activities necessary for the formation of an effective business plan, to establish the degree of expediency of investment. The analysis allows you to substantiate the selected investment method.
When should I conduct an analysis?
Investment analysis can be divided into two categories:
- Subject analysis. The study is carried out before the start of the transaction. It is fundamentally to make a decision on the feasibility of investment. The process analyzes all aspects that may affect the course of investment. Subsection assumes the formation of investment and objectives. The degree of risk is calculated. The social significance of the project and the management strategy is determined.
- Temporary analysis. It is carried out throughout the investment project.
IMPORTANT! Investment analysis is a non-across-term measure, but a dynamic event. Its holding in the process of implementing the project allows you to adjust tasks and objectives, increase efficiency.
Functions of investment analysis
Consider the functions of investment analysis:
- Formation of the structure of information collection required for effective investment.
- Establishing risks that are possible on various levels of the project to invest.
- Search for alternative investment methods.
- Creating a basis for decision-making.
- Establishing the order of investment activities.
- Creating a base for making decisions regarding the attraction of funds.
EA is a multifunctional tool.
Tasks of investment analysis
Consider the tasks of the IA:
- Selection of sources of financing that will ensure the expected result.
- The choice of suitable investment solutions that will increase the company's competitiveness.
- Analysis of the degree of risk for investors.
- Determination of the degree of profitability of the project.
- Improving the quality of investments.
Investment analysis allows you to form a database under all stages of the investment project.
IMPORTANT! The main purpose of the analysis is to determine the feasibility and efficiency of the project. They calculate the result of its implementation and benefits from the project. If the benefits of investments are insufficient, the project will not be approved.
Methods of investment analysis
For various types of investments, various methods of analysis are intended.
Analysis of real investment
Real investment (RI) differ from financial. The differences are determined by the methods used. Consider them:
- Income OT real investment It can be expected only in the long run (year or more).
- The volume is large enough.
- Ri usually have a direct connection with the long-term goals of the company.
All the differences in question should be taken into account when analyzing. The study is carried out in two directions:
- Study of economic efficiency of deposits.
- Determining the degree of risks.
The study of economic efficiency of deposits is carried out in such ways as:
- Accounting estimate . Based on the current estimate of the project values. It does not take into account such a factor as time. Accounting is characterized by simplicity, as well as visibility. However, the considered method is considered auxiliary.
- Dynamic method. The assessment is carried out taking into account such a factor as time. The method is considered more accurate.
To assess the degree of risks, various mathematical methods are applied.
Analysis of financial investments
The FI analysis can be performed by a variety of methods. Consider the main of them:
- Fundamental. The main purpose of this method is to assess the attractiveness of securities, the dynamics of changes in their value. The process analyzes the global market, separate industries. This method allows to explore fundamental questions.
- Technical. It is formed a forecast for the value of securities. The forecast is based on price change in the past. Technical analysis allows you to determine the optimal time to buy and implement the papers.
- Portfolio. The process analyzes the investment portfolio. The main purpose of the method is the study of the ratio of yield and risk values, the choice of the optimal portfolio.
Methods can be used both individually and in the complex.
Procedure for analyzing
The following stages of investment analysis can be distinguished:
- Formation of the information base. The information is collected, on the basis of which the analysis will be performed.
- Conducting a preliminary study. In particular, a preliminary analysis of external factors is carried out, the conditions of the investment environment.
- Evaluation of external factors. At this stage, the market itself is investigated, external parameters that can affect investment attractiveness.
- Investigation of the amount of free funds in the company. It is necessary to determine the amount of funds that will be aimed at investing. At this stage, the organization's potential is also investigated.
- Study of economic stability.
- Creating a conclusion about an investment project based on the complex of factors.
- Conduct comparative analysis.
The analysis steps may vary depending on the purpose of the study.
An example of analysis
The company uses equipment for the production of products. This year, equipment with the same functions appeared, but it is more productive, mobile and fast. The acquisition of technology will increase product production, reduce production costs. Initial cost Equipment amounted to 32 thousand dollars. Depreciation was charged over it for 10 years. Currently, the cost of equipment is 15 thousand dollars. New equipment costs $ 55,500. The service life is 8 years. After this time expires, the equipment will be turned into scrap. The cost of this scrap will be 1,500 dollars.
