International investment activity is growing rapidly, requiring businesses to increasingly sophisticated tools, knowledge and experience.

Assessing the attractiveness of investment projects in this process is becoming increasingly important, helping businesses make the right decisions.

BANCROFT PARTNERS Investment Gruop, a Spanish company with international experience, offers large businesses professional assistance and support in the field of investment engineering and consulting.

We also offer corporate clients with services such as lending, project finance, loan guarantees, financial modeling, project management, etc.

BANCROFT PARTNERS, with its Spanish and foreign partners, is ready to assist you in the construction and modernization of large facilities under the EPC contract.

To find out more, contact our representatives and get a free consultation at any convenient time.

Methods and approaches to assessing the attractiveness of investment projects

In the context of investment consulting, the assessment of the attractiveness of investment projects has quantitative and qualitative aspects.

This depends, among other things, on the objectives of the investor, which may be expressed, for example, in obtaining the maximum possible income or the strategic expansion of the business and the conquest of new markets.

Despite the extensive financial tools, there is currently no unified decision-making system in investment engineering.

Different projects are evaluated by different teams based on specific methods, indicators and criteria, taking into account the specific sector and the interests of the project participants.

The use of advanced methods for assessing the attractiveness of investment projects involves the use of many formulas and criteria. For example, when evaluating financing models for long-term projects, it is necessary to take into account the change in the cost of financial resources over time, possible scenarios for attracting resources, their legal regulation, etc.

At the same time, specialists in the field of investment consulting need to choose one of the best options based on the specific conditions of the project.

The financial literature indicates that any financing mechanism is based on the financial model of an investment project, which should be built with a thorough analysis of all factors affecting a particular project.

The model constructed in this way allows not only to calculate the result with the given forecast parameters and draw up financial reports, but also to choose the most suitable investment schemes and sources of financing in accordance with the established criteria and the wishes of investors.

Multi-criteria assessment of the effectiveness of investment projects

Financial methods for evaluating projects, including NPV and IRR methods, are aimed at calculating the financial effects from the implementation of an investment project.

The decision criteria based on them allow answering the question of whether the investment being assessed is financially beneficial for the participants. However, modern project performance analysis cannot focus solely on the financial effects of a project as measured by the cash flows it generates.

Traditional cost-benefit methods only provide information about the cost-effectiveness of a project in financial terms, so they do not include any non-financial benefits or losses (eg environmental or social).

They also do not take into account the external impacts of the project on other stakeholders. In fact, financial methods represent a major simplification compared to integrated methods.

The implementation of a large investment project (especially at the international level) can have negative consequences for the enterprise in unexpected areas of activity that the project does not directly affect. In other words, the project may disrupt other aspects of the company’s (region’s) activities, despite the fact that the project itself formally remains financially profitable.

A comprehensive analysis that takes into account the impact of the project both on other investments and on the ongoing activities of the participants is not possible using isolated methods of financial analysis. These shortcomings of the traditional financial approach to assessing the attractiveness of investment projects encourage researchers to look for new approaches based on both financial and non-financial criteria (multi-criteria approach).

In practice, the use of multi-criteria methods for assessing the attractiveness of projects is associated with certain methodological difficulties, such as:

• Choosing the right set of non-financial criteria. The choice of criteria for evaluating the attractiveness of a project should be comprehensive, taking into account organizational, financial, marketing, technical, resource and other aspects.

• Assigning adequate weight to all evaluation criteria. The problem of ranking is to assign a certain “weight” to the criteria objectively and reasonably, in accordance with their real value for a particular project.

• The procedure associated with making an investment decision based on one or more investment criteria that are significant for the participants.

So, multi-criteria methods take into account not only financial, but also other significant factors, including economic and social factors. It is more appropriate to use an integrated approach, since the term “profitability” is usually associated with an assessment of a financial nature.

Theoretically, two ways are possible.

Firstly, the assessment of the attractiveness of an investment project is made on the basis of a number of criteria, but the final investment decision is made on the basis of one chosen criterion, which is considered the main one.

Secondly, the assessment is carried out on the basis of several criteria with different “weights”, and then the decision will require a more complex approach.

Experts in the field of investment engineering and consulting can help the client understand the intricacies of analysis and evaluation, choosing the decision-making model for a particular sector, business and project.

Expected benefits of the project for potential investors

The financial model of any large investment project has two components.

These include analysis of capital investments and analysis of cash flows during the implementation of the project.

Capital investments can be made not only in the initial period, but also during the subsequent period, depending on its scale and financing scheme.

When considering real investments, it is necessary to predict both the engineering and commercial parts. This can be explained the fact that real investment projects have clear discrete technical and financial characteristics.

It is impossible to make a final investment decision without forecasting cost indicators. To solve the latter problem, it is necessary to conduct comprehensive pre-investment marketing research. The development of methods for assessing the attractiveness of investment projects requires linking the expected benefits of the project, business planning and comprehensive financial analysis.

Analysis of the expected benefits of the project is now considered widespread in investment engineering.

The task of the finance team is to build a model that most accurately relates the potential benefits and losses of participants with the so-called utility index. The role of such a model lies in the fact that it can be used as a guideline in making an informed decision that meets not only the intentions and interests of the investor, but also his project partners.

The following algorithm is used to determine the expected benefit of the investment:

1. At the first stage, the financial team calculates the potential benefit of each of the results in the context of making an investment decision.

2. At the second stage, each expected result of the project is linked to its probability in order to bring the calculations closer to reality.

3. The results of the calculations for each of the compared projects are used to compare the total expected benefits.

The expected benefit of investment projects is an important indicator for making the right decision, which allows companies to take into account the benefits of each investment and the associated risk.

The construction of such a model for capital-intensive real investment projects has unique features.

In investment engineering, a collegial decision is usually used for such projects. It follows that the “utility” function itself must be of a generalized nature. For example, it is the weighted average of the utility functions of the participants involved in making an investment decision, based on the degree of responsibility or share of the partner in the project.

The theory of the expected benefit allows to a certain extent to formalize the procedure for measuring the level of risk. It assumes that the same benefit will be attributed to a given outcome, regardless of the time of its occurrence. If risk adjustments are made intuitively, then the value assigned to the result may vary depending on the time frame and the specifics of the project.

Experts consider it extremely unlikely that an intuitive procedure could replace the complex calculations required to evaluate the benefits of large investment projects.

Therefore, the use of mathematical tools makes it possible to make investment decisions more reasonable.

Below we list the main factors that should be considered when evaluating the attractiveness of real investment projects and comparing them in terms of expected benefits for participants. If you need professional advice or support in the field of investment consulting, please contact us at any time.

What to consider when assessing the investment attractiveness of a project

The basis for building a model of the expected benefits of the project is business planning, which at the stages of a feasibility study describes the prerequisites for the project, a specific action plan for investors, and also determines the financial characteristics and possible results of the project.

The structure of a business plan in international investment practice may vary slightly, but most of the key planning points are similar and differ only in the structure and content of some elements.

Among the key elements of a business plan, the most important in predicting economic performance is the marketing plan. This document contains an assessment of the market opportunities of the enterprise. The volume of sales of products (services) with its forecasting is most important, because market analysis and the forecast of the formation of the level and structure of demand for products predetermine the result of the project.