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Calculation of Investment Efficiency – Methodology (Part II)
In order to prepare the analysis of the feasibility of the project, the financial projection included both the period of project initiation (years 2007-2010), the reference period adopted in the I analysis years 2011-2030 and the period of economic activity. Item 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). Currency value was expressed in Polish money. The rate of profit tax from legal persons was accepted at the level of 19% throughout the period. The forecast was prepared in net value.
The analyzed undertaking called the improvement of sports infrastructure through the reconstruction of the stadium in RZESZOW involves the implementation of the first phase of the reconstruction of the stadium located in Rzeszow on Hetmanska 69 street, which is currently loaned by the Commune City of Rzeszow. Institutional Sports Club Stal Rzeszow. As part of the investment, nine sections (stands) of the stadium are projected to be constructed along with access roads to the facility located on the eastern side of the stadium. The acquisition of only nine sections (not the entire stadium) is conditioned by the financial possibilities of the city and the accessible allocation of means as part of the Regional Operational Program of the Sub-Carpathian Voivodeship (RPO WP). The new stand will increase the capacity of the stadium to 4,711 seats for spectators of sports events. After receiving the investment, the capacity of the stadium will increase to 14,211. The implementation of the project will increase the level of safety and comfort of the leaders as well as increase participation in games and sports competitions. Facilities that cater to the needs of persons with disabilities, improve the image of the city, rationalize the operating costs of the facilities.
2.1. The cost of travel – the new dimension
The following streams of costs and social benefits will be used in the analysis of the economic efficiency of the investment studied: social cost (new quantification). Private costs include net investment costs and operating costs. Private benefits include changes in working capital and income from operating activities that improve the residual value of the project at the end of the reference period. External benefits are benefits derived from increased access to recreation.
The valuation of the external impacts associated with the modernization of the stadium was based on the Travel Cost Method (TCM). This method accepts the TCM of entertainment stadium goers as a good value measure of non-market character. This method assumes that the cost of travel is an appropriate measure of willingness to pay for the possibility of using a recreational location. The evaluation of the social impacts of the stadium modernization was conducted using the travel method based on the cost and consumer surplus of the travel area calculation, which resulted in approximately 73 000 additional visits to the stadium annually in relation to participation in organized events. Realization of investment. As a result, one has obtained the value of the social benefits obtained from the modernization of the stadium in the amount of 1 022 287 Polish zlotys.
2.2. Numerical data and calculations are indispensable to determine the residual value (RV) of the studied investment.
An essential element of the efficiency account is the coefficient of discount (at). In its calculations, a 5% discount rate has been considered when establishing the discounted cash flow in relation to the investment, while when analyzing the costs and social costs from the realization of the studied investment, a discount rate of 5.5% has been used.
RV = (1+q)NCFm/rq (1)
RV – residual value,
NCFm – cash flow during the last year calculation period,
r – discount rate,
q – net cash flow (NCFm) constant growth rate of the projection period,
RV = 5 289979/0,3418 = 15 474 569
Evaluation of the effectiveness of social investment is called macroeconomic evaluation that examines all the costs and benefits associated with the investment environment, taking into account the impact on the human natural and cultural environment and socio-economic phenomena. Such evaluation should become an indispensable element of efficiency evaluation of investments, especially those financed through public and public-private means. Among the macroeconomic methods of investment efficiency account, the most popular is the method of cost analysis and social benefit (CBA – cost-benefit analysis). The results of a benefit/cost analysis can be expressed in several ways, including economic net value (ENPV) and economic rate of return – ERR.
Economic Net Value ENPV provides information on the actual economic benefits (estimated in money), which will be brought from the realization of the investment.
We will evaluate it based on the following formula (2):
ENPV = St in (2)
St – economic cost flow and cost social balance generated by the project in specific years of the approved temporal horizon
at – coefficient of relaxation, calculated according to the formula = 1/(1+r)t.
The economic rate of return is the discount rate for which the economic net worth equals zero. The economic rate of return will be assessed using the following formula (3):
ERR= r1 + (EPV (r2 – r1)/ EPV + | ENV |) (3)
EPV – positive value ENPV for low discount rate r1.
ENV – negative value ENPV for high discount rate r2.
The method of Economic Updated Net Value (ENPV), Economic Rate of Return (ERR) and Benefit-Cost Ratio (BCR) of the project has been used to evaluate the efficiency of the investment for the society.
Firstly, the financial update of the project was marked net worth. To calculate the ENPV, one must first establish the net cash flow based on the social benefits associated with the investment. Cash flow was set using the formula NCFt = Dt – Kt. The value is increased about the residual value of the facility at the end of the year 2030, the last year of the accounting period.
Based on the presented estimates, a financial plan was prepared for activities directly related to the operator’s use of the stadium. The plan includes the operator’s balance sheet, particularly the net working capital, the profit-loss account and the cash flow account, which inevitably leads to expansion of demand. The most important notion of prediction is presented.
Knowing the results of the calculation of net cash flow, it calculates the level of economic net worth of the studied undertaking. To calculate it ENPV, the formula was used. From the calculation it can be seen that the economic updated value of the investment is 2 064 871,31 Polish zlotys. The investment analyzed above can be seen to be effective, because the economic modernized net value set is greater than zero for the entire accounting period.
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