The performance indicator of the current equipment is 200 thousand units of finished products per year. When operating the new equipment, the value under consideration will increase by 25%. The management of the organization is confident that all this volume of products will be able to implement. Current spending per unit product:
- 12 cents - salary payment.
- 50 cents - raw materials costs.
- 24 CENTER - overhead.
When operating the new equipment, spending will be as follows:
- 8 cents - salary payment.
- 47 cents - raw materials costs.
- 16 cents - overhead.
Costs for paying salaries decreased due to the fact that the operation of new equipment allowed to dismiss one operator. The process has become more automated. Costs on raw materials are reduced due to the fact that losses are reduced. Based on these values, a table is compiled. In this case, the size of the initial investment is $ 35,625 (with a deduction of income from the sale of old equipment, tax deductions).
Under investments or investment In the general sense, the temporary refusal of the economic entity from the consumption of resources available to its disposal (capital) and the use of these resources to increase their welfare in the future. The simplest example of investment is the spending of funds for the acquisition of property characterized by significantly less liquidity - equipment, real estate, financial or other non-current assets.
Basic signs investment activitydefining approaches to its analysis, are:
- Irreversibility associated with the temporary loss of consumer value of capital (for example, liquidity).
- Waiting for an increase in the initial level of well-being.
- Uncertainty associated with the assignment of results on a relatively long-term perspective.
It is customary to distinguish between two types of investment: real investment and financial (portfolio) investments. With further presentation of the material, it will be mainly about the first of them.
The main concepts of the theory of investment analysis include:
It should be noted that in the case of a real investment, the condition for achieving intended goals, as a rule, it turns out to use (operation) of the respective non-current assets for the production of some products and the subsequent implementation. This, for example, belongs to the use of the organizational and technical structures of the newly educated business to extract profits during the statutory activities of the enterprise created with the involvement of investments.
Investment project
If the volume of investments turns out to be essential for this economic entity in terms of the impact on its current and promising financial condition, the adoption of relevant management decisions should be preceded by the Stage of Planning or Design, that is, a stage of investment research, the completion of the investment project.Investment project It is called a plan or program of measures related to the implementation of capital investments and their subsequent reimbursement and profit.
The task of developing an investment project is to prepare the information necessary for the reasonable decision on the implementation of investments. The main method of achieving this goal is the mathematical modeling of the consequences of the adoption of relevant decisions.
Budget approach and cash flows. For modeling purposes, the investment project is considered in the temporary scan, and the analyzed period (the horizon of the study) is divided into several equal intervals - planning intervals. For each planning interval, budgets are drawn up - estimates of revenues and payments reflecting the results of all operations performed in this temporary interval.
The balance of such budget is the difference between arrivals and payments - there is a cash flow of an investment project at this planning interval. If all components of the investment project are expressed in cash assessment, we get a number of cash flow values \u200b\u200bdescribing the process of implementing an investment project.
In the enlarged structure, the cash flow of the investment project consists of the following basic elements: Investment costs. Revenue from product sales. Production costs. Taxes.
At the initial stage of project implementation (investment period), cash flows are usually negative. This reflects the outflow of resources occurring in connection with the creation of conditions for follow-up activities (for example, the acquisition of non-current assets and the formation of pure working capital).
After completing the investment and start of the operational period associated with the start of operation of non-current assets, the value of the cash flow, as a rule, becomes positive. Additional revenue from the sale of products, as well as additional production costsThere may be both positive and negative values \u200b\u200bduring the implementation of the project. In the first case, this may be due, for example, with the closure of unprofitable production, when the revenue decline overlaps cost savings. In the second case, the cost reduction as a result of their savings during, for example, equipment upgrades.
Technically, the task of the investment analysis is to determine what will be the amount of cash flows by a growing outcome at the end of the established horizon of the study. In particular, it is fundamentally important if it will be positive.
