Parameters of an investment projects viola-funding January 9, 2024

Parameters of an investment projects

Parameters of an investment projects
Parameters of an investment projects: The key setting and planning

parameters of an investment projects include the following:

•Scrutinizing the effectiveness of the project and benchmarking results against similar initiatives and the broader context within the sector or host country.

•Defining quantitative and qualitative aspects throughout the project’s phases.
•Identifying relationships between prices, costs, and outcomes to increase profitability.

These parameters serve as the foundational criteria for either endorsing or rejecting the evaluated project. The breadth of information required for project preparation and evaluation spans diverse disciplines, prompting the need for specialized teams.

Viola Funding Limited brings together a team of experienced specialists in the field of project financing, financial engineering and legal support for international projects financing. We are ready to provide our clients with comprehensive professional support, from calculations, modeling, planning and legal advice to raising long-term capital in accordance with the customer’s needs.

Before commencing the actual assessment of an investment project, it is necessary to gather all essential information, adopt specific assumptions, and describe detailed parameters expressed in economic values.

Parameterization of project basics

Parameters of an investment projects can be limited to time, cost, and projects quality, processes that form the basis for investment.

Given that the process of preparing and evaluating an investment project is complex and time-consuming, it is highly recommended to employ specific solutions that facilitate analyses based on data used in the project assessment.

 To develop fundamental Parameters of an investment projects, the below elements must be considered:

• Planning investments in fixed assets.
• Planning operational costs.
• Net working capital demand plan.
• Financing sources program for investment outlays.
• Cash flow statement, profit and loss account, and balance sheet.

It is imperative that data sources ensure the credibility, timeliness, completeness, and relevance of the data used in the parameterization of the investment project. The process of collecting data necessary for the preparation and evaluation of the project should adhere to procedures already in place during the pre-investment phase of the investment process. This approach is crucial to mitigate the risk of capital misallocation resulting from a superficial handling of such data.

The preparation of plans is carried out separately for each period of the project’s operation (associated with the fiscal year), requiring meticulous precision from the project preparation team. It is essential to note that all mentioned elements should be developed with great care to serve as a reliable and robust source of data, enabling an assessment of the profitability of the project.

The importance of assumptions in investment process

In deciding to initiate business activities within the pre-investment phase of the project, it is crucial to first establish the fundamental guidelines for the project, often referred to as initial investment assumptions.

This involves determining the basis on which computational processes will be easily conducted within the developed plans and models necessary for evaluating the profitability of the investment project, commonly specified as either constant or current prices.

Economic and financial analyses are generally carried out in constant prices, which do not account for inflation occurring in the sector.

This is because inflation significantly impacts the changing value of money over time, distorting the course of economic processes when expressed numerically. Therefore, the reported increase in profit or sales by the business project in the current prices compared to the previous year may not necessarily indicate real growth.

An understanding of the profitability of an investment project is only achieved by supplementing the above data with the scale at which inflation occurred. Assessing the profitability of investment projects in constant prices is typically driven by the substantial challenges in predicting future inflation levels. Overestimating or underestimating estimated inflation by just one percentage point can result in a 5% error on an annual scale, significantly impacting the forecasts of the project over a 10-year planning horizon. Another factor that increases the risk of error in forecasting in current prices is the varying pace of price growth for different groups of goods and services.

The inflation complicates determining the change in input prices relative to the outcomes achieved. As a result, estimating the real magnitude of project-generated outcomes based on the incurred costs becomes flawed.

The use of constant prices eliminates the aforementioned risks since, by design, these prices are free from such complications and provide more transparent results.

It is also important to adjust the realistically obtained results during project implementation for specific price growth indicators for certain groups of goods and services and compare the values obtained in this way with the postulated values. This allows project team for drawing conclusions regarding the actual profitability of the intended investment. Regardless of the chosen pricing formula, consistency is crucial in forecasting and discounting cash flows.

Planning operational costs and parameters of investment projects

According to the methodology by UNIDO for the preparation and evaluation of investment projects, the plan of production costs should include all costs related to the specific project, incurred in each year of operation, as well as marketing costs if they have not been previously accounted for.

The sum of manufacturing costs and general administrative costs forms operational costs, which are directly related to the conducted production and sales activities. Incurred operational costs and their structure depend on factors such as the location of the enterprise, natural conditions of host country, type of activity, technology used in production, equipment, degree of utilization of production capacity, organization of the production process, prices of raw materials, materials, and energy, labor costs, and the scale of the facility.

