Bankovní Institut Vysoká Škola Praha Hodnocení Investičního Projektu Založení Nového Podniku

Bankovní institut vysoká škola Praha

Katedra bankovnictví a pojišťovnictví

Hodnocení investičního projektu založení nového podniku

Diplomová práce

Autor: Dmytro Tereshchenko Finance

Vedoucí práce: Ing. J. Fingerland

Praha Červen,2011 "Bankovni institut vysoka skola" (Prague)

Department of Banking and Insurance

Evaluation of investment project of new enterprise establishment

Diploma Thesis

Author: Dmytro Tereshchenko Finance

Supervisor: Ing. J. Fingerland

Prague June, 2011

Statement

I declare, that I am master, worked over the diploma independently using literary sources. I certify that the electronic version of the work coincides with the printed version, and I accept the fact that the work will be archived in the library of BIVS and it will be available to the third parties in the internal electronic database of the institute.

Prague, June, 2011 Dmytro Tereshchenko

Acknowledgement

To my supervisor Ing. J. Fingerland for his professionalism, wise advices and positive mood.

Prague, June, 2011 Dmytro Tereshchenko

Annotation: In the first section of this thesis, we analyzed the essence of the investment project and its role in making investment decisions, stages, and overall sequence of project development, project risks, as well as the investment needs of projects and sources of their funding. In the second section of this thesis, we marked out basic stages, goals and objectives, business planning, identified the theoretical aspects of investment project economic efficiency evaluation, and peculiarities of investment project economic efficiency evaluation organization subject to risks and uncertainties. We highlighted key principles of substantiation and evaluation of investment projects which may be applied practically in all areas of business and for enterprises of different ownership forms, from the inception of the idea to create an enterprise (or invest in a project) until attraction of investment and project implementation. In the third section, based on the analyzed information we developed the business plan for the investment project, as well as thoroughly assessed business ideas and substantiated creation of a new enterprise for implementation of this project.

Anotace: První část práce obsahuje analýzu podstaty investičního projektu a jeho význam v rozhodování o investicích, stupně a celkový vyvoj projektu, jeho rizika, investiční potřeby a finanční zdroje. Druhá část obsahuje základní kroky, cíle a záměry, definuje teoretické aspekty hodnocení ekonomické efektivity investičních projektů, zejména s ohledem na rizika a nejistoty. Jsou zdůrazněny klíčové principy hodnocení investičních projektů, použivané prakticky ve všech oblastech podnikání a pro podniky různých forem vlastnictví - od vzniku myšlenky vytvoření nové společnosti do prvních investic a realizace projektů. Ve třetí části práce je popsáno vytvoření podnikatelského plánu investičního projektu a vyhodnocena celková podnikatelská strategie, idea a perspektíva vytvoření nové společnosti pro realizaci tohoto projektu.

Keywords: investment project, establishment of a new company.

Klíčová slova: investiční projekt, vytvoření nové společnosti.

Contents

Introduction……………………………………………………………………………… 7 1. Theoretical Aspects of Investment Project Implementation…………………. 9 1.1 Economic Essence of the Investment 9 Project………..……………………………. 1.2. Classification of Investment Projects…………………………………………….. 12 1.3. Investment Project Development and Analysis Stages…….……………………... 14 1.4. Overall Sequence of Project Development and Analysis………………………… 18 1.5. Investment Project Risk Analysis and Assessment……………………………….. 21 1.6. Investment Needs and Funding 28 Sources…………………………………………... 2. Economic Essence of the Investment Project 32 2.1. The Role of Business Plan in Efficient Implementation of the Investment Project …………………………………………………………………………………….. 32 2.2. Substantiation of Economic Efficiency of the Investment Project 38 ……………….. 2.3. Basic Criteria of Investment Project Efficiency and Methods of Their Evaluation ……………………………………………………………………………………. 40 3. Substantiation of the Investment Project – Creation of New Enterprise for Construction and Operation of Recreational Complex in Bilohorodka, Kyiv-

Sviatoshyn District, Kyiv Region…………………………………………………………………………….. 44 3.1. Project Summary………………………………………………………………….. 44 3.2. Project Characteristic 49 ……………………………………………………………... 3.3. Marketing 53 Analysis………………………………………………………………... 3.4. Marketing Plan……………………………………………………………………. 61 3.5. Operational Plan………………………………………………...... 62 3.6. Investment Plan……………………………………………...... 66 3.7. Financial Plan…………………………………………………...... 68 Conclusions……………………………………………………………… 74 ………. List of References ………………………………………………………………. 77

Introduction Thesis urgency: Today, attraction of investments in the real economy sector is of great importance for its survival. Adequacy of practical investment decisions made at various investment stages depends on understanding of the logic of investment processes. Investments precede the establishment of the company and determine its future activities, as well as represent the way to use accumulated capital. One of the most important and crucial stages of the process is substantiation of the investment project (investment object), which the investment resources will be invested in. Choice of the investment object depends primarily on such category as investment attractiveness of the enterprise or the investment project. Argumentation and substantiation of investment attractiveness require a business plan. Scientific substantiation of the problem: For the time being, one of the most serious problems faced by the entrepreneur is to substantiate the investment project, namely in preparation and writing of a business plan. But no matter how complicated is the business plan in writing, it is obligatory for any business. Theoretical aspects of substantiation of the investment project were studied by many scholars, in particular V.P. Savchuk, P.L. Vilenskiy, V.N. Livshits, S.A. Smolyak, K.N. Petrov, I.V. Lipsits, V.V. Kosov, W. Behrens, P.N. Havranek, etc. However, the problem of substantiation of the investment project remains urgent for future studies. The purpose and objectives of the study: The purpose of this thesis is to determine the theoretical and practical aspects of substantiation of the investment project as a mechanism of attraction of necessary funding for the desired investment object. According to this purpose a number of the following tasks must be solved: - to determine the role of the investment project in making the investment decision; - to determine the theoretical aspects of investment project economic efficiency evaluation; - to consider peculiarities of investment project economic efficiency evaluation subject to risk factors and uncertainty; - to identify basic characteristics of the investment project business plan; - based on the theoretical and practical knowledge, to substantiate the feasibility of creating a new company ―BEOGRAD‖, to determine the economic effect of the project ―Construction and Operation of Recreational Complex in Bilohorodka, Kyiv-Sviatoshyn District, Kyev Region‖, as well as to evaluate the efficiency of the investment project, to

determine the sensitivity of the investment project performance indicators to changes in various parameters, to determine the optimal source of funding, to make conclusions and give recommendations. Subject and object of the study: Subject of the study – the key principles of substantiation of investment project economic efficiency, from its inception until its implementation, for various participants of the investment process. Object of the study is the activity of newly created enterprise on implementation of the investment project. Methodological basis and investigation methods: Methodological basis of the work is formed by scientific methods of learning. The study involved principles and methods of subject-logical and structural-functional analysis, expert assessments, statistical processing of raw materials and results. Actual data were based on statistical and marketing studies conducted in the course of writing this thesis on the basis of official publications on the Internet and print media, as well as the results of calculations.

1. Theoretical Aspects of Investment ProjectImplementation

1.1. Economic Essence of the Investment Project

Today, attraction of investments in the real economy sector is of great importance for its survival. Adequacy of practical investment decisions made at various investment stages depends on understanding of the logic of investment processes. One of the most important and crucial stages of this process is the choice of an investment project to contribute investment resources. Choice of the investment object depends primarily on such category as investment attractiveness of the project. The economic literature has not yet developed a unified approach to definition of the term ―investment attractiveness‖. Investment attractiveness was traditionally understood as the existence of such investment conditions which affect the investor’s preferences in choosing a particular investment object. The investment object may be a separate project, enterprise as a whole, corporation, city, region, or country. It is not difficult to find what they have in common: own budget and own management system. The object of each level (and, accordingly, its investment attractiveness) has its own set of significant properties. M.N. Kreynina1 notes that ―investment attractiveness depends on all indicators characterizing financial condition... However, speaking narrower, investors are interested in indicators which affect the enterprise’s returns on capital, stock price, and dividend level‖. Thus, investment attractiveness is an economic category characterized by efficient use of assets of the enterprise, its solvency, stable financial condition, ability to develop on the basis of increasing returns on capital, technical and economic production level, product quality and competitiveness. In the international practice, if a project involves investment attractiveness, it is called the ―investment project‖. Typically, any new project of the enterprise somehow involves attraction of new investments. In the most general sense, the project is a specially drawn up proposal to change the enterprise’s activities in order to achieve a particular purpose. As you know, the most important capital property is an opportunity of bringing profit to its owner. One of the forms of using such an opportunity is long-term capital contribution or investment.

1 Financial Management, Textbook, M.N. Kreynina

In the investor’s (capital owner’s) opinion, the essence of investment lies in the refusal of making profit ―today‖ for the sake of ―tomorrow’s‖ profit. Operations of such kind are similar to loan granting by the banks. Accordingly, to make decision on long-term investment one shall have information more or less supporting two fundamental assumptions: 1. invested funds must be returned in full; 2. profit resulting from this operation must be high enough to compensate temporary refusal of using funds, as well as risk caused by uncertainty of the outcome. To systematize analysis and planning, investments may be grouped according to certain classification features enabling deeper understanding of investments’ nature. The following is the most common classification. a) According to investment objects: • real; • financial; • intellectual. Real (capital generating) investments are funds allocated to increase fixed and/or current assets for further obtaining of certain results (mostly income)2. In planning and management practice, all capital contributions (real investments) are divided into the following areas of use: retooling, reconstruction, and modernization of existing production. Financial investments are funds contributed in various financial assets: stocks, shares, bonds, equity interests, bank deposits, etc. Intellectual investments are funds contributed in production through acquirement of patents, licenses, know-how, payment for research and development, funding of personnel training and retraining. b) According to risk extent: • risk-free, i.e. investments ensuring 100% of expected outcome. For example, short- term government bonds; • bearing acceptable risk, i.e. investments suggesting possible loss of expected net profit in the investment project concerned;

2 Investment Project Efficiency Evaluation, Theory and Practice, P.L. Vilenskiy, V.N. Livshits, and S.A. Smolyak.

• bearing critical risk, i.e. investments suggesting possible loss of not only profit but also expected income (proceeds); • bearing catastrophic risk, i.e. investments suggesting possible loss of all own assets as the result of bankruptcy. c) According to the investor’s nationality there are internal and external investments. d) According to the investor’s organizational legal form there are government, municipal investments, investments by legal entities, individuals, etc. e) According to investment relevancy there are global, national economy, large-scale, local investments, etc. The starting point of investment process is the investment project, i.e. its intention, description and implementation plan. The investment project shall prescribe for compulsory technical and economic estimate of lump-sum investment costs and evaluation of their efficiency. The project is a concept that is realized in two aspects: • a set of documents containing formulation of the objective and scope of future activities aimed at its achievement; • a set of activities (works, services, management operations and decisions) ensuring achievement of certain objectives (obtaining of certain results). The investment project helps to solve an important task of clarification and substantiation of technical feasibility and economic expediency of creation of a particular object of entrepreneurial activity. Conscious decision on investing in objects of entrepreneurial activity may only be taken on the basis of well-designed investment project. Thus, the problem of making investment decisions lies in evaluation of the plan of expected developments in terms of the extent to which its content and possible consequences of its implementation comply with the expected outcome. In the most general sense, the investment project means a plan or a program for capital contribution with the purpose of profit gaining3.

