Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability

Authors

DOI:

https://doi.org/10.15587/1729-4061.2022.252997

Keywords:

explicit formula, calculation, project risk, situation, high certainty, partial uncertainty

Abstract

A new systems approach to quantitative estimation of financial risks of investment projects was proposed: an integral risk of the project as a whole for all its parameters at once and the risks for each of its parameters separately. At the same time, the very concept of the project risk has been generalized: instead of the conventional risk of unprofitability, a new, more general concept of the risk of unacceptably low project profitability has been introduced. Two levels of the project profitability were considered: a level acceptable to the investor and a realistically achievable level. Corresponding values of design parameters and indices of financial efficiency of the project were found for these levels. Based on the found values, relative margins of investment acceptability and risks of unacceptably low profitability of the project were calculated. A procedure of comprehensive assessment of the risk of unacceptable low profitability of the project for cases of high certainty and partial uncertainty has been developed. Explicit formulas for quantitative risk assessment of unacceptably low profitability of the project have been derived, ranges of values of all risks under consideration have been determined and appropriate recommendations have been given. Explicit formulas for calculating the values of project risks and dynamic points of project acceptability are convenient and useful for software implementation (for example, within the Monte Carlo method). For the Monte Carlo method and the method of scenarios, another alternative approach to assessing the integral risk of unacceptably low project profitability was proposed by the authors based on the direct calculation of unacceptable scenario values of any criterion of the project financial efficiency. A new index of financial efficiency of the project has also been introduced: a discounted period of acceptable return (discounted payback period of the project is its special case).