Generally, operational costs  and parameters of investment projects and industrial facility consist of four basic categories:

• Manufacturing costs (materials, production supplies, labor costs, workshops maintenance).
• General administrative costs (salaries, taxes, rents, insurance and office maintenance costs).
• Depreciation (for example, constituting an investment costs).
• Financial costs (including interest).

When determining the level of operating costs for full production capacity, it is essential to distinguish between variable and fixed components of these costs. Dividing costs into “variable” and “fixed” allows identifying the relationship between variable costs and the degree of utilization of the production capacity of the investment project. Variable costs include raw materials, direct labor costs, plant services and supplies. Fixed costs, primarily encompassing general production costs and long-term service costs, remain relatively constant regardless of the production level, although they may change in the case of long-term analysis.

When calculating the amount of production and marketing costs incurred in the investment project, it is necessary to classify them into direct and indirect costs. Direct costs are defined as costs that can be attributed to a production unit or service due to their direct connection. In contrast, indirect costs are considered expenses related to the production process but do not have a direct impact on the manufactured products or services.

Planning working capital requirements

Net working capital is calculated as the difference between current assets and current liabilities. The primary goal of the net working capital planning requirements is to determine a size that ensures the current implementation of production tasks throughout the investment period.

In investment practice, it often happens that the financial difficulties faced by a new project result from a lack of funds for net working capital (NWC).

The calculation is based on specific turnover ratios. Turnover ratios for current assets and liabilities are calculated by dividing the number of days in the accounting period by the number of days of minimum coverage for a given element of net working capital. Then, the costs forming the basis for estimating selected elements of working capital are divided by the appropriate turnover ratios. This yields the annual requirement for a specific working capital position. Summing up all working capital positions results in the annual requirement for NWC.

Current assets include, among others, finished goods inventory, work in progress, spare parts, materials and raw materials, energy and equipment, receivables, and cash. Current liabilities consist of obligations to suppliers, tax obligations, etc. NWC ensures the maintenance of financial liquidity by determining the amount of assets necessary to immediately settle incurred obligations.

One of them involves determining, for each element of working capital, corresponding to them total cost positions, such as manufacturing costs, operating costs, or cost of goods sold, which form the basis for their estimation.

Selecting sources of financing for an investment project

Initially, it is crucial to determine the method of financing the expenditures in the fixed assets, and this should at least partially occur during the construction phase of the plan. The final selection of financing sources for investment expenditures should be prepared only after building the program for total investment costs and for working capital.

Based on the source of origin, we distinguish between internal and external capital. Internal financing does not involve third parties and is based on the redistribution of net profit from the sale of products and services, depreciation, and asset sales. External financing relies on funds obtained from the environment and may result from the involvement of both equity and debt capital.

The financing of investment costs can involve the following sources:

1. Equity capital.
2. Debt capital.
3. Project’s funds

Equity capital consists of owner and partner contributions, as well as shareholder contributions or stock issuances.

This capital comes from additional issuances of own shares, grants, contributions, or subsidies. It forms a stable basis for financing the project, determining its financial liquidity, as it is provided for an indefinite period and does not have the nature of immediate demandability.

The capital requirements of investment projects often exceed the capabilities of the owners, forcing them to seek external sources of financing. Debt capital is mainly obtained from national or foreign commercial banks (investment loans, working capital loans) and financial institutions, constituting liabilities to these entities. It can also come from other sources of financing, such as credit or loans granted by third parties, leasing, bond or stock issuances.

Debt capital, along with the interest, is most often subject to repayment according to the terms and conditions specified in the loan agreement or other document governing the rules for its provision by the creditor.

The appropriate capital structure, setting optimal parameters of an investment projects are particularly important issue, influenced by factors such as specific phase, organizational-legal form, economic conditions, or market environment. Financing is not only the accumulation of resources but also the management of these funds to maintain the balance and liquidity of the project.

 Project finance and investment consulting from VIOLA FUNDING LIMITED:

• From €50 million and more.
• Investments up to 90% of the project cost.
• Loan term from 10 to 20 years.

To consider the issue of financing your project, send us the completed application form and project presentation by e-mail

eMAIL:[email protected]


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