3 Enterprise Finance Management, V.P. Savchuk, 2003

1.2. Types and Classification of Investment Projects Forms and content of investment projects may vary depending on the objective and expected outcome, the most important of which are: Project analysis allows to generalize the experience in project development, and to list standard projects. Main types of investment projects found in the international practice are as follows. 1. Replacement of outdated equipment as a natural process of existing business extension on the same scale. This type of projects does not usually require very long and comprehensive substantiation and decision making procedures. Multiple alternatives may arise when there are several types of such equipment, and one must substantiate advantages of one of them. 2. Replacement of equipment to reduce current production costs. The purpose of such projects is to use better equipment instead of operating, however relatively less efficient equipment which has recently become obsolete. This type of projects involves detailed analysis of each project profitability, since more sophisticated equipment in the technical sense is not clearly more advantageous one from the financial perspective. 3. Increased production and/or service market expansion. This type of projects requires very responsible decision which is usually made by superior level management of the enterprise. More detailed analysis is required for commercial feasibility of the project with accurate substantiation of market niche expansion, as well as financial efficiency of the project with clarification of whether the increased sales volumes result in corresponding increase in profit. 4. Expansion of the enterprise to release new products. This type of projects is the result of new strategic decisions and may involve changes in the essence of business. All stages of analysis are equally important for projects of this type. Particularly, it should be emphasized that a mistake made in the course of projects of this type may lead to the most dramatic consequences for the enterprise. 5. Projects with environmental pressure. Environmental analysis is an essential element of investment planning. Projects with environmental pressure are in their nature always related to environmental pollution, and therefore this part of analysis is critical. The main dilemma which must be addressed and substantiated using financial criteria is which project option to follow: (1) to use more sophisticated and expensive equipment increasing capital costs, or (2) to purchase less expensive equipment and increase current costs.

6. Other types of projects which are less important in terms of responsibility for decision making. Projects of this type involve construction of a new office, buying of a new car, etc. All investment projects are divided into four groups, each of which includes projects classified according to the following features. According to content: Investment projects are divided into enterprise expansion (development) projects and rehabilitation (reorganization) projects. Development projects involve measures aimed at the increase of output. Rehabilitation investments are usually anti-crisis measures and reflected in business plan of financial recovery of the enterprise. According to scale: Projects are divided into global, large-scale, regional, industrial, urban and local. According to duration: Short-term projects (up to one year) involve development of new technological processes with modernization of equipment, etc. Long-term projects involve research and development (of new technologies, new products) and application thereof. In the economic literature, investment projects may be classified according to other features. According to the degree of urgency: First priority (urgent) projects, projects which are currently highly attractive for the enterprise, and projects which implementation is postponed for a longer period of time. According to the degree of interrelationship: Alternative projects suggesting selection of the best project among possible investment options; independent projects when the company may simultaneously implement two and more projects; and interrelated projects when acceptance of one project depends on acceptance of another one. Thus, one shall make one decision for both projects – for example, construction of a concrete products plants and creation of necessary production infrastructure (communications, roads, water supply, electricity, etc.). According to investment objectives: - projects ensuring output increase; - projects aimed at product diversification; - projects ensuring improved product quality; - projects ensuring reduced product cost; - projects aimed at implementation of a social program for the enterprise (improvement of working conditions, solution of environmental problems, etc).

According to the level of dependency: - projects which depend on implementation of other projects; - projects which do not depend on implementation of all other company’s projects. According to implementation period: - short-term projects: implementation period is less than 1 year; - mid-term projects: implementation period is up to 3 years; - long-term projects: implementation period is over 3 years. According to the amount of necessary investment resources: - small (up to USD 100,000) - medium (from USD 100,000 to USD 1,000,000) - large (over USD 1,000,000) According to funding source: - funded from domestic sources; - funded through acquiring shares (primary or additional share issue); - funded through loan raising; - investment projects with mixed forms of funding. Depending on the liquidity level: - highly liquid projects: when investment objects may be converted into monetary form within a short term (up to 1 month); - projects with average liquidity: may be converted into monetary form within 6 months; - projects with low liquidity: may be converted into monetary form over a longer period of time (within 6 months and more); - non-liquid projects: investment projects which may not be implemented as independent investment objects for various reasons (outdated technology, decrease in demand on the market of similar products, etc) .

1.3. Investment Project Development and Implementation Stages The task of investment project development is to prepare information required for reasonable decision making on investment. The time period from the beginning of making investment to final effect thereof is called life (or investment) cycle of the investment project. In practice, conditions which the project undergoes through during its life cycle are called phases (steps, stages). In its turn, each phase (step) may be divided into the next

level phases (steps), i.e. subphases (substeps), etc. There is no any versatile approach to division of the investment project development and implementation process into phases, therefore such division may be quite varied. Let's consider some options of such division4. 1. Two-stage division which makes distinction between project development and implementation: - project development means creation of a model, mode of action to achieve project objectives, calculations, selection between options, substantiation of project decisions; - project implementation means its practical realization, bringing into life, economic reality. 2. The World Bank and UNIDO (the United Nations Industrial Development Organization department) adopted the following division into phases: - pre-investment phase: analysis of investment opportunities, pre-feasibility study, feasibility study, report on investment opportunities; - investment phase: negotiation and conclusion of contracts, designing, construction, marketing, training; - operational phase: acceptance and commissioning, equipment replacement, expansions, innovations. 3. Methodological recommendations involve the following steps of investment project development and implementation: - formation of investment intention (idea): choice and preliminary substantiation of intention; innovative, patent and environmental analysis of technical solutions; pre- selection of enterprises for implementation; - investigation of investment opportunities: study of product demand; estimation of price level; organizational legal form of implementation and number of participants; assessment of investment amount; initial authorizations; - feasibility study of the project (construction): marketing research; preparation of product release program; description of construction organization; cost-benefit analysis; risk assessment, etc; - preparation of contract documents: negotiations with potential investors; tenders; - preparation of project documentation; - construction and installation works;

4 http://pacug.org/?p=21

- operation of the object, monitoring of economic performances: product certification, creation of dealer network, service (repair) centers, current monitoring (detailed analysis) of project economic performance indicators. 4. In terms of project management (managers), there are the following life cycle stages of the project: - intention; - problem analysis (objectives, requirements, tasks); - concept development (feasibility study, alternative concepts); - detailed work (specifications, drawings, detailed plans); - project execution (working documentation, testing, acceptance); - use (introduction, maintenance, operation); - liquidation (dismantling, recycling, sale, development task). 5. In terms of economic content, life cycle of the investment project is divided into three phases and project liquidation phase. In this regard, the entire project development cycle may be represented in the form of a diagram (see Fig. 1)

Income Project lifetime

1 Time 3 Investments

The above diagram is rather conditional, however it is possible to distinguish three main phases of project development thereon: pre-investment, investment and operational. The total duration of these stages constitutes a project lifetime5. 1. pre-investment phase – includes several stages: formation of investment intention, investigation of investment opportunities, formation of investment proposal, pre- investment investigation, feasibility study and preparation of a business plan, final wording of the project and making decision thereon;

5 Enterprise Finance Management, V.P. Savchuk, 2003

2. investment phase – practical realization of the investment project: development of organizational and economic mechanism of interaction between project participants, performance of design works, purchase (lease) of land, construction of facilities, purchase and installation of equipment, creation of production infrastructure. This is the most costly phase absorbing major (or all) amount of investments. It ceases upon object commissioning. The period of return on investment means a period of operation in which initial investment is returned through gaining income from product sales. It ceases when all investments are compensated with income; 3. operational phase – this period may involve investment costs (production growth, equipment depreciation), however proceeds from product sale far exceed. The project is becoming more and more outdated, product demand is falling, and profitability of the project is being reduced. At the same time, fixed assets of the project depreciate morally and physically, i.e. life cycle of the investment project comes to end, and to avoid its operation at loss it is expedient to scrap the project and to prepare a new investment project by this time; 4. project liquidation – may involve additional revenues (e.g., in case of sale at the residual value of equipment) or additional costs (e.g., if land recultivation is required). At each phase (step) certain problems are addressed. As we move forward in phases, the project idea is refined and enriched with new information. Thus, each phase (step) is a kind of intermediary finish: the results obtained at such phase shall prove the expediency of the project and, thus, are considered as a ―ticket‖ to the next stage of development6. These phases are linked by cash flows ensuring formation and use of the capital, return on investment, capital reproduction (simple or advanced). Cash flows have two circles of motion: • reproduction of fixed and intangible capital. Fixed assets are used within several production cycles and are gradually wearing. Their wear leads to the decrease of fixed capital that is compensated by depreciation charges included into the cost of products or services. Depreciation charges are the source of simple capital reproduction, i.e. one of the sources of investment. Intangible capital costs are reimbursed similarly to fixed capital, but the period of their use is shorter;

6 http://www.finekon.ru/jetapy%20razr%20invest.php.

• reproduction of current capital. Current assets are spent in each production cycle for raw materials, fuel and energy, labor remuneration, social needs, etc. Current capital is reproduced in each production cycle from sales proceeds and in the equivalent to goods production costs. Current assets are returned to the owner upon business liquidation as part of the proceeds from sale of the last consignment.

1.4. Overall Sequence of Project Development and Analysis Despite the variety of projects, their analysis usually follows some general scheme which includes special sections evaluating commercial, technical, financial, economic and institutional feasibility of the project. The project is analyzed at pre-investment phase (step)7. At this stage, project feasibility evaluation takes place in terms of marketing, production, legal and other aspects. Background information for this shall be data on macroeconomic environment of the project, expected product sales market, technologies, tax conditions, etc. The first stage results in structured description of the project idea and time schedule of its implementation. Pre-investment phase (step), in its turn, comprises the following stages: Search for investment concepts; Preliminary preparation of the project; Final preparation of the project and evaluation of its technical, economic and financial feasibility; Final review and decision making. Search for investment concepts: In the international practice, the following classification of assumptions on which basis the investment concepts may be searched for by enterprises and organizations of various profiles is adopted:8 1. availability of minerals or other natural resources suitable for processing and industrial use. Such resources may vary broadly: from oil and gas to sweep-wood and plants suitable for pharmaceutical purposes; 2. opportunities and traditions of existing agricultural production determining the potential for its development and range of projects which may be implemented at enterprises of agroindustrial complex;

7 http://market-pages.ru/realnieinvist/6.html. 8 http://www.finekon.ru/jetapy%20razr%20invest.php.

