Analysis and Risk Assessment of the Investment Project of the
Organization
Angelina Alexandrovna Klimakova
Financial University under the Government of the Russian Federation, Leningradsky ave, 49, Moscow, Russian Federation
Keywords: Investment project, risk assessment methods, scenario method, analysis of sensitivity, PJSC «NLMK»
Abstract: The article substantiates the need for a full-fledged assessment of the effectiveness of the investment project,
consisting not only of the analysis of standard indicators of project efficiency (NPV, DPP, IRR), but also the
analysis of the risks of projects. In addition, the analysis and risk assessment of the investment project of the
organization, the ways to improve the effectiveness of risk assessment methods of the investment project are
proposed. The purpose of this work is to analyze and assess the risks of the investment project of the
organization. To conduct the study the following methods were used: classification, analysis, comparison,
modeling and forecasting. The work performed showed that the use of only one method for risk assessment
is considered ineffective, since only different combinations of methods for analyzing the risks of an
investment project can give a complete picture of the weaknesses and strengths of the project, as well as assess
its effectiveness in case of changes in any external conditions.
1 INTRODUCTION
As we know, making investment decisions is
inseparably connected with uncertainty and risks.
This means that in evaluation of any investment
project we must evaluate not only its efficiency with
standard indicators NPV (net present value), IRR
(internal rate of return) and DPP (discounted payback
period), but also pay attention to risk evaluation tools
of this project.
The importance and relevance of this topic is that
full-fledged assessment of investment project
efficiency is possible only in case of analysis of not
only standard indicators (NPV, DPP, IRR), but also
the analysis of project risks. This applies to all
companies, regardless of the area in which they
operate.
This work is devoted to the analysis and risk
assessment of the investment project of the
organization, the study of indicators that characterize
the effectiveness of the investment project.
Conclusions made in the work, which reflect the
recommendations on the choice of methods for
assessing the risks of investment project in the
company, can find practical application in the
analysis of investment projects in various
organizations.
The object of the study is an investment project of
Novolipetsk Steel Company (NLMK).
The subject of the research is methods of
investment risk assessment.
The purpose of this work is to analyse and assess
the risks of an organization's investment project.
Achievement of the specified goal determined the
statement and solution of the following tasks:
1. definition of the concept of investment
project;
2. description of classification of risks of an
investment project and methods of their estimation;
3. analysis of investment project by the example
of Novolipetsk Steel Company (NLMK);
4. characteristics of risk assessment methods for
NLMK's investment project;
5. evaluation of the effectiveness of risk
assessment methods of the investment project at
NLMK.
The following methods were used for the study:
classification, analysis, comparison, modeling and
forecasting.
The analysis of works on the problem under study
showed that at present the main methods of risk
assessment of organizations are formed. But, at the
same time, only a small part of enterprises is engaged
in the analysis and risk management of the investment
project. As a rule, companies assess the effectiveness
Klimakova, A.
Analysis and Risk Assessment of the Investment Project of the Organization.
DOI: 10.5220/0010697200003169
In Proceedings of the International Scientific-Practical Conference "Ensuring the Stability and Security of Socio-Economic Systems: Overcoming the Threats of the Crisis Space" (SES 2021),
pages 223-227
ISBN: 978-989-758-546-3
Copyright
c
2022 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
223
of the project in traditional ways, using a discounted
approach, and do not consider the risks that may be
inherent in it.
Theoretical and methodological basis and
information base of the study are the works of
domestic and foreign researchers. As an information
base the materials of the Novolipetsk Steel Company,
available in the public domain, are used.
The issues of studying the risks of an investment
project and the choice of methods for risk analysis are
presented in the works of foreign and domestic
scientists. The basics of the concept of probability and
risk were developed in their works by such scientists
as F. Knight, K. Gauss and D. Neumann. In the future,
the study of various types of risks and methods of
their assessment was carried out by many specialists,
including L. Haight, F. Hayek, J. Conan, M. Golder,
L.V. Dontsova, N.A. Nikiforova and O.P. Zaitseva.
2 MATERIALS AND METHODS
2.1 The Concept of an Investment
Project
According to the Federal Law dated February 25,
1999 N 39-FL "On investment activities in the
Russian Federation, carried out in the form of capital
investments" an investment project is a substantiation
of economic feasibility, volume and terms of capital
investments, including necessary project
documentation, elaborated in accordance with the RF
legislation, as well as description of practical steps to
make investments.
Each investment project has its own life cycle,
which consists of 5 stages: initiation, planning,
implementation, monitoring (control), closing of the
project.
