Economic efficiency and methods of capital investment assessment

Economic efficiency of investments is manifested in all spheres of investment activity — capital construction, the innovation sphere, the financial capital circulation sphere, the sphere of realization of property rights, and the production sphere. Investment efficiency can be achieved by observing the following basic conditions for expanded reproduction.

Firstly, it is necessary to observe the optimal ratio between accumulation and consumption, accumulation and investment, real and financial investments, investment and the increase in capital assets due to investments, and capital expenditures (investments) and the return on investment.

Secondly, investment efficiency is achieved when equality is maintained between the growth of savings and the growth of investments, i.e., long-term investments over the period under consideration. The essence of this condition is that for investment efficiency and sustainable economic development, all savings must be invested in production to increase real capital.

The following situations are possible:

• the need for investment, i.e., investment demand, can significantly exceed savings, and in this case, there is a shortage of investment resources;
• there is incomplete use of investment resources, when savings are greater than the need for investment.

Thirdly, investment activity as a unity of the processes of investing resources and obtaining a stream of income in the future will be effective provided that investment demand and investment supply are balanced through the establishment of an equilibrium price.

In Russia, during the period of economic reform and the transition to market relations, the generally accepted economic category for the market, "investment", began to be used instead of the economic category "capital investments". At the same time, capital investments are considered and used as a "capital-forming" element of investments. For them, total (absolute) economic efficiency and comparative economic efficiency are calculated.

For total economic efficiency, the growth of net income (NI), the growth of profit (PR), savings in costs (SC), and other effects obtained through capital investments (K) can be used as an effect (result). Two indicators are calculated:

• the coefficient of total economic efficiency Eo5 as the ratio of any of the listed effects to capital investments, but it is preferable to use the growth of profit and savings in costs:

where A PR is the cumulative profit for period T, years.

E x a m p l e 1 7. 1. Capital investments in machinery provide savings in operating costs of 897 thousand rubles. With a volume of capital investments of 5813 thousand rubles, the efficiency coefficient is 0.15, and the payback period is 6.5 years.

In addition, the capital investment recovery period is calculated:

To select the best from a number of capital investment options, the indicator of reduced costs is used. As a result, the comparative efficiency of capital investments is determined.

where Ci — production costs (cost price) for the compared options; Ki — capital investments for the compared options; En — standard coefficient of comparative efficiency of capital investments; Tn — standard payback period for capital investments (the inverse of En).

E x a m p l e 17.2. Capital investments and current costs, million rubles, by option are presented in the table.

1 2 3 4 Capital investments 82.5 104.3 88.4 73.8 Current costs 13.8 13.5 14.2 15.0 Efficiency coefficient 0.12 0.12 0.12 0.12 Reduced costs 23.7 26.0 24.8 23.8 It is known that future money is always cheaper than today's, not only because of inflation, but because its alternative use is missed. They could be invested today and generate income. Therefore, it is necessary to compare costs and future income, for which future receipts are recalculated by discounting.

The future value F is less than the current value Pb(1 + Ns)T times, where Ns is the interest rate; T is the number of years. In order to calculate what a certain amount of money turns into at any positive rates of its growth, compound interest is calculated using the formula

The process inverse to calculating compound interest is discounting, which allows one to determine how much a future amount of money is worth now:

The discounting formula finds application in the calculation and analysis of the feasibility of acquiring a capital asset, taking into account the purchase price, interest rate, annual income from use, and residual value after the service life.

The interest rate has a greater influence on the profitability of a capital project. For example, at 10% it will be profitable, and at 15% it will be ineffective. To determine ways to increase the efficiency of capital investments, the factors influencing their use are preliminarily specified and established.

Increasing the efficiency of capital-type investments is possible through: ◊ shortening the deadlines and reducing the volume of unfinished construction, i.e., reducing the construction lag; ◊ increasing the yield of crops and the productivity of livestock animals; ◊ full utilization and rational use of production capacities; ◊ improvement of property relations, since an owner uses investments with greater responsibility;

◊ improving investment policy; ◊ using high-quality industrial inputs for agriculture; ◊ mobilizing diverse and all possible sources of funding for capital investments.

These and other paths allow for increasing the economic and social efficiency of investments in the agro-industrial complex.

Define the concepts of "innovation" and "innovative product"

Any capital investments in agriculture — from purchasing machinery to constructing storage and greenhouse complexes — are based on the innovation cycle and an assessment of the farm's potential. The investment process in the agro-industrial complex covers several sequential stages, from the inception of a scientific and technical idea to its full adoption in production. Financing for such projects is carried out through the enterprise's own funds, as well as attracted budgetary and extra-budgetary sources of the Russian Federation, directed toward strict target programs. Understanding the structure of these processes allows managers and agronomists to competently plan business scaling.

Efficiency Assessment, Payback Period, and Construction Lag

The efficiency of capital investments is achieved only under strictly defined conditions: adherence to technologies, meeting implementation deadlines, and reaching the facility's design capacity. For an objective assessment of capital investments, various types of economic efficiency are calculated in practice. Comparative efficiency is determined using a special methodology when it is necessary to choose the most profitable option from several alternative technological or design solutions.

When calculating the economics of capital expenditures, two time indicators are of key importance:

• Capital investment payback period — the time period required to fully cover the incurred investment costs through the obtained economic effect or profit.
• Construction lag — the time gap between the start of investment (execution of construction and installation works) and the actual commissioning of the facility with the receipt of the first products.

The main paths for increasing the efficiency of capital investments remain the reduction of construction timelines, accelerated mastery of design capacities, and effective use of the enterprise's innovation potential. Systematic consideration of factors influencing innovation activity allows for reducing financial risks and ensuring the sustainable development of the farm.