3. evaluation of possible future changes in the amount and structure of demand under the influence of demographic or socio-economic factors or as the result of new types of goods appearing on the market; 4. structure and volumes of import which may provide an impetus for development of projects aimed at creation of import substituting productions (especially if this is encouraged by the government under foreign trade policy); 5. experience and tendencies in the development of production structure in other sectors, especially with similar levels of socio-economic development and resources; 6. needs which have already arisen or may arise in consuming industries in the domestic or global economy; 7. information about plans to increase production in consuming sectors or growing international demand for already manufactured products; 8. known or newly discovered opportunities to diversify production on a single raw materials base (for example, deepening of wood processing through creation of finishing materials from waste and low-quality timber); 9. rationality of the increase in production scale to achieve cost saving in mass production; 10. general economic conditions (e.g., creation by the government of particularly favorable investment climate, improvement of opportunities for export as the result of changes in national currency exchange rates, etc)

Preliminary preparation of the project: The purpose of this stage is to develop the investment project (or business plan of the project) – a document describing all major aspects of future commercial enterprise, analyzing all problems which it may face, and identifying the ways to address these problems. Preliminary investment project must have a well-defined structure similar to that which will be required in detailed development of the project. Business plan of the project may contain the following sections devoted to the analysis of possible solutions in terms of: volumes and structure of goods production based on the investigation of market potential and production capacity required to ensure the expected output; technical foundations of production organization: characteristic of future technology and equipment fleet required for its implementation; desirable and possible locations of new production facilities;

resources used and their volumes required for production; organization of work and labor remuneration; amount and structure of overhead costs; organizational and legal enforcement of the project, including legal forms of functioning of newly created facility; financial support of the project, i.e. assessment of required investment amounts, possible production costs, as well as ways to gain investment resources and achievable profitability of their use.

Final preparation of the project and evaluation of its technical, economic and financial feasibility9: Preparation of detailed feasibility study and financial rationale of the project shall ensure alternative approach to problems related to all aspects of upcoming investments: technical, financial and commercial. At this stage of analysis, it is particularly important as accurately as possible to determine scale of the future project, i.e. expected output or quantitative parameters of activity in the sphere of services. As accurate as possible time scheduling for all types of work without which this investment project may not be implemented is also important. Such scheduling is of particular importance for analysis based on comparison of discounted cash inflows and outflows. Preparation of all types of data for final decision making is the main point of final formulation of the investment project and thorough evaluation of its technical, economic and financial feasibility. This stage involves evaluation of investment efficiency and determination of possible cost of attracted capital. Background information is capital contribution schedule, sales volumes, current (production) costs, need for current assets, discount rate. The results are usually presented in the form of tables and investment performance indicators: net present value (NPV), payback period, internal rate of return (IRR). One shall choose optimal project funding scheme and evaluate investment efficiency from the project owner’s (holder’s) perspective. For this purpose one may use data on interest rates and loan repayment schedules, as well as dividend payment level, etc. The results of financial appraisal of the project shall be financial plan of the project, expected forms of financial reporting, and solvency indicators.

9 Investment Planning, Ye.G. Nepomnyashchiy

Final review and decision making: This step involves analysis of the impact of external environment factors and situation inside the company. If these figures are negative, the project will be either postponed, or its implementation will be rejected. In case of positive decision, one shall move to the second stage of investment project development – investment itself. At the stage of investment one shall conclude contracts with investors, equipment suppliers and builders. The main task of this phase is to commission the object on a turnkey basis. At final stage, the object must be brought to full capacity. It starts to operate. Any method of investment analysis suggests review of the project as relatively independent economic object. Therefore, at the first two stages of development the investment project must be reviewed separately from other activity of the enterprise implementing it. Independent review of the project excludes the possibility of proper choice of their funding schemes. This is due to the fact that decision on using a particular funding source for investments is usually made at the level of the enterprise as a whole or its financially independent division. In this case, the consideration shall be first given to current financial condition of this enterprise which is almost impossible to reflect in the local project. Thus, at large enterprises the task to choose funding scheme for the investment project (at least for projects ranked as ―major‖) shall be fulfilled at superior management level. Middle management shall fulfill the task on choice of the most efficient, that is the most potentially profitable projects from available list. In view of the above, overall evaluation of the investment project lies in provision of all information in the form allowing a decision maker to conclude on whether it is reasonable to make investments or not. So, commercial (financial and economic) appraisal of the investment project plays particularly important role in this equation. Thus, the problem of making decision on investments is to evaluate the plan of expected developments in terms of extent to which content of the plan and possible consequences of its implementation comply with the expected outcome.

1.5. Investment Project Risk Analysis and Assessment In the market economy, each business entity focusing on economic growth always develops an investment activity strategy as the prerequisite for achievement of long-term goal. This is quite justified and fair, since development level of both a separate enterprise and the economy as a whole is largely characterized by volumes and forms of investment

program implementation. In its turn, the success of enterprises carrying out investment activities depends on how the investment project selection system is organized (Investment Construction Projects)10. First of all, management must choose project efficiency criteria. To this end, one shall use not only quantitative estimation methods (calculation of future cash flows, payback period and other indicators), but also take into account factors of qualitative nature. For example, management decides on whether the project meets objectives and tasks of the company, what is the extent of investment risk, etc. In modern conditions, sound accounting and risk assessment in decision making are obligatory. Today, the entire burden of responsibility for the decision made is imposed on managers. They often have to work in new conditions and unknown situation characterized with high risks, contradictions, constant and unexpected changes. Therefore, it is very important to ―equip‖ decision makers with risk assessment technologies which are as much as possible close to the Ukrainian economy realities. Risk management allows you to systematically assess and manage the impact of uncertain factors increasing the likelihood of goal achievement11. In general, risk means the possibility of occurrence of an adverse event entailing various types of losses (e.g., physical injury, loss of property, gaining income below the expected level, etc)12. As a rule, all kinds of risks are interrelated and affect the entrepreneur’s activity. Changes in one kind of risk may cause changes in the majority of other risks. Risk classification13 means systematization of numerous risks on the basis of certain features and criteria allowing to combine subsets of risks into more general concepts. The most important elements forming the basis of risk classification include: • time of occurrence; • main factors of occurrence; • nature of accounting; • nature of consequences; • sphere of occurrence, etc.

10 Enterprise Finance Management, V.P. Savchuk, 2003

11 The Fast Forward MBA in Project Management, Eric Verzuh, М-К-2010 12 http://www.risk24.ru/analiz.htm

13 http://artkmv.ru/page.php?p=manag_084

According to time of occurrence there are historical, current and future risks. Analysis of historical risks, their nature and ways of reduction provides an opportunity of more accurate prediction of current and future risks. According to factors of occurrence14, risks are divided into: • Political risks – risks caused by changes in political situation affecting entrepreneurial activity (closing of borders, embargo on export, military operations in the country, etc). • Economic (commercial) risks – risks caused by adverse changes in the enterprise's economy or in the country’s economy. The most common type of economic risk comprised of private risk – changes in market conditions, unbalanced liquidity (inability to fulfill payment obligations in time), changes in management level, etc. According to nature of accounting, risks are divided into: • External risks – risks which are not directly related to activities of the enterprise or its contact audience (social groups, legal entities and (or) individuals showing potential and (or) real interest in the activity of a particular enterprise). The external risks level is greatly affected by a number of factors – political, economic, demographic, social, geographical, etc. • Internal risks – risks related to activities of the enterprise itself and its contact audience. Their level is affected by business activity of the enterprise’s management, choice of optimal marketing strategy, policy and tactics, as well as other factors: production capacity, technical equipment, specialization level, labor efficiency level, safety level. According to nature of consequences, risks are divided into: • Net risks (sometimes also called simple or static) which are characterized by the fact that they almost always entail losses in entrepreneurial activity. Reasons of net risks may be natural disasters, wars, accidents, criminal acts, company’s inability, etc. • Speculative risks (sometimes also called dynamic or commercial) which are characterized by the fact that they may entail both losses and additional profit for the entrepreneur in terms of the expected outcome. Reasons of speculative risks may be changes in market conditions, currency exchange rates, tax laws, etc.

14 http://www.risk24.ru/analiz.htm

Risk classification according to the sphere of occurrence based on fields of activity is the largest group. According to fields of entrepreneurial activity, there are production, commercial, financial and insurance risks. Production risk is related to the enterprise’s failure to meet its plans and obligations in terms of manufacture of products, goods, services, and other manufacturing activities as the result of adverse impact of external environment and inadequate use of new techniques and technologies, fixed and current assets, raw materials, working hours15. Among the most important reasons of production risk one may mention the following: reduction of expected production output, growth of tangible and/or other costs, payment of increased fees and taxes, low discipline of supplies, loss of, or damage to equipment, etc. Commercial risk is a risk arising in sale of goods and services produced or purchased by the entrepreneur. Reasons of commercial risk include reduction of sales volumes due to changes in market conditions or other circumstances, increase of buying price, loss of goods in the course of circulation, increase of circulation costs, etc. Financial risk relates to the possibility of the company’s failure to fulfill its financial obligations. Main reasons of financial risk include depreciation of investment and financial portfolio due to changes in currency exchange rates, failure to make payments. Insurance risk16 is a risk of occurrence of insured events as the result of which the insurer shall pay the insurance benefit (insurance payment). This risk may result in losses caused by inefficient insurance activity both at the stage preceding conclusion of an insurance contract, and at later stages – reinsurance, formation of insurance reserves, etc. Main reasons of insurance risk include incorrectly identified insurance rates, hazardous methodology of the insured. When forming classification associated with production activities one may mark out the following risks: Organizational risks are risks related to errors of the company’s management and employees; problems of internal control system, poorly developed rules of work, i.e. risks related to internal organization of the company. Market risks are risks related to instability of economic conditions: risk of financial losses due to changes in commodity prices, risk of reduced demand for products, translational currency risk, risk of liquidity loss, etc.

15 http://www.addere.ru/rm24.htm 16 http://ru.wikipedia.org/wiki

Credit risks are risks related to counteragent’s failure to fulfill his obligations fully and in time. These risks exist both in the banks (risk of non-repayment) and at the enterprises having accounts receivable, and in organizations operating on the securities market. Legal risks are risks of losses cased by disregard or change of legislation within the period of transaction; risk of non-conformity of legislation in different countries; risk of incorrect documentation resulting in counteragent’s inability to fulfill contractual conditions, etc. Technical and operational risks are risks of damage to the environment (environmental risks); risks of accidents, fires, damages; risks of the facility’s dysfunction due to errors in design and installation, a number of construction risks, etc. In addition to the above classifications, risks may be classified according to their effects: Acceptable risk is a risk of failure to implement decision that leads to that the enterprise faces profit loss. Within this area, entrepreneurial activity retains its economic expediency, i.e. losses occur, but they do not exceed amount of expected profit. Critical risk is a risk at which the company faces loss of revenue; i.e. area of critical risk is characterized by threat of losses which are certainly higher than expected profit and, in extreme cases, may lead to loss of all funds invested by the enterprise in the project. Catastrophic risk is a risk at which the enterprise may become insolvent. Losses may reach value being equal to property condition of the enterprise. Also, this group includes any risk related to direct danger to human life or occurrence of environmental disasters. There are numerous types and classifications of risks depending on the specifics of the company’s activity. There is separate classification of investment risks, real estate market risks, securities market risks, etc. Risk analysis is a procedure for identification of risk factors and assessment of their significance, i.e. analysis of the likelihood of occurrence of some undesirable events which will adversely affect achievement of project objectives. Risk analysis includes risk assessment and methods of risk reduction or decrease of risk related adverse effects. Risk assessment means determination of risk value (degree) using quantitative or qualitative methods. Risk analysis may be divided into two complementary types: qualitative and quantitative. Qualitative analysis aims at determination (identification) of factors, areas and kinds of risks. Quantitative analysis shall enable numerical determination of size of some risks and

risk of the enterprise as a whole. Final results of qualitative risk analysis, in its turn, serve as background information for quantitative analysis. Fig. 2. Project risks assessment and analysis procedure17.

