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Calculation of Investment Efficiency – Methodology (Part II)
In order to prepare the analysis of project feasibility, a financial projection studied investment including both the period of project initiation (years 2007-2010), the period of reference accepted to the I analysis years 2011-2030 and the period of economic functioning of the object including years which are beyond the period of reference (years 2031-2049). All data included in the projections are expressed in fixed prices (without taking inflation into account). Money values were expressed in Polish money. The rate of profitable tax from legal persons was accepted in the whole period on the level of 19%. The forecast was prepared in net prices.
The analyzed undertaking called Improvement of the sport infrastructure by way of reconstruction of the Stadium in RZESZOW consists in the realization of the first stage of reconstruction of the Stadium situated in Rzeszow at Hetmanska 69 street, at present loaned by the Commune City of Rzeszow to the Institutional Sports Club Stal Rzeszow. As part of the investment, nine segments of stadium (stands) are foreseen to be built on the present facility on the eastern side of the stadium along with the access roads. The realization of only nine segments (not the whole stadium) is conditioned by the financial possibilities of the City as well as the accessible allocation of means as part of the Regional Operation Programme of the Sub-Carpathian Voivodeship (RPO WP). The new stands will make it possible to enlarge the capacity of the stadium about 4 711 sitting places for spectators of sport contests. After the realization of the investment the capacity of the stadium will increase up to 14 211. The realization of the project will also make it possible to increase the level of safety and comfort of leading as well as participation in games and sport competitions, adapt the facility to the needs of handicapped people, improve the image of the city, rationalize operating costs of the facility.
2.1. Costs of the trip – new quantifications
In the analysis of economic efficiency of the studied investment the following streams of costs and social benefits will be used social costs (new quantifications). Private costs include net investment expenditures and operation costs. Private benefits include incomes from operation activity corrected about the changes of circulatory capital and the residual value of the project in the end of the period of reference. The external benefits is benefits resulting from the increase of accessibility to the place of recreation.
Pricing of external effects connected with the modernization of Stadium was based on the method of costs of the trip (TCM). This method consists in accepting the TCM of people heading to the place of recreation Stadium as a measure of value of good of a non – market character. The method assumes therefore that costs of the trip constitutes a suitable measure of readiness to pay for the possibility of using place of recreation. The evaluation of social effects of Stadium modernization using the method costs of the trip was conducted on basis of costs of the trip zonal calculations and consumer’s surplus resulting from about 73 000 additional approaches to Stadium annually in connection with participation in organized events as a result of realization of an investment. As a result, one has received the value of social benefits resulting from the modernization of the Stadium in the amount of 1 022 287 polish money.
2.2. Numerical data and calculations indispensable to determine residual value (RV) of the studied investment
An essential element of efficiency account is the coefficient of discount (at). While establishing discounted money flows concerning investments in its calculations one has considered the discount rate of 5%, while analyzing the costs and the social costs from the realization of the studied investment one has used the discount rate on the level of 5,5 %.
RV= (1+q)NCFm/r-q (1)
RV – residual value,
NCFm – cash flows in the last year calculation period,
r – discount rate,
q – constant growth rate of net cash flow (NCFm) projection period,
RV= 5 289979/0,3418 = 15 474 569
The evaluation of social investments efficiency called the macroeconomic evaluation consists in examining all costs and benefits relating to the surroundings of the investment, taking into consideration the influence on the natural and cultural environment of man and social – economical phenomena which accompany the undertaking. Such an evaluation should constitute an indispensable element of investment efficiency evaluation, especially the ones funded by public and public – private means. Among the macroeconomic methods of the investment efficiency account, the most popular is the method of costs analysis and the social benefit (CBA – Cost-Benefit Analysis). The results of benefitscosts analysis can be expressed in many ways, in this in the net economic value (ENPV) and the economic rate of return – ERR.
The economic net value ENPV informs about real economic benefits (estimated in money), which will be brought by the realization of an investment.
We will evaluate it on the basis of the following formula (2):
ENPV=at St (2)
St – balances of economic costs streams and costs social generated by a project in particular years of the accepted temporary horizon
at – coefficient of discount, 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 equals zero. The economic rate of return will be evaluated from the following pattern (3):
ERR= r1 + (EPV (r2 – r1)/ EPV + | ENV |) (3)
EPV – positive value ENPV for a lower discount rate r1.
ENV – negative value ENPV for a higher discount rate r2.
To evaluate the efficiency of an investment for the society one has used the method of economic updated net value of the project (ENPV), economic rate of return (ERR) and the coefficient of benefits-costs (BCR).
As the first, the economic updated net value of the project was marked. In order to calculate ENPV one should firstly establish the net money flows on the basis of social benefits connected with the investment. Money flows were set with the use of the formula NCFt= Dt – Kt. In the last year of the accounting period the value increased about the residual value of the facility in the end of 2030 years.
Based on the presented assumptions the financial plan of the operator of the Stadium for the activity connected directly with its usage was worked out. The plan includes the operator’s balance, especially his positions indispensable to elaborate the demand on the net circulating capital, the profit-and-loss account and the account of money flows. The most important assumptions of the forecast are presented.
Knowing the results of calculation of net money flows, it calculate the level of economic net value of the studied undertaking. To calculate ENPV it, the formula was used. From the calculations can be seen that the economic updated value of investment carries out 2 064 871,31 polish money. It can be seen from the aforementioned that the analyzed investment is effective, because the economic modernized net value set for the whole accounting period is larger than zero.
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