Profit and amortization. In investment analysis, the concepts of profit and cash flow play a major role, as well as the concept of depreciation.
The economic meaning of the concept of "profits" is that it is an increase in capital. Speaking otherwise, it is an increase in the welfare of the economic entity, which disposes of a certain amount of resources. Profit is the main goal of economic activity.
As a rule, the profit is calculated as a difference between income derived from the sale of products and services at a given time interval, and costs associated with the production of this product (provision of services).
It is necessary to emphasize that in the theory of investment analysis the concept of "profit" (however, as many other economic concepts) does not coincide with its accounting and fiscal interpretation.
In investment activities, the fact of profit is preceded by the reimbursement of initial investments, which corresponds to the concept of "depreciation" (in English the word "AMORTIZATION" means: repayment of the main part of the debt). In case of investment of funds into non-current assets, depreciation deductions are performed.
Thus, the substantiation of the implementation of the main requirements imposed on the project in the field of real investments is based on the calculation of the amounts of depreciation and profits within the established horizon of the study. This amount, in the general case, will amount to the total cash flow of the operational period.
Cost of capital and interest rates. The concept of "Cost of Capital" is closely related to an economic concept - profits.
Capital value in the economy is its ability to create an additional cost, that is, to make a profit. This value in the relevant market is the capital market - and determines its value.
Thus, the cost of capital is a profit rate that determines the value of the disposal of capital over a certain period of time (as a rule - year).
In the simplest case, when one of the parties (the seller, the lender, the lender) transfers the right to dispose of capital to the other party (to the buyer, borrower), the cost of capital is expressed in the form of interest rates.
The amount of interest rate is determined on the basis of market conditions (that is, the availability of alternative use of capital) and the degree of risk of this option.
At the same time, one of the components of the market value of capital is inflation. When performing calculations at constant prices, the inflationary component from the amount of interest rate can be excluded. To do this, use one of the modifications known fishera Formulas:
Where,
R is a real interest rate;
n - nominal interest rate;
I - the tempo of inflation.
All bets and the rate of inflation in this formula are given in the form of decimal fractions and should refer to the same period of time.
In general, the interest rate corresponds to the share of the principal amount of the debt (principal), which must be paid at the end of the estimated period. The rates of this kind are called simple.
Interest rates that differ in the duration of the estimated period can be compared with each other through the calculation of effective rates or interest rates. The calculation of the effective rate is carried out according to the following formula:
Where,S is a simple bet;
N is the number of percentage of interest within the interval under consideration.
The most important component of the cost of capital is the degree of risk. As a result of various risks associated with various forms, directions and terms of use of capital, in the capital market at every moment of time may be observed various estimates His cost.
Discounting
The concept of "discounting" refers to the number of key in the theory of investment analysis. Literal translation of this word from English ("Discounting") means: cost reduction, markdown.Discounting It is called the operation of the calculation of modern value (the English term "present value" can also translate as "True Value", "The present value", etc.) monetary sumsrelating to future time periods
The opposite discount operation is the calculation of the future value ("Future value") of the original monetary amount - is called an incidence or compound and is easily illustrated by an example of an increase in the amount of debt amount at a given interest rate:
F \u003d p * (1 + r) n
Where,
F - Future value;
P is a modern value (source value) of the sum of money;
R is a percentage rate (in decimal terms);
N - the number of periods of interest accrual.
The transformation of the above formula in the event of a solution to the opposite problem looks like this:
P \u003d F / (1 + R) N
Discounting methods are used if it is necessary to compare the amounts of cash receipts and payments separated in time. In particular, the key criterion for the effectiveness of investment - net modern value (NPV) - represents the amount of all cash flows (revenues and payments) arising during the period under consideration given (recalculated) at one time, as a rule, as a rule, is chosen The moment of starting investment.
As it follows from all the above, the interest rate used in the formula for the calculation of modern value is no different from the usual rate reflecting, in turn, the cost of capital. In the case of the use of discounting methods, this rate is nevertheless commonly referred to as the discount rate (possible options: "Compare rate", "barrier rate", "Discount rate", "Coefficient of bringing", etc.).