Stages of project life Stages of project risk planning cycle and management

Qualitative analysis Project planning цикла проекта Quantitative analysis

Management of revealed risks, Project gathering information about implementation realized risks

Project summary, filing Project completion information about realized risks into project archive

Quantitative assessment, however, meets the greatest difficulties due to the fact that it requires relevant background information. Risk assessment is effected in the course of project planning and includes qualitative and quantitative analyses. If according to assessment results the project is accepted, the enterprise shall manage revealed risks. The results of project implementation will generate statistics allowing to determine risks more accurately, and work with them. If project uncertainty is too high, it may be sent back for revision after what risk assessment is effected again18. a) Qualitative risk analysis The result of qualitative risk analysis is the description of uncertainties inherent to the project, reasons of their occurrence, and project risks. For description it is convenient to use specially designed logic cards – a list of questions helping to reveal existing risks. These cards may be developed both independently and with help of consultants. As the

17 Yevgeniy Dubinin, Investment Analyst of SBU ―Sok‖ of Wimm-Bill-Dann, Magazine ―Financial Director‖ http://www.fd.ru/ 18 http://www.risk24.ru/analiz.htm

result, you will get a list of project risks. After that, they must be ranked according to the degree of importance and the amount of possible losses, and major risks shall be analyzed using quantitative methods for more accurate assessment of each of them. b) Quantitative risk analysis Quantitative risk analysis is needed to assess how the most important risk factors may affect performance indicators of the investment project. Analysis allows us to determine, for example, whether small changes in sales volumes will result in a significant loss of profit, or the project is profitable even in case of 40% of expected sales. There are several basic techniques of holding such an analysis: analysis of impact of individual factors (sensitivity analysis), analysis of impact of set of factors (scenario analysis), and simulation (Monte Carlo method). Sensitivity analysis. This is a standard method of quantitative analysis which lies in alteration of magnitudes of critical parameters, their inclusion into financial model of the project, and calculation of project performance indicators for each alteration. Sensitivity analysis may be held using both specialized software packages (Project Expert, Alt-Invest) and Excel. It is better to represent analysis calculations in the table. The purpose of sensitivity analysis is comparative analysis of impact of various factors of the investment project on key performance indicator of the project, e.g. internal rate of return19. Sensitivity analysis is held with the purpose of accounting and prediction of impact of changes in input parameters (investment costs, cash inflows, cut-off rate, reinvestment level) of the investment project on the resulting indicators20. Sensitivity analysis is very descriptive, but its main drawback is that only one factor is analyzed, and others are deemed unchanged. In practice, however, there are usually changes in several indicators. To evaluate such situation and adjust NPV of the project by the amount of risk one may use scenario analysis. Scenario analysis. To begin with, we need to determine the list of critical factors that will change simultaneously. To this end, using the results of sensitivity analysis we may choose 2-4 factors having the greatest impact on project results. There is no sense to consider simultaneously a number of factors, since this will only complicate calculations.

19 Enterprise Finance Management, V.P. Savchuk, 2003

20 http://financial-analysis.ru/methodses/metIASensitivityAnalysis.html

The consideration is usually given to three scenarios: optimistic, pessimistic and the most probable, but their number may be increased, if necessary. In each of these scenarios, one shall record relevant magnitudes of chosen factors, and then calculate project performance indicators. Simulation. If accurate parameters may not be set, and analysts may identify only ranges of possible fluctuations, one shall use Monte Carlo simulation method. Most often, such an analysis is held to identify currency risks (currency fluctuations during a year), as well as risks of interest rate fluctuations, macroeconomic risks, etc. Because of their complexity, calculations by Monte Carlo method are always made using software products with an appropriate function (Project Expert, Alt-Invest, Excel).

1.6. Investment Needs and Funding Sources After a business idea of the project is formed, one shall determine which and how much assets (fixed and current) are needed to implement this idea, i.e. briefly speaking, what shall be acquired to implement the project? Then you must answer another equally important question: where to get money to acquire necessary fixed and current assets. Finally, one shall analyze how will money work, i.e. which will be the return on investment in the acquired fixed assets. The last question is the most important, since if the enterprise is able to raise some money, it may have an alternative for investment, so you must be firmly confident that the chosen investment project is the most efficient. Following the above logic, the investment analysis shall be divided into three consecutive blocks21: 1. Determination of investment needs of the project. 2. Selection and search for funding sources, and determination of attracted capital cost. 3. Prediction of financial return on investment in the form of cash flows, and cost-benefit analysis of the investment project by comparing predicted cash flows with the initial investment amount. All investment needs of the enterprise may be divided into three groups: • direct investments, • ancillary investments, • investments in research and development.

21 http://www.investplans.ru/index.php/business-planning-info/investment-financing/79-2009-06-05-12-26- 27.html

Direct investments are those directly needed for implementation of the investment project. They include investments in fixed assets (tangible and intangible assets) and current assets. Ancillary investments are investments in facilities which are geographically and functionally related to direct object: • investments in facilities which are not technologically related to ensuring normal operation (access roads, power lines, sewerage, etc) • non-production investments, such as investments in environmental protection, social infrastructure. Investments in research and development maintain and support the project. These, above all, are material resources (equipment, stands, computers and various devices) required to conduct pre-feasibility studies, as well as current assets required, for example, to ensure current activities of research institute or university on the enterprise’s instruction. Source of investment funding All sources of financial resources of the enterprise may be conceptually represented in the following sequence22: - own financial resources and internal reserves, - borrowed funds, - attracted financial resources received from sale of shares, equity and other contributions by members of labor collectives, citizens, legal entities, - funds centralized by associations of enterprises, - off-budget funds, - state budget funds, - funds from foreign investors. All funds at the disposal of the investment project have their cost, i.e. the use of all financial resources shall be paid for, regardless of their source. Fee for the use of financial resources shall be paid to a person who provided such funds – an investor in the form of dividends for the enterprise's owner (shareholder), or interest charges for the lender who provided financial resources for certain period of time. In the latter case, the amount of invested funds shall be reimbursed.

22 Enterprise Finance Management, V.P. Savchuk, 2003

Accounting and analysis of fee for the use of financial resources are very important in cost- benefit analysis of investments. This issue is addressed in the next section of these educational materials. Let’s note two fundamentally important features of payment for own financial resources of the enterprise accumulated in the normal course of business, and for borrowed financial resources invested in the enterprise in the form of financial instruments of ownership (shares). At first glance, it may seem that if the enterprise already has some financial resources, then no one should pay for them. It is wrong. The fact is that having financial resources at disposal the enterprise always has an opportunity to invest them, for example, in any financial instruments, and thereby earn on them. Therefore, the minimum value of these resources is the enterprise’s ―proceeds‖ from an alternative way of investment of its available financial resources. Thus, when making decision on investment in own investment project, the enterprise estimates value of this capital as at least equal to that of an alternative investment. Structure of own financial resources of the enterprise is shown in Fig. 323.

Fig. 3

Own financial resources

Monetary portion of contributions Accumulations formed as the by owners of enterprises result of business activity (authorized funds)

Mobilization of internal assets

Structure of borrowed financial resources is shown in Fig. 4

23 Enterprise Finance Management, V.P. Savchuk, 2003

Fig. 4 Borrowed financial resources

Bank loan Borrowing by legal entities against debt obligations

Bond offering Leasing

2. Investment Project Efficiency Management 2.1. The Role of Business Plan in Efficient Implementation of the Investment Project Having chosen a business you must plan how it will be organized. This plan is required to everyone: those who you are going to ask for money for implementation of your project – bankers and investors; your employees wishing to understand their prospects and tasks; and most importantly – you for careful analysis of your ideas, verification of their expediency and feasibility. Business plan is used exactly for these purposes. Business plan is a document describing certain business idea and possible ways of its implementation. Main function of business plan is to assess whether it is possible to implement a particular business idea, and if so, which profitability may be promised by the project and what risks it involves. There are four reasons to draw up a business plan: 1. The possibility to foresee and eliminate problems before they arise. 2. The possibility to attract investments needed for implementation of business ideas. 3. Business plan is a standard document of modern business world, ―face‖ of the enterprise to which attention is paid first. 4. The possibility to use business plan as a tool of control and management in internal activities of the company24. Purposes of drawing up a business plan Main purpose of business plan development is planning of the company’s business activity in the short and long term in accordance with its capabilities and market needs. However, business plan may also be developed for other purposes25: to determine probability degree of achievement of specified results in a completed project or technical solution; to convince colleagues in probability of achievement of certain qualitative and quantitative indicators of proposed business project; to prove feasibility of restructuring of work and organization of the existing enterprise or creation of new one to a particular group of people; to attract attention and gain interest of the potential investor;

24 How to Develop a Business Plan, Practical Guide, K.N. Petrov.

25 Business Planning, Brief Course of Lectures, Yuliya Yevgenyevna Solodyashkina

to justify economic expediency of the sphere in which the company is developing; to calculate expected financial results (sales volumes, profit, etc); to appraise investments in this project; to identify intended sources of funding of implementation of selected project. Consequently, business plan is a hybrid instrument: on the one hand, it presents the results of prospective analysis adopted for practical purposes, and on the other hand – commercial proposal. These two sides require balance both in content and form of presentation. Completeness and accuracy of information must be combined with optimism and enthusiasm26. Kinds of business plans (in terms of subject matter and funding sources)27 - Internal; - Investment; - Innovative. Rules of drawing up a business plan 1. Information contained in the business plan must be clear, comprehensive and brief. 2. Business plan must be intelligible, i.e. understood by public, not just by narrow circle of specialists. 3. Business style of writing is obligatory. 4. Business plan must not be full of technical details. 5. Business plan must contain not only positive but also negative aspects, the degree of risk. 6. Business plan must be both serious analytical instrument, and means of advertising. 7. Business plan must determine the period of project implementation and deadlines. Main functions of business planning 1. Planning (allows to determine strategic areas and effect direct planning of the company’s activity). 2. Financing (allows to attract external funds). 3. Cooperation (allows to engage in implementation of the company’s plans potential partners willing to invest in production of own capital or available technology).

