Calculating the economic effect of the proposed measures as a way to determine the effectiveness of investments

Calculation of the economic effect of the proposed activities is conducted in order to determine the appropriateness of financing a certain project, the essence of which is to make a profit.

Types of economic effect

Investment activity involves investing capital in order to generate additional profits to achieve a social effect. In the second case, the economic effect can not be calculated, since the social effect does not imply profit.

The economic effect can be positive and negative. To achieve a positive effect, it is enough to make a profit. In other words, the amount of the investor's income must be higher than the amount of investment. This effect is called profit. The second way to get a positive effect is not investment, which increases the volume of income, but in saving costs of production. The most beneficial way to get a positive effect is to increase revenues and reduce production costs.

A negative positive effect is achieved when the costs of the proposed activity exceed revenues. In this case, the economic effect will be called a loss.

Method for calculating the economic effect

The classical formula for calculating the economic effect is as follows:

Ef = D - 3 * K, where

Ef - economic effect;

D - income or savings from events;

З - expenses for carrying out of actions;

K is the normative coefficient.

Regulatory Ratio

In addition to the concept of "economic effect," there is another term that is used to determine the appropriateness of investing. This is economic efficiency. It also requires a regulatory ratio. It shows the minimum permissible efficiency of the investment project, which should be achieved for the state and society.

The normative coefficient is a constant. Its value varies depending on the industry in which it is applied. The value of this index ranges from 0.1 to 0.33. The highest value of the parameter is in the chemical industry, and the lowest in the transport sector. In the industrial sector, the regulatory ratio is 0.16; In the sphere of trade - 0,25.

The expediency of calculating the economic effect of the proposed activities

The economic effect can be calculated for any period of time. It depends on how long the activities are calculated. Calculation of the annual economic effect is carried out in those cases when activities requiring investments are conducted or may be conducted during the year. An example is the payment of bonuses to employees for increasing sales by month. Thus, there is no better way to understand the feasibility of bonuses, how to calculate the economic effect for the year. The formula for calculating the economic effect of the proposed measures in this case would be as follows:

Er = (A1 - A0) * 3 * K, where

• Er - annual effect;
• D1 - income after activities;
• D2 - income before the event;
• 3 - costs;
• K is the normative coefficient.

Example

In order to more clearly understand how the feasibility of an investment project is determined, it is necessary to consider an example of calculating the economic effect.

The company is engaged in the manufacture and sale of furniture. Management has decided to award bonuses to employees if they can improve product quality. As a result of the measures taken to improve the quality of the goods, the company was able to earn $ 100,000, which is 15,000 more than before the introduction of activities. Invested was 8 thousand dollars, and the regulatory ratio is 0.25. Accordingly, the economic effect is calculated as follows:

Ef = 15 - 0.25 * 8 = 13.

Long-term investments

In those cases where investment will be conducted over a long period of time, the economic effect indicator will not be able to reflect the appropriateness of financing. You must always take into account the opportunity costs. They appear in the case when the investor makes one or another choice in the presence of another alternative. In this situation, the opportunity costs that an entrepreneur could earn if it chooses another option for investing his funds are considered to be alternative costs.

There is always at least one alternative investment option, and it must be taken into account in order to obtain a more complete picture in calculating the economic effect of the proposed activities. This alternative is a bank deposit. In this case, it is necessary to take into account the percentage of the deposit and to discount income and expenses.

In this situation, the indicator of net present value will act as an economic effect. However, if calculation of the classical economic effect was not taken into account, and the positive effect was achieved when incomes exceeded costs, even in case of net present value, even its negative value may indicate that costs exceed costs.

The thing is that not always negative value of net present value means excess of expenses over incomes. If you calculate the calculation percentage, for example, 5%, then the positive value means that the return on investment is more than 5%. If the TTS is 0, then the investment is profitable by exactly 5%.

To understand how profitable the proposed measures are, when the net present value is less than zero, it is necessary to calculate the internal percentage. A positive value indicates the profitability of the project, and the negative - its loss. If the internal percentage is 2 at a costing rate of 5%, then the investment paid off by 2 percent, but with an alternative use of these funds, they could bring in 3% more. Thus, the net present value , unlike the coefficient of economic efficiency, is a more suitable solution for calculating the financing of measures for improving the enterprise, designed for a long term.