Criteria for Financial Acceptability of an Investment Project

Abstract

Н itability to the minimum of investor requirements. For this, the values of discounted indicators of financial efficiency of the investment project NPV (Net Present Value) and PI (Profitability Index) should be compared not with break-even values, but with the lower limit of profitability acceptable to the investor. Instead of two other main indicators of the financial efficiency of the project -IRR (Internal Rate of Return) and DPP (Discounted Payback Period) -the authors propose to use new, more general indicators of financial project's acceptability -IRAR (Internal Rate of Acceptable Return) and DPAR (Discounted Period of Acceptable Return). For the break-even level of project's profitability, the values of the new and traditional indicators are the same, that is: IRAR = IRR, DPAR = DPP. Since the criteria for financial project`s acceptability are formulated for a situation of uncertainty, then the mathematical expectations of the values of the corresponding indicators are considered. The application of the proposed criteria for the financial acceptability of the project is illustrated with a specific example.As an example, an investment project with a rental flow of payments and three scenarios of possible development is considered. For this project, an analysis of its financial acceptability when setting different levels of project's profitability. In a situation of partial uncertainty, decisions on the implementation of a any investment project are made taking into account two factors: the profitability of the project and its risk. Therefore, in addition to indicators of the financial acceptability of the project, the article also considered indicators of the risk of unacceptably low profitability of the project. For the example under consideration, the values of these risk indicators were obtained using the scenario method and the Monte Carlo method.Keywords: criteria of financial efficiency of the project, levels of profitability of the investment project, analysis of financial acceptability of the project, risk of unacceptable project profitability, methods of scenarios and Monte Carlo.