26 Ernst&Young Business Plan Manual 27 How to Develop a Business Plan, Practical Guide, K.N. Petrov.

4. Control (verification of compliance of the company's activity with business plan, control over planned figures). Business plan structure Summary Its main purpose is to provide clear preliminary idea of business plan content. The importance of appropriate summary writing is that potential investors shall from the first words of brief description of the proposed project make sure of its economic efficiency and possibility to implement the intended project28. Summary briefly sets forth the following: - essence of the project: its purpose and potential efficiency; - who and how will implement the project; - sources of project funding; - potential benefits of investments in the project: sales volumes, production and sales costs, rate of return, payback period and period of return on invested funds. General description of the company (if the project will be implemented on the basis of already existing enterprises) Purpose of this section is to present the company as a trustworthy and able to cope with implementation of the project. The section must address the following issues: - brief history of the company’s development; - business success, especially in sphere of project implementation; - main reasons of making decision on implementation of the investment project exactly for this company; - details of the company’s current financial condition confirming reliability of investing in the project29. Goods (products or services) This section must contain information about product (service) offered to the market. The emphasis should be given to commercial qualities of products: - which needs are satisfied by products (services) offered for production; - what positively distinguishes them from similar products or services already available on the market; - which copyrights protect offered products or services;

28 Ernst&Young Business Plan Manual 29 Business Plan: Organization and Planning of Entrepreneurial Activity, E.A. Utkin, М. 97.

- what is their possible price and how much goods are competitive on the market; - what rate of return will be provided by sale of products or services. Marketing plan This section must contain evidence that products will bring significant market prospects and may be successfully sold despite competition. It must describe how the company plans to sell. The section must present the company’s marketing strategy on a particular market sector, pricing policy, implementation methods, and advertising policy: - who are major consumers of products (services); - which are sales volumes today and in future; - who are major competitors, their strengths and weaknesses; - market conditions; - proposed system of distribution and marketing of products or services on the domestic and foreign markets; - selling price and pricing structure; - necessary advertising arrangements, proposed promotional tools and structure of advertising expenditures; - sales promotion activities: public relations, sales promotion, etc. Production plan This section must prove that necessary production resources are available or may be attracted. The section must include the following information: - where products (services) will be produced; - whether the creation of new production capacities is needed, or one may use available ones; - what is the expected optimal production output; - which investments are necessary to achieve optimal capacity; - deadlines and amounts of investments (investment schedule); - how the company will be provided with raw materials, components, and other production factors; - which technologies and equipment will be used. Organizational plan One of main circumstances affecting the decision on participation in investment projects are the company’s human resources and possibility of process organization. - which will be the organization chart of the enterprise;

- how the company will be provided with human resources – the list of available specialists and their qualifications, work experience; - what is the level, form of labor remuneration for various categories of employees, including social benefits; - brief description of key personnel. Legal plan This section shall be drawn up if organizational and legal form of the enterprise or other legal aspects of implementation of the investment project are crucial. - what is the legal status, ownership form of the enterprise; - which rights will be given to a potential investor; - which legal rights are given to the enterprise; - what licenses and patents are owned by the company for implementation of the project - what is the legal basis for relationships between employer and employees. Financial plan This is the key section. It must contain a forecast of financial results of implementation of the investment project. Materials in this section shall be prepared using methods of financial analysis and efficiency evaluation, and shall be drawn up in the form of tables. The section must include the following information: - what is the total amount of investments required for implementation of the project; - what are funding sources; - under which conditions investments will be attracted; - which are costs of production and sales of products (services); - what is possible total income from sale; - which taxes must be paid by the enterprise; - on which dates and in what amounts the borrowed funds are to be repaid; - what is possible profit from project implementation; - what are possible cash flows during project implementation; - what is predicted balance during and at the end of project implementation. Risks and problems This section is required if the project has high degree of risk (venture projects). The section contains the following information: - identification and classification of risk factors; - assessment of project sensitivity to various risks;

- development of project implementation scenarios (normal, pessimistic, optimistic); - evaluation of the project based on the likelihood of different scenarios. To summarize, the author would like to highlight the role of a business plan as of the main instrument of argumentation and justification of investment attractiveness of the project, and based on received theoretical and practical knowledge to identify key elements of real business plan. Business plan is a hybrid instrument: on the one hand, it presents the results of prospective analysis adopted for practical purposes, and on the other hand – commercial proposal. Prior to drawing up a business plan one should understand what is needed for and how to make it not just a beautiful book, but really helpful document. Based on the investigations held I would like to highlight some distinctive features of a real business plan: 1. There is no unnecessary information which analysis does not lead to certain actions in development of the investment project. 2. Market analysis shall contain only information related to the development of certain project and shall not include everything that may be found. 3. Marketing plan shall determine a market niche and give a realistic assessment of prevailing market conditions in respect of the project concerned. 4. It contains clear explanation why specified sales volumes are predicted. 5. It contains clear and detailed list of expenses. When preparing a business plan and providing it to investors one shall verify its compliance with basic criteria of business planning, using the rule ―if I were an investor, would this document convince me to invest money in the project‖. One may distinguish 5 criteria according to which the paper submitted may NOT be considered as A BUSINESS PLAN: 1) if submitted business plan contains proposals concerning project development strategy which does not originate from presented market analysis; 2) if market analysis contains information which is not used in strategy development; 3) if marketing strategy does not specify explicit criteria for promotion of products (services) on the market; 4) if business plan contains at least one figure which value may not be explained;

5) if business plan contains no detailed interpretation of costs and incomes for each month of the next year.

2.2. Substantiation of Economic Efficiency of the Investment Project One of the most critical and important stages of pre-investment study is substantiation of economic efficiency of the project, including analysis and integrated assessment of all available technical, economic and financial information. Investment appraisal takes central place in the process of substantiation and choice of possible options of funds investment in operations with real assets30. Countries with developed market economies have developed and widely use investment appraisal methods based primarily on comparison of profitability (efficiency) of investment in various projects. In this case, an alternative investment in a particular project is financial investment in other objects, as well as placement of funds (capital) in the bank against interests or their transformation into securities. Choice of methods and criteria for evaluation of investment projects depends on project specifics, its innovations, industry type, and a number of other factors. The final decision shall be made by the customer and agreed upon with the investor, partners, counteragents, and other stakeholders. In foreign practice, and now in national practice as well, the most common are five basic methods which are conventionally unified into two groups. - The first group includes methods based on the use of discounting concept, such as the method of determination of net present value, calculation of return on investment and internal rate of return. - The second group consists of simple or traditional methods (not involving the use of discounting concept), in particular the method of calculation of investment payback period and the method of average rate of return ((estimated, simple or annual), sometimes called the method of determination of book rate of return on investment), as well as by finding the breakeven point and using the analysis of dynamics and probability. Pre-investment studies and gathering of data in full amount required to substantiate the project efficiency is time-consuming and expensive process. For this reason, investment object efficiency is usually evaluated in two stages31.

30 Investment Projects Efficiency Evaluation, Theory and Practice, P.L. Vilenskiy, V.N. Livshits, and S.A. Smolyak. 31 Investment Project Efficiency Evaluation, Business Magazine, http://bizkiev.com/content/view/1015/205/

At the initial stage, one shall effect preliminary evaluation aimed at determination of expediency of pre-investment studies in full. At the second stage, one shall conduct a full-scale study. For preliminary evaluation one shall apply the same analytical tool as for full-scale study. This allows to replace missing data with expert and other preliminary evaluations, and to reduce scope of necessary calculations. However, to prevent negative consequences and significant damage from creation and implementation of irrational or insufficiently efficient project, its efficiency shall be evaluated (specified) at each stage of its development. One may carry out the following types of project efficiency evaluation32. 1. Efficiency of the project as a whole. Efficiency of the investment project as a whole is usually evaluated from public and commercial perspective, and both types of efficiency are considered from the perspective of a single participant implementing the project at own expense. Objectives of project efficiency evaluation as a whole: identification of potential attractiveness of the project to potential participants; search for funding sources. 2. Efficiency of participation in the project. Project participants may be an enterprise implementing the project and its shareholders; banks engaged in project financing; leasing company providing equipment for the project, etc. Presence of several members of the investment project predetermines their diverging interests, different attitudes to the priority of various projects. Each participant forms specific cash flows for calculation of performance indicators and, consequently, possible mismatch of evaluation results and decision on participation in the project. Therefore, you should determine project efficiency for each direct participant. Objectives of determination of the efficiency of participation in the project33: verification of feasibility of the investment project; verification of interest in the project by all participants. It should also be noted that to avoid unnecessary difficulties when considering the essence and effect of investment appraisal methods one shall make assumption for absence of

32 Investment Project Evaluation, Galina Sergeyevna Staroverova, http://www.elitarium.ru/2007/07/04/ocenka_jeffektivnosti_investicionnykh_proektov.html 33 Investment Project Efficiency Evaluation, Business Magazine, http://bizkiev.com/content/view/1015/205/

taxes, risk and uncertainty. Assessment of risk or uncertainty associated with investments is, however, an important part of the process of making investment decisions. The problem of risk and uncertainty, as well as taxation is complex and requires special consideration. Investment projects may be evaluated in different ways, but, apparently, if you use any of them (except for the environmental, social and other projects) it is important to know the level of income which will be provided by investments and the amount of additional profit they bring. In the long term, if calculations are based on the life cycle of products (goods), results will be the same, in the short term – there may be significant differences. This is due to the fact that new construction requires purchase of new equipment or development of new products, and therefore consumption of resources exceeds their arrival.

2.3 Basic Criteria of Investment Project Efficiency and Methods of Their Evaluation It is known that the capital contributed into investment projects together with portion of profits from their implementation will be reinvested in assets to generate income (profit) in the future. From these perspective, some project details may not seem so significant. However, some standardized questions should be answered in the beginning of financial analysis (calculation of efficiency)34. For example, the goal pursued by the project (what it is caused by, which circumstances caused it, its main purpose, what is it needed for, where it will be implemented and why); impact on current and future activities of basic company; changes or absence of changes in management organizational structure, product quality, production output, ecology, etc; deadlines for achievement of project implementation results (for example, expected capacity, which equipment is required for this purpose, deadline for its arrival and selling price, etc); investor and investment amount. Criteria for substantiation of investment project efficiency may be maximum profit or yield, minimum labor costs, time to achieve goals, market share, product quality, profitability, etc. It is extremely important in this case to calculate and trace the direction of cash flows: capital expenditures; operating costs; revenues35. Criteria used in the analysis of investment activity may be divided into two groups depending on whether time parameter is considered or not36: 1.1. Based on discounted estimates (―dynamic‖ methods): 1.2. Net Present Value (NPV);

34 Enterprise Economy, О.P. Korobeynikov, D.V. Khavin, V.V. Nozdrin 35 Enterprise Economy, О.P. Korobeynikov, D.V. Khavin, V.V. Nozdrin 36 http://bizkiev.com/content/view/1015/205/

1.3. Profitability Index (PI); 1.4. Internal Rate of Return (IRR); 1.5. Modified Internal Rate of Return (MIRR); 1.6. Discounted payback period (DPP); 1.7. Payback period (PP); 1.8. Accounted Rate of Return (ARR). Until recently, calculation of investment efficiency37 had been effected mainly from ―production‖ perspective and rarely met requirements of financial investors:  firstly, static methods of investment efficiency calculation were used without regard to time factor being of fundamental significance for financial investor;  secondly, used indicators were focused on identification of production effect of investments, i.e. the increase of labor productivity, reduction of costs as the result of investments which cost-effectiveness was falling by the wayside. Therefore, to evaluate project financial efficiency it is expedient to apply so-called ―dynamic‖ methods based primarily on discounting of cash flows formed in the course of project implementation. Application of discounting allows to reflect the basic principle of ―tomorrow's money is cheaper than today’s‖, and thus take into account the possibility of alternative investments at discount rate. General scheme of all dynamic methods of efficiency evaluation is principally the same and based on the prediction of positive and negative cash flows (roughly speaking, expenses and incomes associated with project implementation) for planning period, and on the comparison of resulting net cash flows discounted at the appropriate rate with investment costs. Such an approach is obviously connected with the need to make a number of assumptions which may be brought into practice (especially in Russia) with great difficulty. Let us consider two most obvious obstacles. Firstly, you must correctly assess not only the amount of initial investments, but also ongoing costs and revenues for the entire period of project implementation. All conventionality of such data is obvious even in stable economy with predictable level and structure of prices and high degree of market knowledge. The amount of assumptions that we have to make when calculating cash flows in the Russian economy is much higher (accuracy of prediction is a function of systematic risk degree).

