All Of The Following Influence Capital Budgeting Cash Flows Except Calculation of Investment Efficiency – Methodology (Part II)

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Calculation of Investment Efficiency – Methodology (Part II)

Abstract

In order to prepare the project feasibility analysis, the financial projection studied the investment including the project initiation period (years 2007-2010), the reference period accepted for the first analysis of the years 2011-2030. and the period of economic functioning of the project. facility including years outside the reference period (years 2031-2049). All data included in the projections are expressed in fixed prices (without taking inflation into account). Monetary values ​​were expressed in Polish money. The corporate income tax rate was accepted throughout the period at the level of 19%. The forecast is prepared in net prices.

1. Introduction

The analyzed undertaking entitled Improving the sports infrastructure through the reconstruction of the stadium in Rzeszow consists of the realization of the first phase of the reconstruction of the stadium located in Rzeszow at Hetmanska Street 69, which is currently on loan from the Rzeszow City Municipality to the Institutional Sports Club Stal Rzeszow. As part of the investment, the construction of nine segments of the stadium (stands) is planned on the current building on the eastern side of the stadium together with access roads. The realization of only nine segments (not the entire stadium) is conditioned by the City’s financial capabilities as well as the available distribution of funds within the Regional Operational Program of the Subcarpathian Voivodeship (RPO WP). The new tribunes will enable an increase in the capacity of the stadium by around 4,711 seats for spectators of sports competitions. Realization of the investment will increase the capacity of the stadium to 14,211. Realization of the project will also enable an increase in the level of safety and comfort of management and participation in matches and sports competitions, adapt the facility for the needs of people with disabilities, improve the image of the city, rationalize the facility’s operating costs.

2. Results

2.1. Travel costs – new quantifications

In the analysis of the economic efficiency of the studied investment, the following flows of costs and social benefits will be used – social costs (new quantification). Private costs include net investment expenditures and operating costs. Private benefits include income from operating activity adjusted for changes in working capital and the residual value of the project at the end of the reference period. External benefits are benefits that result from increasing the availability of recreation sites.

The determination of the prices of the external effects related to the modernization of the Stadium was based on the travel cost method (TCM). This method consists in accepting the TCM of people who go to the place of recreation, the Stadium, as a measure of the value of a good of a non-marketable nature. The method therefore assumes that travel costs represent an appropriate measure of willingness to pay for the opportunity to use a recreation site. The evaluation of the social effects of the modernization of the Stadium using the method of travel costs was carried out based on the costs of zonal travel calculations and the consumer surplus resulting from about 73,000 additional accesses to the Stadium per year in connection with participation in organized events as a result of the realization of the investment. As a result, the value of social benefits resulting from the modernization of the stadium was realized in the amount of 1,022,287 Polish money.

2.2. Numerical data and calculations necessary to determine the residual value (RV) of the studied investment

An essential element of the efficiency calculation is the discount coefficient (at). When determining discounted cash flows related to investments, a discount rate of 5% was taken into account in his calculations, while a discount rate of 5.5% was used when analyzing the costs and social costs of realizing the studied investment.

RV= (1+q)NCFm/rq (1)

Where:

RV – residual value,

NCFm – cash flows in the last year’s accounting period,

r – discount rate,

q – constant growth rate of net cash flow (NCFm) projection period,

RV= 5 289979/0.3418 = 15 474 569

Assessment of the effectiveness of social investments, called macroeconomic assessment, consists in examining all the costs and benefits related to the environment of the investment, taking into account the impact on the natural and cultural environment of man and the socio-economic phenomena accompanying the undertaking. Such an assessment should be an indispensable element of assessing the effectiveness of investments, especially those financed with public and public-private funds. Among the macroeconomic methods of calculating the efficiency of investments, the most popular method is the cost-benefit analysis (CBA). The results of the benefit/cost analysis can be expressed in several ways, in this case in the net economic value (ENPV) and the economic rate of return – ERR.

The economic net value of ENPV informs about the real economic benefits (estimated in money) that the realization of the investment will bring.

We will estimate it based on the following formula (2):

ENPV=on St (2)

Where:

St – balances of economic flows of costs and social costs generated by the project in certain years of the accepted temporary horizon

at – discount coefficient, calculated according to the formula at=1/(1+r)t.

The economic rate of return is the discount rate for which the economic net value is zero. The economic rate of return will be estimated according to the following form (3):

ERR= r1 + (EPV (r2 – r1)/ EPV + | ENV |) (3)

Where:

EPV – positive value of ENPV for lower discount rate r1.

ENV – negative value of ENPV for higher discount rate r2.

To assess the effectiveness of the investment for society, the method of economic updated net value of the project (ENPV), economic rate of return (ERR) and benefit-cost ratio (BCR) was used.

The economically updated net value of the project is marked as the first. In order to calculate ENPV, one must first determine the net cash flows based on the social benefits associated with the investment. Cash flows are set using the formula NCFt= Dt – Kt. In the last year of the accounting period, the value increased around the residual value of the building at the end of 2030.

3. Conclusion

On the basis of the presented assumptions, a financial plan of the Stadium operator was drawn up for activities directly related to its use. The plan includes the operator’s balance sheet, especially its positions necessary to work out the net working capital requirements, the profit and loss account and the cash flow account. The most important forecast assumptions are presented.

Knowing the results of the calculation of net cash flows, the level of economic net worth of the studied entrepreneur is calculated. A formula was used to calculate ENPV. It is evident from the calculation that the updated economic value of the investment amounts to 2,064,871.31 Polish money. It is evident from the above that the analyzed investment is effective, because the set economic modernized net value for the entire accounting period is greater than zero.

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