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5. Evaluation projects

Chapter 5

EVALUATION PROJECTS

 

by: josavere

INTRODUCTION

A characteristic defined clearly of century XXI is the lack of employ and the great need to work. The educative system must to page attention to form well entrepreneurs.
Nowadays a world has an unemployment problem, which attempts against human dignity and generates a great amount of inherent conflicts due to the incapacity to take care of basic needs due to lack of income. The world requires good entrepreneurs characterized by its personal values, which the teacher FERNANDO VILLA URIBE1  summarizes as follows: 
  • Solidity of its spiritual values
  • Respectfulness
  • Honest
  • Self-assertiveness
  • Conscience watchful
  • Free, understanding this freedom as the faculty to do what one must do.
  • Humbleness
  • He gives a good example
  • He commits himself
  • He loves his work
  • Enthusiastic
  • He is punctual in appointments, supplies, commitments, debts, and gives back the telephone calls
  • Respect with his acquired qualities
  • He knows himself well
  • He is truthful (direct, noble, pleasing, faithful, friendly, reliable and resolved)
  • He is intuitive (sense of smell to be a step ahead of the events)
  • He’s Patient
  • He possess constructive feedback

In addition to all the qualities that an industrialist must possess he requires the know-how to evaluate projects or at least, are able to understand it for acceptance o rejection.
The certain thing is that we must learn to evaluate projects, determine the proportions objectively to have an action guide.   Why undertake something, if the calculations show us that it is merely a business?   On the other hand, if these, calculations elaborated of the most cautious way indicate a good alternative of yield why not execute it?

 

1. BASIC PRINCIPLES

a. Remember that you must enjoy which this doing.  We must combine likes with businesses and enjoying ourselves while we work.
b. A correlation between the capacity of investment and the type of activity must settle down. With little capital we cannot think about a brewing industry.
c. It is more important to analyze the macroeconomic conditions to see the tendency of the country and the horizons that the government in his development plans presents. Let us remember the Matrix of sector growth (josavere) 
d. The approach must be done thinking about globalization as an irreversible worldwide phenomenon.
e. As far as possible, we must look for projects with variable structures (little investment fixes) in not order to jeopardize the resources available.
f. The trade (investment decisions) is the natural leader and its careful investigation demands time and economic resources, which are due to be involved in the project.
g. In the measurement that a good decision of investment appears it facilitates the capital gain, by contributions or indebtedness.
h. Known the market, to establish a strategy follow up which will depend on a level of income and its continuity.
i. Of being possible, the maximum indebtedness must look for in the long term.
h. When structuring a project, it is urgent to respect the principle of financial conformity, in order to neither to fall into liquidity problems nor to overvalue the proportions of the cash need, sacrificing yield.

 

2. PROCEDURE

a. To project the cash flow, which must be made justifying clearly the income of cash and the correlated payments wisely, to determine the proportions of them in the probable dates of occurrence.
b. To carry out calculation using calculating financier or the Excel as user acquires knowledge in the example at the end of this document.
c. To evaluate the results judiciously, using the recommendable method but in the particular case within the alternatives:
  • Net present value (VPN)
  • Internal rate of return (TIR)
  • Period of recovery

A. PROJECTIONS: the important thing is the estimation of the future income using sustainable criteria for the particular situation. It is not the same to project the future income in a cattle ranch that in cultures of neither delayed yield; nor it can be the same in chicken farms than the operation of a mine. The clear message consists of recognizing that the essential to project income, which is the knowledge of the business, considering it’s the own factors of the particular case and the conditions of the industry in which it operates.
In the estimation of income, the financiers, we must act like advisers of those who know the business. The debits, by its condition of so, are easier to predict with a high degree of certainty.
In the income it is recommended to build with caution (conservative) and in the debits, covering and projecting in sub-optimal conditions, for this way of handling the operative risk of a practical way.   Knowing income and debits we elaborate a cash flow according to the model of "josavere" because it has the advantage to be prioritizing payments and in addition, it constitutes a base to structure a model of easily auditable treasury, which allows that the policies drawn up by the management are accomplished.
The model is constructed as follows: 
Income: organizing them by periods according to the business individually. 
Debits: classifying them as follows

  • Investments
  • Fiscal
  • Labor
  • Operation
  • Suppliers
  • Service to the debt

With the balances that show the periodic numbers we have like establishing if the balances are positive or negative and to take the accumulated figure during the life of the project, considering the adjustments of price and the increases in the different headings from debits, which can be bound to the inflation, the devaluation of both variables simultaneously.

B. TO CARRY OUT CALCULUS: like explain it in the chapter about financial function (book one) in which the different alternatives to evaluate projects.
Base on the knowledge exposed defined a method to use according to the characteristics of the particular case, which summary as follows:
If one is a project of fast recovery, in a stable economy and with healthy currency, we can use the period of recovery of the investment or the accounting rate of yield.
If one is a project of delayed yield or long life profit, independently of the macroeconomic conditions it must use TIR (internal rate of return) or VPN (net present value). Both methods must take to us to the conclusion, safe in case of mutually excluding projects.
The TIR compares with the rate of cut or the minimum rate of return of the company. If the VPN is positive, indicates that the project, is acceptable mathematically, the greater the amount, the better.

C. EXCLUDING AND DEPENDENT PROPOSALS: when two projects are mutually excluding and employees, the VPN is better than the internal rate of return like defect acceptance number. Both must reach the same conclusion (acceptance or rejection).
The calculations would consider this in Excel:

D. JUDICIOUS EVALUATION OF THE RESULTS: taking care of the capacity to generate cash because what is worth in finances it is the treasury and not the accounting results. The exceptionally good businesses appear in very few and rare occasions reason why we must use indicators that allow us to carry out a Benchmarking taking care of the irreversible phenomenon of globalization.


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1. Fernando Villa Uribe, SER UN BUEN EMPRESARIO, Plaza & Janés

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