37 Investment Project Efficiency Evaluation, Theory and Practice, P.L. Vilenskiy, V.N. Livshits, and S.A. Smolyak.

Secondly, calculations using dynamic methods involve the prerequisite of currency stability in which cash flows are estimated. In practice, this prerequisite is realized through application of comparable prices (with possible subsequent adjustment of the results with due regard to expected inflation rates) or use of stable foreign currency for calculations. The second way is more expedient in case of implementation of the investment project jointly with foreign investors. Both these methods are certainly far from perfect: in the first case, possible changes in price structure remain beyond our vision; in the second case, the outcome is also affected by changes in the structure of currency and ruble prices, foreign currency inflation, foreign exchange rate fluctuations, etc. This raises the question of expediency of application of dynamic methods for analysis of production investment in general: because in conditions of high uncertainty and making various assumptions and simplifications, the results of relevant calculations may be even further from truth. It should be noted, however, that the purpose of quantitative methods of efficiency evaluation is not just perfect prediction of expected profit amount, but rather ensuring of comparability of the projects concerned in terms of efficiency based on certain objective and verified criteria, and preparing of foundation for final solution. Analysis of development and dissemination of dynamic methods for determination of investment efficiency demonstrates the necessity and possibility of their application for evaluation of investment projects. In highly industrialized countries, 30 years ago the attitude to such efficiency evaluation methods was approximately the same as in our times in Russia: in 1964 in USA only 16% of investigated enterprises applied dynamic methods in investment analysis. By the mid 80's, this share rose up to 86%. In Central Europe (Germany, Austria, Switzerland), in 1989 more than 88% of surveyed enterprises applied dynamic methods for investment efficiency evaluation. Finally, measures for investment risk assessment and application of methods of accounting of uncertainty in financial calculations allowing to reduce impact of incorrect predictions on the outcome, and thus to increase probability of correct decision may significantly increase substantiation and correctness of the analysis. From among the variety of dynamic methods for calculation of investment efficiency the most known and often applied in practice is the method of assessment of internal rate of return on the project and the method of estimation of net present value of the project. In addition, there are a number of special methods.

Methods of investment project efficiency evaluation are the ways to determine expediency of long-term capital investment in various objects (projects, activities) in order to assess their possible profitability and return on investment38. Investment projects, including proposals for development of new design of machinery and equipment, technology, new materials and other activities shall be subjected to detailed analysis in terms of outcomes, optimality criterion – an indicator that expresses the ultimate measure of economic effect of the decision made for comparative evaluation of possible alternatives and selection of the best one. I would like to highlight basic methods of investment project evaluation which may be applied in the analysis of investment projects:  Each investment project is usually associated with cash flow which elements represent either net cash outflow, or net cash inflow. Net outflow in the k-th year means an excess of current cash costs of the project over current cash proceeds (in case of reverse ratio there is net inflow). Cash flow in which inflows follow outflows is called ordinary. If inflows and outflows alternate, cash flow is called extraordinary.  Analysis is usually conducted by years, although this restriction is not mandatory. Analysis may be conducted by equal periods of any duration (month, quarter, year, etc). In this case, however, one must be aware of comparability of values of cash flow elements, interest rate and period length.  It is assumed that all investments are effected at the end of the year preceding the first year of project implementation, although they may be implemented over the next several years.  Cash inflow (outflow) refers to the end of the next year.  Discount factor used to evaluate projects using methods based on discounted estimates shall match the period underlying the investment project (for example, annual interest rate is taken only if the period length is a year). It should be emphasized that application of project evaluation and analysis methods involves a multiplicity of used forecasts and estimates. Multiplicity is defined as both the possibility to use a number of criteria, and unconditional expediency of key parameters variation. This is achieved using simulation models in the form of spreadsheet.

38 Investment Project Efficiency Evaluation, Textbook, V.P. Savchuk

3. Substantiation of the Investment Project – Creation of New Enterprise for Construction and Operation of Recreational Complex in Bilohorodka, Kyiv-Sviatoshyn District, Kyiv Region

3.1 Project Summary The project of construction and operation of Entertainment and Water Park Complex is proposed for consideration of potential investors. The attractive view of mirror-like surface of the lake surrounded by luxuriant greenery, restaurant is above lake’s surface, comfortable summerhouses and VIP-rooms, various types of bath houses (sauna, Russian, Turkish, Japanese, etc.) gathered in one unique complex, as well as fitness centre, bowling, billiard rooms along with covered water area – there are far from being complete list of worth of the complex that is claim to be one of the best place of the mass proms for residents and guests of Kiev city. This new multifunctional complex having unsurpassed style we plan to be one of the best recreational places in Kiev region in the near future.

LOCATION The complex is planned to be located in the Belogorodka village at the west part of Kievo-Svyatoshinskiy district of Kiev region on a land plot that bordering with a picturesque natural lake. The projected Entertainment and Water Park Complex will be located in 2 km away from the main thoroughfare – international highway E-40 that has daily traffic flow up to 15 thousand vehicles. Land plot area is 1,9 hectares. The land plot is oblong and its size approximately 160 x 120 meters. Project’s applicant has this land plot on lease. Postal address of the future complex: 2B, Jubileiniy alley, Belogorodka village.

STRUCTURE OF THE COMPLEX Kyiv post control The complex will be whole year round operative and will include the following components: Summer area:  bungalows with the private area and beach;  water situated restaurant;  complex of exotic baths;

 children's centre along with summer open air sites, covered hall having multilayer labyrinth, amusement arcade, etc.;  comfortable beach with the elements of aqua park;  boats and catamarans’ rental. Complex of baths building, including:  aqua park area;  complex of baths «Baths of the world»;  gym, hall for shaping-up exercises, etc.;  Spa procedure area for relaxation and health improvement;  Private recreational area;  12 rooms for rent;  Shake bar. Restaurant and entertainment complex, including:  Sales area;  entertainment complex: bowling, dance floor and disco, amusement for adults and children, etc.;  complex of restaurants (restaurants of the world) with opened area and theme landscape zone; Separate VIP-area:  Сlub;  slot machines;  poker club;  rooms;  strip bar;  saunas;  separate entrance and parking.

OBJECTIVES The objectives of the Entertainment and Water Park Complex for the period of operation include:  providing the customers with new scope of services meet with world standards in this field;  Exceeding the customer's expectations for the entertaining and health improving services;

 Concentration the services being provided in one place;  Assembling an experience and effective staff;  To increase the number of customers by 10% each year;  Increase exposure and market using Internet technology, mass media and direct advertising.  Through incentives and increased exposure on the Internet and mass media, increase attendance by 30% the first year.

KEYS TO SUCCESS The primary keys to success for the Entertainment and Water Park Complex will be based on the following factors:  Provide a facility that is first class with attention to detail.  Give each guest a sense that he or she is our top priority.  Provide high quality services.  Retain our guests to ensure repeat attendance and referrals.

INVESTMENTS COSTS Total value of investments under this project amounts to 21 576 900,13 US dollars, including:  construction costs – 20 553 352,13 US dollars;  maintenance costs of building owner services – 551 905,39 US dollars;  advertising expenses – 52 562,42 US dollars;  other expenses (electricity, transport, communication, staff training, etc.) – 419 080,15 US dollars. TERMS

Beginning of the project – June, 2011, beginning of construction works – April, 2012, opening of the Complex is planned at January, 2013. Duration of the investment phase of the project is 31 months from the beginning. For this period will be completed construction of the Complex as well as purchased and assembled all necessary equipment. Planned schedule of construction costs includes the following main phase.

Table 1

Planned schedule of construction costs

Value, US $ № Project’s phase Period (VAT incl.) 1 Start up costs 11 826,54 1-2nd month 2 Design of presentation 10 512,48 1-3rd month 3 Concept formation of the project 98 554,53 4-5th month development 4 Heading work and lake improvement 294 349,54 4-11th month 5 Elaboration of design documents and 157 687,25 4-10th month design approval 6 Interior of building design, landscape 249 671,48 6-9th month design 7 Design drawings 157 687,25 10-16th month 8 Pipelines and networks 446 386,33 6-19th month 9 Construction of summer area 657 030,22 7-11th month 10 civil and erection works, including: 10.1 Bathhause and health complex (unit 1) 8 425 492,77 11-23rd month 10.2 Restaurant and entertaining complex (unit 7 169 645,20 14-26th month 2) 10.3 Unit 3 1 699 737,19 15-27th month 11 Landscape gardening and land 1 082 787,12 24-28th month improvement 12 Staff recruitment and training, etc 26 281,21 26-30th month 13 Commissioning of the Complex 39 421,81 30-31st month 14 Opening of the Complex 26 281,21 31st month Total investment costs 20 553 352,13 31 months

FUNDING SOURCE OF THE PROJECT

For the financing of capital expenditure is planned to obtain an investments in amount of 21 576 900,13 US dollars for 5 year and 2 months. The amount of investment were determined as value of aggregate investment costs under proposed project.

RETURN OF INVESTMENT DUE DATE

Return of the whole amount of investment to the Investor is planned at 62nd month of the project, i.e. in a 5 year and 2 months from the moment of granting of investment. Distribution of profit between owner of the project and Investor is subject to negotiate.

DISCOUNTED CASH FLOW CRITERIA

Criteria Grivna US Dollar Discount rate, % 15,00 10,00 Pay back period - PB, mths. 62 62 Discounted payback period - DPB, mths. 80 73 Average rate of return - ARR, % 27,25 27,25 Net present value - NPV 62 439 105 14 287 916 Profitability index - PI 1,51 1,83 Internal rate of return - IRR, % 27,41 27,41 Modified rate of return - MIRR, % 19,44 16,41

Cash flow criteria calculation period - 127 mths. Relative project’s life cycle: 10 year and 7 months (127 months).