The choice of discount rate largely depends a qualitative assessment of the effectiveness of the investment project. There are a large number of different techniques that allow us to substantiate the use of one or another value of this bet. In the general case, you can specify the following options for choosing a discount rate:
- Minimum profitability of an alternative way of using capital (for example, a rate of profitability of reliable market securities or a deposit rate in a reliable bank).
- The existing level of capital profitability (for example, the weighted average cost of the company's capital). The cost of capital, which can be used to implement this investment project (for example, an investment loan rate).
- Expected level of profitability of invested capital, taking into account all the risks of the project.
Listed above betting variants differ mainly by the degree of risk, which is one of the components of capital value. Depending on the type of discount rate of the discount rate, the results of calculations associated with the assessment of investment efficiency should be interpreted.
Tasks for assessing an investment project
The main purpose of the assessment of the investment project is the rationale for its commercial (entrepreneurial) consistency. The latter implies the fulfillment of two fundamental requirements:- Full reimbursement (payback) of invested funds.
- Obtaining profit, the size of which justifies the refusal of any other way of using resources (capital) and compensates for the risk that occurs due to the uncertainty of the final result.
Two components of the commercial consistency of the investment project should be distinguished, its necessary and sufficient conditions, respectively:
- Economic investment efficiency.
- Financial status of the project.
Economic evaluation or assessment of the effectiveness of investment of capital is aimed at determining the potential feature of the project under consideration to ensure the required or expected level of profitability. When performing an investment analysis, the task of assessing the effectiveness of investment is the main defining the fate of the project as a whole.
The financial assessment is aimed at choosing a project financing scheme and thereby characterizes the possibilities for the implementation of the economic potential that has the project. When evaluation, an economic approach should be adhered to and consider only those benefits and losses that can be measured in money equivalent.
Stages of assessing an investment project
The investment project development cycle can be represented as a sequence of three stages (stages):- Formulation of the idea of \u200b\u200bthe project
- Evaluation of the investment attractiveness of the project
- Selection of project financing scheme
As the stages are progressing, the presentation of the project is specified and enriched with new information. Thus, each stage is a kind of intermediate finish: the results obtained on it should serve as a confirmation of the feasibility of the project and, thus, are "skipping" to the next stage of development.
On the first stage There is an assessment of the possibility of project implementation from the point of view of marketing, manufacturing, legal and other aspects. The source information for this is information about the macroeconomic environment of the project, the estimated market for products, technologies, tax environments, etc. The result of the first stage is a structured description of the project idea and a temporary schedule of its implementation.
Second stagein most cases, it turns out to be decisive. There is an assessment of the effectiveness of investment and determining the possible value of the attracted capital. Source information for the second stage is a chart of capital investments, sales volumes, current (production) costs, the need for working capital, discount rate. The results of this stage are most often drawn up in the form of tables and indicators of investment efficiency: net current cost (NPV), payback period, internal rate of profitability (IRR).
Third stage It is associated with the choice of the optimal financing scheme of the project and the assessment of the effectiveness of investments from the position of the owner (project holder). This uses information about interest rates and repayment schedules of loans, as well as the level of dividend payments, etc. The results of the financial assessment of the project should be: a financial plan for the implementation of the project, the forecast forms of financial statements and financial valuation indicators.
Any method of investment analysis involves the consideration of the project as a conditionally independent economic object. Therefore, at the first two stages of development, the investment project should be considered separately from the rest of the enterprise, its implementing.
A separate (local) nature of the review of projects excludes the possibility of correct choice of the schemes for their financing. This is due to the fact that the decision to attract one or another source to finance investment is made, as a rule, at the level of the enterprise as a whole or its independent financially division. At the same time, the current financial condition of this enterprise is taken into account, which is almost impossible to reflect in the local project.
Thus, at large enterprises, the task of choosing a scheme for financing an investment project (at least for projects attributable to the category "large") with the need to go to the highest level of management. At the average managerial level, the task of choosing the most effective, that is, the most potentially profitable projects from the existing list.