At the same time, at each stage of the investment
project it has different risks, which should be
identified in advance and find effective methods of
managing them, because the consideration of any
investment project and its implementation is
impossible without taking into account the changes
occurring in the economy (Naidenova, 2020).
At the moment, many investment projects,
especially in the sphere of small and medium
business, as indicators of their future effectiveness
assess only the classic indicators of profitability, the
amount of future cash flows and payback period of
the project, without paying attention to its risks. But
it is the realization of any of the risks may lead to a
project becoming unprofitable. That is why when
assessing an investment project, it is necessary to pay
special attention to its possible risks (Stefan, 2018).
2.2 Classification of Investment Risks
A unified classification of investment project risks
has not been worked out yet. Risks of an investment
project can be classified according to various
parameters, for example, according to the stages of
the life cycle of the project, according to the criterion
of acceptable risk limit and the possibility of
insurance, based on the sphere and form of
manifestation, as well as the source of occurrence
(Shevchenko, Razvadovskaya, Kaplyuk, Rudneva,
2020).
2.3 Methods of Risk Assessment of an
Investment Project
In order to manage the risks of an investment project,
it is necessary to assess them. The updated
international standard on risk assessment methods
IEC 31010:2019, which is a supplement to the ISO
31000:2018 standard, presents and describes 41 risk
assessment methods, which are grouped into 10
groups related to elements of the risk management
process (Suyasa, 2019). Qualitative and quantitative
methods are used to assess the risks of an investment
project.
Qualitative analysis is a method of prioritizing the
risks of the project for further analysis or action by
assessing their probability and impact on the project,
in case of implementation.
The purpose of qualitative analysis is to determine
the severity of risk by predicting the probability and
impact of risk. Typically, this procedure is performed
for all identified risks within a project, and for all
types of projects. Risks are usually presented in a risk
assessment matrix, which is then used to report the
existing most significant risks to the relevant
stakeholders.
While qualitative risk analysis should generally
be performed for all risks, quantitative risk analysis
has a more limited application depending on the type
of project, the risks of the project, and the availability
of data to use for quantitative analysis. This is why
quantitative analysis is usually done only for the most
significant risks identified by the qualitative method.
The most popular quantitative methods are sensitivity
analysis, scenario method and modeling (Gileva,
2017).
It is worth noting that, as a rule, when making a
decision to implement an investment project,
investors use a combination of different methods to
SES 2021 - INTERNATIONAL SCIENTIFIC-PRACTICAL CONFERENCE "ENSURING THE STABILITY AND SECURITY OF
SOCIO - ECONOMIC SYSTEMS: OVERCOMING THE THREATS OF THE CRISIS SPACE"
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more thoroughly assess the various indicators and
risks of the project. For example, to determine the
effectiveness of an investment project, as a rule, a
number of indicators is used, which can be divided
into statistical and dynamic. Statistical indicators
include the following: return on investment (ROI),
payback period (PP), investment efficiency ratio
(ARR). In turn, dynamic methods of assessment
include such indicators as: net present value (NPV),
internal rate of return (IRR), discounted investment
payback period (DPP) and modified internal rate of
return (MIRR) (Suslov, 2021).
Next, let's consider the analysis and risk
assessment of the investment project on the example
of Novolipetsk Steel Company (NLMK).
3 RESULTS AND DISCUSSION
3.1 Analysis of an Investment Project
at Novolipetsk Steel Company
(NLMK)
Novolipetsk Steel Company is the leading production
site of the international NLMK Group. NLMK uses
qualitative and quantitative methods to assess risks.
In particular, the company uses in its practice the
method of expert evaluations, as well as the method
of scenarios, the application of which is possible in
the absence of statistical data for risk assessment.
Next, let us consider an example of an investment
project for NLMK and assess its risks.
The purpose of the project is to build a plant for
the production of steel structures and hot-dip
galvanized metal with polymer coating (Sukharev,
2018).
The construction of the plant is planned to be
carried out in the vicinity of the Lipetsk site of NLMK
Group. To implement the project requires borrowed
funds in the amount of 5 500 thousand dollars U.S.
(bank loan for 7 years at 11%), working capital of
2,000 thousand dollars U.S., equipment costs of 3,300
thousand dollars U.S., labor costs of 870 thousand
dollars U.S. and other costs of 2,300 thousand dollars
U.S. It is assumed that the price of 1 ton of produced
goods will be 850 dollars U.S. and the cost of 1 ton
will be equal to 380 dollars U.S. (Eriksson, 2021).