Author Biographies

Alexander Vasiliev, Odessa I.I. Mechnikov National University

PhD, Associate Professor

Department of Mathematical and Computer Modelling

Nataliia Vasilieva, Odessa State Academy of Civil Engineering and Architecture

PhD, Associate Professor

Department of Higher Mathematics

Natalia Tupko, National Aviation University

PhD, Associate Professor

Department of Applied Mathematics

References

  1. Keršytė, A. (2012). Investment risk analysis: theoretical aspects. Economics and management, 17 (3). doi: https://doi.org/10.5755/j01.em.17.3.2099
  2. Hopkinson, M. (2017). Net Present Value and Risk Modelling for Projects. Routledge, 180. doi: https://doi.org/10.4324/9781315248172
  3. Gotze, U., Northcott, D., Schuster, P. (2015). Investment Appraisal. Methods and Models. Springer, 366. doi: https://doi.org/10.1007/978-3-662-45851-8
  4. Carmichael, D. G. (2016). Adjustments within discount rates to cater for uncertainty – Guidelines. The Engineering Economist, 62 (4), 322–335. doi: https://doi.org/10.1080/0013791x.2016.1245376
  5. Zholonko, T., Grebinchuk, O., Bielikova, M., Kulynych, Y., Oviechkina, O. (2021). Methodological Tools for Investment Risk Assessment for the Companies of Real Economy Sector. Journal of Risk and Financial Management, 14 (2), 78. doi: https://doi.org/10.3390/jrfm14020078
  6. Smolyak, S. A. (2012). Investment Project Evaluation under Risk and Uncertainty Investment Project Evaluation under Risk and Uncertainty (Expected Effect Theory). Moscow, 158. doi: https://doi.org/10.2139/ssrn.2097349
  7. Aven, T. (2015). Risk Analysis. John Wiley & Sons, Ltd, 197. doi: https://doi.org/10.1002/9781119057819
  8. Tarzia, D. A. (2016). Properties of the Financial Break-Even Point in a Simple Investment Project As a Function of the Discount Rate. Journal of Economic & Financial Studies, 4 (02), 31. doi: https://doi.org/10.18533/jefs.v4i02.226
  9. Vasil’ev, A., Vasil’eva, N., Tupko, N. (2017). Development of combined method for analysis of financial risks of investment project. Technology Audit and Production Reserves, 4 (4 (36)), 43–49. doi: https://doi.org/10.15587/2312-8372.2017.108527
  10. Vasyliev, O., Vasylieva, N., Tupko, N. (2021). Reserves of investment acceptability of the project based on values of its parameters and efficiency criteria. Scientific Bulletin of Kherson State University. Series Economic Sciences, 43, 81–85. doi: https://doi.org/10.32999/ksu2307-8030/2021-43-12
  11. Firescu, V., Branza, D. (2016). Cost volume profit, a managerial accounting technique. Scientific Bulletin – Economic Sciences, 15 (3), 25–34. URL: http://economic.upit.ro/repec/pdf/2016_3_3.pdf
  12. Hazen, G., Magni, C. A. (2021). Average internal rate of return for risky projects. The Engineering Economist, 66 (2), 90–120. doi: https://doi.org/10.1080/0013791x.2021.1894284
  13. Mahmoud, H., Ahmed, V., Beheiry, S. (2021). Construction Cash Flow Risk Index. Journal of Risk and Financial Management, 14 (6), 269. doi: https://doi.org/10.3390/jrfm14060269
  14. Nykamp, S., Bakker, V., Molderink, A., Hurink, J. L., Smit, G. J. M. (2013). Break-even analysis for the storage of PV in power distribution grids. International Journal of Energy Research, 38 (9), 1112–1128. doi: https://doi.org/10.1002/er.3106
  15. Blaset Kastro, A. N., Kulakov, N. Y. (2020). Risk-adjusted discount rates and the present value of risky nonconventional projects. The Engineering Economist, 66 (1), 71–88. doi: https://doi.org/10.1080/0013791x.2020.1815918
  16. Brzakovic, T., Brzakovic, A., Petrovic, J. (2016). Application of scenario analysis in the investment projects evaluation. Ekonomika Poljoprivrede, 63 (2), 501–513. doi: https://doi.org/10.5937/ekopolj1602501b
  17. Prokopenko, T., Lavdanska, O., Povolotskyi, Y., Obodovskyi, B., Tarasenko, Y. (2021). Devising an integrated method for evaluating the efficiency of scrum-based projects in the field of information technology. Eastern-European Journal of Enterprise Technologies, 5 (3 (113)), 46–53. doi: https://doi.org/10.15587/1729-4061.2021.242744
  18. Oleksandr, V., Nataliia, V., Nataliia, T. (2019). A new approach to formation of rating of parameters of investment project in terms of their risks. Scientific Bulletin of Kherson State University. Series Economic Sciences, 34, 153–156. doi: https://doi.org/10.32999/ksu2307-8030/2019-34-33

Downloads

Published

2022-02-25

How to Cite

Vasiliev, A., Vasilieva, N., & Tupko, N. (2022). Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability. Eastern-European Journal of Enterprise Technologies, 1(4 (115), 77–86. https://doi.org/10.15587/1729-4061.2022.252997

Issue

Vol. 1 No. 4 (115) (2022): Mathematics and Cybernetics - applied aspects

Section

Mathematics and Cybernetics - applied aspects

License

Copyright (c) 2022 Alexander Vasiliev, Nataliia Vasilieva, Natalia Tupko

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

The consolidation and conditions for the transfer of copyright (identification of authorship) is carried out in the License Agreement. In particular, the authors reserve the right to the authorship of their manuscript and transfer the first publication of this work to the journal under the terms of the Creative Commons CC BY license. At the same time, they have the right to conclude on their own additional agreements concerning the non-exclusive distribution of the work in the form in which it was published by this journal, but provided that the link to the first publication of the article in this journal is preserved.

A license agreement is a document in which the author warrants that he/she owns all copyright for the work (manuscript, article, etc.).
The authors, signing the License Agreement with TECHNOLOGY CENTER PC, have all rights to the further use of their work, provided that they link to our edition in which the work was published.
According to the terms of the License Agreement, the Publisher TECHNOLOGY CENTER PC does not take away your copyrights and receives permission from the authors to use and dissemination of the publication through the world's scientific resources (own electronic resources, scientometric databases, repositories, libraries, etc.).
In the absence of a signed License Agreement or in the absence of this agreement of identifiers allowing to identify the identity of the author, the editors have no right to work with the manuscript.
It is important to remember that there is another type of agreement between authors and publishers – when copyright is transferred from the authors to the publisher. In this case, the authors lose ownership of their work and may not use it in any way.