3.2. Project Characteristic 3.2.1. Project Location One of the indisputable advantages of planned complex is its convenient location. The complex will be located near to one of the main Ukrainian highways – route of international significance E-40 with daily traffic of about 15 thousand cars. Another indisputable advantage is that recreational complex will be located on the bank of picturesque natural lake within the territory of Bilohorodka Village Council. Bilohorodka Village Council territory is located in the western part of Kyiv- Sviatoshyn district directly adjacent to the capital – city of Kyiv with paved roads leading thereto. The plot with an area of 1.90 hectares for construction of the recreational complex is located on the leased land within the territory of low-height construction and prospective public facilities. Dedicated postal address of the project is village of Bilohorodka. Beautiful view of water surface of the lake surrounded by lush greenery, convenient parking for 200 cars, restaurant over the water, cozy alcoves and VIP halls, complex of international baths, as well as fitness centers, bowling, billiard, water zone – this is not a complete list of advantages offered by the complex pretending to be one of the best centers of mass rest by residents and guests. Rectangular building site 160 x 120 meters in area is located on the bank of natural lake. On the north-east it marches with reserve lands (projected residential street), on the

south-east – with a plot of planned children's educational institution with an elementary school, on the south-west – with reserve lands, and on the north-west – with public lands (Shchorsa Street). Car parking at Shchorsa Street will be located so as not to create any inconvenience for resting visitors.

3.2.2. Project Description As it was already mentioned, the project concept is to create an environment which would enable people to have a rest at new higher-quality level, as well as to ensure positive emotions and provide health-improving services. The complex is a universal place intended both for family rest, and for sports. A variety of leisure activities offered in the complex will not leave indifferent even the most conservative visitors. a) Summer zone  bungalows with the private area and beach;  water situated restaurant;  complex of exotic baths;  children's centre along with summer open air sites, covered hall having multilayer labyrinth, amusement arcade, etc.;  comfortable beach with the elements of aqua park;  boats and catamarans’ rental. b) Building № 1. The building will be five-stored. Main entrance leads to reception where clients will be able to get full information on scheme of the complex, services, availability of rooms, and prices. Its two-colored stained-glass window faces the water park zone, and it there are visual and pedestrian paths to fitness and spa centers located on the third floor, the hotel complex, as well as an access to restaurant and entertainment complex. Water zone: On terraces facing the water zone there are baths, winter garden and launch pads. All water amusements are linked by slow river running along the water park perimeter. Clients can get to launch pads through two staircases leading from terraces. On terraces there is a winter garden with whirlpools, massage rooms, solariums, observation sites, two outdoor terraces with a view of the lake to be used in summer time. As it was mentioned above, functional zones of the complex are located in such a manner as to ensure the use of each block independent of other zones. Thus, from the recreational

block one can easily get to catering outlets, water zone, baths and spa centers, as well as to hotel complex. Main part of the complex is certainly water zone and bath complex which has no analogues in Kyiv region. The entrance ticket to the water zone includes use of all attractions, beaches, sun loungers and changing rooms without restrictions during hours paid. Staying in the water park is limited to hours paid and working hours of the complex. Visitors are allowed to go from one zone of the complex to another provided that they wear a wristband controlling hours paid. Also, this wristband helps clients open and close safe boxes for clothes, pay for all additional services, including food (within the amounts previously contributed to electron account at the entrance). When exiting, visitors will be able to withdraw all unspent money from their electron accounts. Visitors will also be offered services of bath and spa complex. Bath complex: The heart of bath zone is the ―Rome patio‖ with a whirlpool. The patio similar to recreational area has vertical visual connection with a winter garden, around which there is public zone with a bar, various saunas, Turkish hammam, Russian bath and steam baths made in Roman and Arabic style, salt and snow rooms, fonts. This area has an access to rest zone with 20 comfortable rooms for rest and relaxation, as well as to outdoor terrace. Bath zone is not closed, a large stained-glass window faces the lake and is visually linked with water zone due to large open doorways in walls and ceiling. VIP zone: It is located on the third floor, with an access to outdoor terrace. This group has separate entrances and may operate in a stand-alone mode. There will be 4 ―sauna-suite‖ rooms with an area from 100 to 125 m2 and additional utilities. All rooms face quay, have separate emergency exits and waiter service. Fitness center: The complex will also offer services of fitness center. Qualified instructors will help clients choose suitable training program, select appropriate form and mode of training, as well as tell about nutrition specifics. To make the customer sure that he chose that particular type of training that suits him, you may attend training by a one-time ticket. Fitness is a specific set of physical activities that includes strength and aerobic classes. Typically, this is a training methodology allowing to improve cardiovascular and respiratory system, work off excess weight, relieve stress, and raise mood. Shaping classes will be highly appreciated by those who are accurate and precise in everything. Shaping involves a system of exercises meant for specific muscle groups, and also provides an opportunity to monitor changes in your body with pinpoint accuracy.

Equipment and interior of the club meet generally accepted standards (ventilation, as well as mirrored wall allowing to see not only instructors during the classes, but also oneself that enables to control correctness of exercises). Spa saloon: The complex will have a spa saloon including:  waiting area (reception + phytobar),  aqua-thermal zone (wet zone and thermal zone),  spa zone,  beauty zone, and  relaxation zone. The hotel complex 4 **** with 12 rooms: 4 rooms of 1st category, area of each room is at least 22 m2; 4 rooms of 1st category (family triple), area of each room is at least 25 m2; 2 ―studio‖ rooms, area of each room is at least 30 m2; 2 apartments, area of each apartment is at least 60 m2. According to the required high level of comfort, all rooms will be equipped with shower cabins (or bathrooms), cable TV (at least 20 channels), telephone, minibar, safe, and other kinds of necessary amenities. c) Building No 2. Restaurant and entertainment complex. The building will be five-stored. Main entrance leads to reception. On the first floor there is shopping and entertainment center. There you may find any entertainment you like, and visit: - shopping mall; - bar; - bowling (six tracks), another advantage of the complex. Bowling hall is designed for 6 tracks and may operate independent of the entire complex. Also, there is a billiard hall (8 tables) and zone of slot machines in the bowling cafe. Bowling club may be used as a disco club. - children's center (huge three-level town-maze, dry swimming pool filled with colored balls, boxing pears, Canadian cobwebs, cascade hills, hanging bridges, obstacle courses, bungee, soft room with life-size toys and dolls, hall with slot machines for children, bar, children's banquet hall, ski hill, clowns, jugglers, animators, magicians, karaoke, professional photo and video). On the ground floor there is an indoor shooting room. On the second floor there is a restaurant with 100 seats, two VIP-rooms, and outdoor terraces.

On the third and fourth floors there is a variety of theme restaurants (restaurants of the world) – Italian, French, Oriental and others, as well as professional karaoke club, pub. There is also view of, and access to Building № 1. d) Building No 3. A separate VIP zone with its own infrastructure. The project provides for leasing of premises to gaming operator.

3.2.3. Consumer Properties, Features and Advantages of Offered Services The planned recreational complex focuses primarily on consumers with high and middle income who are in need for social and entertainment services of high level of comfort. Consumers’ requirements are extremely high as well. To meet the needs of potential customers, the complex is designed to provide visitors with the most complete range of services, and to establish new standards of their provision. The ultimate goal of this complex is to create a feeling of comfort and convenience in the customers when they visit it. The recreational complex is a universal place intended for youth, family, corporate rest and sports. A variety of leisure activities offered by the complex will not leave indifferent even the most conservative customers. The complex has convenient location in an environmentally clean place 2 kilometers from city boundary. Territory of the complex will be surrounded by summer terraces and park alley. For customers’ convenience, there will be 2 parkings. Those who just want to spend time in a quiet and pleasant atmosphere may sit at tables in cozy alcoves. Such an opportunity for rest is also prescribed by catering outlets in this complex satisfying any taste and budget. All this allows us to characterize the created complex as a unique place for holiday activities. Working hours of the complex: Bath complex, water zone and spa center: from 09:00 a.m. to 11.00 p.m. every day. Restaurant complex: around the clock. Summer zone: around the clock. VIP zone: from 12:00 p.m. to 06:00 a.m. every day. Main features of the complex are:  maximum proximity to major customers;  convenient location of the complex with parking;  unique architectural and planning solutions;  complexity of services offered;  high quality decoration and interior design, their convenience;

 modern world level equipment;  highly qualified staff. According to the results of marketing research, demand in Kyiv region for services of socio-cultural nature is not satisfied in full. Thus, all services of the recreational complex: water amusements in water zone, baths, as well as fitness centers, bowling, billiard, cozy alcoves and VIP-rooms are able to attract a significant proportion of population both from the capital and other large cities.

3.3. Marketing Analysis 3.3.1. Entertainment Industry Market Characteristic It has been noticed yet by ancient people that if a person is not hungry, he/she strives for entertainments. In modern western society which underwent poverty and reached enough high level of satisfaction of physiological needs, a specific area of highly profitable business – leisure and entertainment – appeared quite long ago. Only recently a similar tendency emerged in Russia and Ukraine, where entertainments having disappeared from the spectrum of low quality and, therefore, inefficient public services were reborn in commercial real estate – as ―magnets‖ of shopping and entertainment centers. Today, more and more attention is paid by local developers to entertainment section of shopping and entertainment centers. Thus, entertainments are gradually taking the form of quite successful independent business and catalyze development of ―entertainment‖ segment of real estate market – recreational centers. According to the State Statistics Committee of Ukraine, the Ukrainians spend for rest on average 4.2% of all their consumer expenses. In USA this figure is almost the same – about 4.9%. However, comparing the percentage of expenses for entertainments by middle class in USA and Ukraine, the experts conclude that Ukrainians spend for entertainments much more portion of their expenses – 13% vs 5%. Taking into account that today's entertainment consumers in the majority are representatives of actively growing middle class, one may conclude that the potential of the entertainment market in Ukraine is enormous. Entertainment complexes Entertainment real estate market in Kyiv is actively growing. According to Build & Live Development, existing entertainment property may be divided into four types: various outdoor facilities, small indoor pavilions, built-in premises in various shopping, entertainment, office and other centers and buildings, separate capital buildings.

