Evaluation of Investment Projects in Undeveloped Markets

• Published in: Problemi ekonomìki 2018-06, Vol.2 (36), p.258-267
• Main Authors: Usherenko Svitlana V., Kharchenko Yevhinii Yu
• Format: Article
• Language: English
• Subjects: analysis of sensitivity; capital asset pricing model; investment project; net present value; value at risk; weighted average cost of capital
• ISSN: 2222-0712; 2311-1186

Using the example of a diversified industrial enterprise, there developed an approach to evaluating the prospects of the implementation of an innovation and investment project on manufacturing a product under conditions of an undeveloped sales market as well as associated risks. It is substantiated that the project can be promising due to its social significance manifested in obtaining environmental, social, and environmental effect from it realization. To evaluate alternative investment projects, there developed a methodological approach that implies analysis according to the following scheme: volume of the market for the product, designed capacity and production technology, competitive environment; characteristics of consumers. This will allow to demonstrate the advantages and disadvantages of each of the alternative projects at the initial stage of the study. The effectiveness and expediency of the project implementation should be evaluated by the following indicators: payback period (PP), accounting rate of return (ARR), net present value (NPV), profitability index (PI), discounted payback period (DPP), internal rate of return (IRR). When making the decision about the implementation of a particular project, its social effect as well as the forecast of future cash flows reflecting changes in their value over time with regard to the discount rate should be taken into account. In developing markets, it is most appropriate to take for the discount rate the weighted average cost of capital, which is calculated in accordance with the CAPM model using the central bank discount rate as risk-free rate, and to calculated the risk premium using the methodology developed by A. Damodaran, based on the data on the country’s credit rating by Moody’s. The identification of the main risks of the project is possible by conducting an expert survey providing for the evaluation of importance and probability of occurrence of individual risk. The subjectivity of an expert survey has to be reduced by identifying the main mental traps. A more in-depth study of an impact of each risk has to be conducted by using the VaR concept and analysing the sensitivity of impact of simultaneous two risks to the net present value of the project.