The production line is designed for a volume of up to
4000 tons per year. The final cumulative cash flow is
positive (6,378 thousand dollars U.S.), which
indicates that this investment project is financially
sound. That is, all project costs, including repayment
of the loan and payment of interest on it, are fully
financed by the cash flows from the project
implementation.
According to the calculations, the discounted
payback period of DPP project is just over 4 years,
the internal rate of return IRR is 23.67%, and the NPV
of the project is 2,463 thousand dollars U.S. This
indicates the effectiveness of the project.
When implementing the project, the following
risks may arise:
the risk of delay in the preparation of project
documentation and displacement of the start date of
the project;
the risk of an accident in production;
the risk of reduction of prices for the products
manufactured;
the risk of increase of the cost of the products;
the risk of increase of the interest rate on the
credit and change of credit conditions;
the risk of breakage of equipment and temporary
suspension of production;
the risk of underproduction of the planned
volume of production;
the risk of change in tax legislation;
the risk of underfunding of the project due to
losses caused by fraud and corruption;
the risk of leakage of commercially sensitive
information (production technology).
3.2 Characteristics of NLMK
Investment Project Risk
Assessment Methods
Let us analyse the risks of lower prices for the output
products, increased production costs and
underproduction of the planned volume of products
with the help of the scenario method used in the
company.
Consider 3 scenarios: pessimistic, optimistic and
realistic (most likely).
Each of these scenarios is characterized by a small
deviation of the considered indicators of volume,
price and cost. In the case of the pessimistic scenario,
the price and sales volume decrease by 5%, and the
cost increases by 5%. In the case of the optimistic
scenario, the indicators are reversed - price and sales
volume increase by 5%, while cost of sales decreases
by 5%. In the case of the realistic scenario, all
indicators remain basic.
The method of scenarios has shown that the
occurrence of the pessimistic scenario is not critical
for the investment project, because in this case, the
NPV of the project remains positive and the project is
financially solvent. This means that in the case of this
Analysis and Risk Assessment of the Investment Project of the Organization
225
scenario, to carry out this investment project is still
appropriate. In this case, the internal rate of return
(IRR) is 18.54%, and the payback period of the
project is almost 4 years.
The realistic scenario also allows the project to
pay off, moreover, its internal rate of return becomes
23.67%, which is more than 2 times higher than the
discount rate and indicates a large safety margin and,
consequently, a low risk of the project. The payback
period of the project is just over 4 years.
In case of the optimistic scenario when
implementing the investment project, NPV will also
be positive, the internal rate of return will be 28.73%,
and the discounted payback period will be 3.5 years.
Given the probabilities of occurrence of different
scenarios, the expected NPV will be 2,531 thousand
dollars U.S. This is a good indicator for the project.
Despite the fact that Novolipetsk Steel also uses
the method of expert evaluations for risk analysis, the
company does not have a wide range of risk
assessment methods, which is quite a serious
disadvantage for it.
Thus, the scenario method used at NLMK for risk
assessment allows us to assess the feasibility of the
investment project in case any of the scenarios occurs.
However, it does not make it possible to determine
which of the factors has the greatest impact on the
change in NPV, so it is not very effective.
3.3 Evaluating the Effectiveness of Risk
Assessment Methods for an
Investment Project at NLMK
For quality increase of investment project risk
analysis, you can use sensitivity analysis. For
example, conducting a sensitivity analysis on the
project under consideration showed that the
considered risks are not critical for the project,
because even in the case of reducing the volume or
cost indicators by 30% NPV of the project remains
positive, which indicates its financial solvency even
in difficult times. However, a 30% reduction in price
leads to a negative NPV and negatively affects the
implementation of the investment project (see Figure
1).
Figure 1: Sensitivity analysis of NLMK's investment
project.
This pattern was revealed by conducting a
sensitivity analysis. Having only the method of
scenarios for risk assessment did not make it possible
to understand to what extent certain indicators can
deviate, while leaving the project financially sound.
4 CONCLUSIONS
Thus, we can conclude that indeed only different
combinations of risk analysis methods of an
investment project can give a complete picture of the
weaknesses and strengths of the project, as well as
assess its effectiveness in case of changes in any
external conditions (Golov, 2020).
On this basis, it is worth noting that Novolipetsk
Steel, being one of the largest metallurgical
companies, should pay special attention not only to
the management system of the organization as a
whole, but also to risk assessment in individual
investment projects. Since it is successful
implementation of investment projects that will
contribute to improving the company's efficiency and
increasing its competitive advantages. In case of an
inaccurate assessment of an investment project,
NLMK faces the risk of incurring losses under the
project and its non-payback, as well as losing part of
its competitive advantages due to the slowdown of its
own development as compared to competitors.
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