According to Build & Live Development, entertaining elements of Kyiv are represented by such directions: 1. Entertainment complexes operating in stand-alone mode An example may be entertainment complex ―Blockbuster‖ with total area of 12,000.00 sq. m., and recreational and sports facilities: carting center, 16-hall cinema, 3-D IMAX cinema, bowling, ice rink, rollerdrome, laser game ―Hyperboloid‖, chain of restaurants and catering outlets, fitness center (swimming pool, sauna, solarium, massage, jacuzzi), children’s room, children's slot machines. 2. Children's entertainment complexes Major children's gaming complexes: ―Igroland‖ with an area of about 1,500 sq. m. offering a variety of children's entertainments; ―Tropical‖ with an area of 2,000 sq. m., family entertainment center ―Dyvosvit‖ with an area of over 6,000 sq. m. Main entertainments offered by children's entertainment centers include slot machines and simulators, mazes and air guns, autodrome and climbing zone, cafes and pizzerias, performances, children's events, stage for concerts and performances, cinema. 3. Entertainment zone in shopping center Entertainment segment of first more or less professional commercial real estate facilities was originally organized by shopping center administration, as there were almost no operators of this type of service. Permanent elements of entertainment zone for all shopping centers became food-courts, slot machines, children's rooms. Today, recreational areas in shopping and entertainment centers usually have cinema, casino, disco club, climbing hills, ice rinks and rollerdromes. 4. Entertainment complex as a part of shopping and entertainment center First powerful entertainment complexes are appearing in Kyiv today as a part of shopping and entertainment centers. As a rule, such complexes occupy the entire floor or wing. The largest entertainment complex is located in shopping and entertainment center ―Rhythm‖ with entertainment area of 10,000 m2, including bowling club ―Vitamin‖, billiard club ―Paradise‖, disco club ―Caramel‖, computer club ―Station‖, slot machines, pizzerias, cafes and restaurants with varied menus and, of course, children's rooms, VIP and conference halls. Entertainment complex in shopping and entertainment center ―Caravan MegaStore‖ has ice rink (1,105 sq. m.), cinema, bowling with bar, gaming center for children, billiard, plenty of cafes, bars and fast food restaurants. Areas of shopping and entertaining center ―Caravan‖ also allow to hold regular concerts, performances and other actions. This

category of successful entertainment components may be confidently complemented with entertainment complex in Brovary shopping and entertainment center ―Terminal‖ – a 4- stored building with an area of 75,000 m2 and entertainment, recreation and sports facilities: carting centre, cinema ―Butterfly‖, bowling, ice arena, laser game ―Hyperboloid‖, casino, fitness center (swimming pool, sauna, solarium, massage, whirlpool), children's slot machines, public catering establishments; hotel ―Landhaus‖. Six shopping centers include cinemas (25 halls in general). Another six facilities have bowling (102 tracks) and 3 rinks. Today, in Ukraine there are 7 operators of bowling clubs, 7 operators of multiplexes, and 4 operators of shopping and entertainment centers. Construction cost of entertainment areas exceeds corresponding figures for shopping areas because of huge public area, however with higher adaptability. Payback period of investment in entertainment centers is not less than five years. Average profitability is 20-25%. The level of attractiveness of entertainment segment in Ukraine is determined by prospects of its development. The potential of entertainment market in Ukraine is very high. Restaurant complexes Suburban establishments are actively developing, especially those which are located on key routes – Odesa, Zhytomyr, Obukhiv. On summer weekends, urban restaurants become empty, whereas countryside restaurants are overcrowded. Each year this tendency becomes more and more pronounced. Only those urban restaurants win which are located in recreational area (parks, embankments). This phenomenon is probably caused by the emerging tradition of good family rest. The idea of ―outdoor rest‖ is getting more and more civilized form. Suburban establishments are usually created under the same scheme: restaurant (in the same premise or in separate houses), hotel with 15-25 rooms (in the same building or in a cottage format), outdoor grill (barbecue is an essential feature of ―outdoor rest‖), playground, and sometimes a small zoo or a pool. Despite active development of countryside establishments, most often they are not branded and intended for drivers, rather than for Kyiv citizens who purposefully go to this place. In this case, we deal with situation when supply creates demand – any good countryside establishment will find its consumers. Bath complexes Ukrainian market of bath services is far from saturation. For 4 million population of the capital and suburbs there are about 170 saunas, with market operators owning the bath network under the same trademark being only formed (e.g., capital complex ―Bantu‖),

and those within one city. For comparison: in Sweden for 10 million people there are 8 million saunas. Majority of Ukrainian bath establishments operate in the medium price range. Therefore, nobody speaks of qualitative saturation of the market (introduction of new types of baths, etc). Private baths in large cities began to emerge quite long time ago. However, only in the last three years the market began to develop and undergoes significant changes. There are too many ―closed‖, ―elite‖ and VIP baths. But family and health-improving establishments are in deficit. It is not necessary to build a bath in the most popular place of the center. Bath is not visited by accident. One may attract the customer’s attention with a huge number of additional services: it is, of course, steaming, classic massage, soapy massage, peeling, solarium, stone therapy. Stone therapy is a popular modern thermal procedure in which heated stones are placed on certain parts of the body. Baths of different nations Bathing culture of different nations becomes more and more popular. It is fashionable to know Japanese, Turkish or ancient Roman bath traditions. There are many different national baths and other interesting water treatments which may diverse services and help stand out among competitors. Finnish sauna is known to everybody. It differs from steam one by lower humidity (5-15%) and higher temperature (80-140°C), whereas in Russian steam bath humidity reaches 90%, and temperature is kept at 60-80°C. Generally speaking, if there is Russian bath, sauna is not very attractive. But situation may be corrected. Today, infrared saunas which are substantially different from ordinary ones are very popular. Infrared rays heat human body, rather than air, and to spend just 5-8 minutes in such sauna is enough. Modern bath complexes often have Turkish baths. Main features of what is currently called Turkish bath are heated marble or ceramic loungers and steam in the air. They are intended for washing, rather than warming up. In such a premise it is comfortable and nice to get soapy massage or peeling. Another option gaining popularity among people is Roman bath. It maintains 100% humidity, i.e. it is full of steam which is produced by steam generator. This type of bath is endured much more easily than Russian steam bath or sauna, and has beneficial effect on skin. But at the same time in Roman steam bath customers may be offered aromatherapy. There are also rare options of baths, such as Japanese. Japanese bath involves several

procedures: first, barrels with hot herbal infusions and cold water; then, sawdust bath (immersion into sawdust heated to 45°C), and after that – massage on marine stones. Besides, baths may be equipped with salt room. This is a small room (up to 10 sq. m.) which walls, ceiling and floor are covered with natural salt blocks or tiles. The air here is filled with particles of sea salt that makes it similar to mountain air. It is believed that salt room is very useful medical procedure. Among other things, today customers are attracted by what is called spa. Spa is any hydrotherapy: water massage, swimming pool with artificial current and jacuzzi.

Water parks Ukrainian water parks market has just begun to develop. Today, in Ukraine there are 12 quite successful water parks: 1. Water park ―Terminal‖ (Brovary) 2. Water park ―Cape of Good Hope‖ (Berdiansk) 3. Water park ―Banana Republic Akvaparkos‖ (Yevpatoria) 4. Water park ―Zurbagan‖ (Sevastopol) 5. Water park ―Blue Bay‖ (Simeiz) 6. Water park ―Limpopo‖ (Ternopil) 7. Water park ―Poseidon‖ (Chornomorske) 8. ―Almond Grove‖ (Alushta) 9. Water park ―Water World‖ (Sudak) 10. Water park ―Wave‖ (Kharkiv) 11. Water park ―Aquarius‖ (Mykolaiv) 12. Water park ―Jungle‖ (Kharkiv) About a dozen more water parks are at design or planning stage. Whereas first facilities built in Ukraine were outdoor water parks on the coast, now we build (Kharkiv, Ternopil, Chornomorske) and are going to build indoor water parks in large cities intended for year-round operation. In the West, developers' aqua projects are considered one of the most profitable. An average water park in Europe is paid back in 3-5 years. (For comparison: investments in shopping centers in a large European city are paid back in 7-9 years.) Today, the best Ukrainian water parks offer the following prices. Daily ticket to water park ―Blue Bay‖ in Simeiz costs UAH 210 for adults and UAH 140 for children. Half-day ticket costs UAH 190 for adults and UAH 120 for children.

In Berdiansk water park ―Cape of Good Hope‖ ticket for visit from 10:00 a.m. to 07:00 p.m. costs UAH 230 for adults and UAH 220 for children. Half-day ticket is UAH 40 cheaper. In other water parks prices are approximately the same. Estimated capacity of Ukrainian water parks ranges from 500 to 1500 visitors per day. Whereas first facilities built in Ukraine were outdoor water parks on the coast, in the foreseeable future much activity will start in a segment of indoor water parks in large cities. World experience in operation of indoor water parks shows that such facility will be profitable, provided that at least 300 thousand people live in 20 km radius of its location. According to specialists, only in Kyiv the need for water entertainment complexes makes up at least 6-8 facilities.

Conclusions

Taking into account tendencies on the Ukrainian market and the fact that today’s leisure and entertainment industry takes form of quite successful independent business, we propose to develop at the land plot in Bilohorodka the recreational center with bath-and- restaurant complex and water zone which will serve as an additional competitive advantage due to its size and location on the bank of natural lake two kilometers from Kyiv city boundary. To determine expediency of construction of such project in Bilohorodka the marketing field research was conducted as the result of which it was revealed that the need for socio-cultural services is not enough. Thus, commercial expediency of such complex in suburbs of Kyiv is based on a number of contributing factors:  favorable competitive situation;  growing demand for similar services;  large market. Market niche of such kind of services as recreational complex with water park elements is practically not occupied, since there is no single complex which would include the whole spectrum of such services in Kyiv region. Proposal of this type of services is limited in terms of quantity and quality, therefore a new, well-organized complex located near Kyiv will attract a sufficient number of consumers and customers. Therefore, this complex may become a leader in entertainment and leisure industry not only in Kyiv region, where it is located, but in Ukraine as a whole.

3.3.2. Competitive Market Environment One of the main issues arising in the study of competition on the market of entertainment services is to determine who is a true competitor of a particular establishment. All similar complexes aim to find their identity, create their own atmosphere comfortable for visitors. In other words, the market of such services is segmented so that it is difficult to combine restaurant complexes, sports complexes, sports clubs and fitness centers in some fairly homogenous group in order to determine true competitors. In the course of detailed marketing research we revealed respective market niche substantiating the expediency of construction of the object which was originally designed as an entertainment center with a unique architectural solution and convenient location in a green area. Among countryside complexes, in terms of location and range of services one may identify as the main competitor recreational and restaurant complex ―Two Beavers‖39, but the significant difference here is absence of the bath complex and the water park, as well as absence of children's center. Characteristic of the competitor is shown below. Currently, there are no objects in Kyiv similar to that proposed by us. For the time being, the nearest existing competitors of this complex are suburban complexes listed in the table. However, they differ fundamentally in terms of the complexity of services and are located in other parts of suburbs, and may not be regarded as direct competitors. Characteristic of potential competitors is shown in Annex No 1.

Annex № 1. Characteristics of potential competitors

Price № Name Address Kitchen category 27 km New Obuhovskaia route, Hotel-restaurant complex 150-300 Ukrainian, v. Podgortsy, Blue lake 1 UAH European «Tripolie» (Кiev, Suburban area) Old Polish, Restaurant for the city 2 Peter and Paul Borshchagovka 150-300 Ukrainian, «Opalkova Hata» (Кiev, Ring Road) UAH European, