Home  Journals  Financial Analytics: Science and Experience  32(218) - 2014 August

Mathematical model of an investment project with borrowed capital

Available online: 19 August 2014

Subject Heading: BUSINESS ASSESSMENT

JEL Classification: 

Pages: 39-45

The article deals with a model of an investment project on the principle of debt capital. The purpose of the paper is the mathematical justification of the separation of gross income of investment project as per an income of an investor and lender's interest income. The method is based on a study of net cash flow generated by the invested capital. The existing methods are based on an assessment of the performance of money flow: present value index NPV and domestic interest rate IRR. "The General rule of NPV: if the NPV > 0, in that case the draft must be adopted". "The general rule of IRR: if the IRR > r, in that case the draft must be adopted". These are the rules featured in the textbook for higher educational institutions [1]. These rules are simple and versatile. It is their advantage and their weakness. Essentially, they are indicative and do not provide an answer to the question: "What is really an investor's income in cash generated by the invested capital?" The solution of this task was possible on the basis of the method of an assessment of the performance of the effectiveness of an investment project on the principle of debt capital. The result of the research is to develop a model of an investment project in the form of a financial portrait of the Excel spreadsheet that contains the calculation of the income of an investor and the interest expense on the loan, as well as data on the cash flows of project and lender. Model can be applied for the calculation and analysis of all types of investment projects. The article shows that the model of project significantly changes the perspective on the economic substance of the effectiveness of the investment project - internal interest rates - IRR. The article proves that the IRR is the interest rate at which the entire project gross revenues are spent while paying the interest paid to the creditor.

Keywords: loan capital, investment, cash flow, project, income, percentage, cost

References:

1. Damodaran A. Investitsionnaya otsenka: instrumenty i metody otsenki lyubykh aktivov [Investment Valuation: Tools and Techniques for Determining the Value of any Asset]. Moscow, Al'pina Pablisherz Publ., 2010, 1338 p.
2. Lukasevich I.Ya. Investitsii: uchebnik [Investment: a textbook]. Moscow, INFRA-M Publ., 2011, 413 p.
3. Tsar'kov V.A. Analiticheskie metody i modeli otsenki effektivnosti investitsionnykh proektov [Analytical methods and models for assessing the efficiency of investment projects]. Audit i finansovyi analiz – Audit and financial analysis, 2014, no. 2, pp. 241–247.
4. Tsar'kov V.A. Novye metody i modeli analiza investitsionnykh proektov [New methods and models of the investment projects analysis]. Finansovaya analitika: problemy i resheniya – Financial analytics: science and experience, 2013, no. 47, pp. 33–43.

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ISSN 2311-8768 (Online)
ISSN 2073-4484 (Print)

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