Integral indicators in business planning or how to evaluate an investment project?

What are integral indicators? What do they show? Where did they come from? In this article I will make a timid attempt to share my thoughts on this topic. If wrong, correct me.

So, I propose to return to the distant nineties. It was then that two comrades, having studied the experience of “foreign colleagues”, put into circulation the methodological recommendations for evaluating investment projects, which were subsequently approved:

You may ask: Do you need them in FIG? It seems to have somehow coped with the decision. Magnitki and Dneproges built … Before, yes, coped. And now it is necessary to cope “scientifically”, the market is in the yard! In paragraph 1.1, it is written: “The methodological recommendations (hereinafter referred to as Recommendations) contain the description of correct (consistent and reflecting the rules of rational economic behavior of business entities) methods for calculating the effectiveness of investment projects (PI).

I will not go into the features of the “recommendations”, I’ll dwell on the essence. And the bottom line is that there are integral indicators on the basis of which an investment project can be “evaluated” from the standpoint of “accept / not accept”, well, like good or disgusting. Yes, just so categorically. Well, in the future, all our writers of economics textbooks, of course, picked up this idea and … began to replicate it, rewriting them from each other. That is why currently the texts of most of the economic literature devoted to the evaluation of investment projects (read integral indicators), like two peas in a pod, are similar, and it seems that textbooks were written by copy.

But before plunging deeply into these very integral indicators, let’s decide on the terminology: what, strictly speaking, are we talking about? And we are talking about integral indicators, investment projects and … an attempt to evaluate them (“good project” or not). There are a lot of interpretations about what an “investment project” is, but for ourselves we define that:

An investment project is usually understood as a justification of the economic feasibility of investing money, other assets for the purpose of obtaining profit or other benefits. An investment project is a kind of detailed scenario for the implementation of the proposed business, i.e. a document that describes in detail how, when, where, at what time and for what money, etc. you need to perform certain actions in order to realize your plans.

The evaluation of an investment project (which acts as an object of evaluation) is an orderly and purposeful process of determining in the first place…. it is profitable or not profitable to invest in a particular investment project, or which project to choose when choosing from several options. It must be borne in mind that an investment project can be assessed by a large number of factors: the financial viability of the project, the professionalism of the project initiator, the situation in the market in which the initiator will work, and many others.

I will immediately draw attention to the fact that the evaluation of investment projects, at least in our region, is even more rare. The same rarity as the evaluation of intellectual property. But the business is “growing up”, becoming wiser, and with substantial investments, both the initiators of investment projects and potential investors already understand that investing money without serious study and convincing justification prescribed in the business plan is a questionable, if not to say adventurous.

It was not so long ago that it was considered to invest in one form or another “under a good person”, and, in most cases, it ended sadly, although … ideas were often good enough. And now … investments are wary, very much so. Therefore, I recall the old Russian saying: “measure seven times – cut once”.

According to the author of the article, the methodology for evaluating investment projects, which is quite well described in educational literature, both in finance and in business valuation, is highly questionable. What do they write to us in textbooks? Decide on the discount rate, calculate the net discounted income, payback period (including discounted), the investment profitability index, the internal rate of return … and that’s all? And all these coefficients will make it possible, with a high degree of probability, to make an expert conclusion on whether this is a good project or not? Do you know what I tell you? Damn it!

By the way, exactly these indicators are, so to speak, “integral”? Why such a name? This is the authors of such a name. They themselves do not know what they are doing. After all, the “integral” is a value resulting from the action that is the opposite of differentiation (this is according to Ozhegov). Well, called and called …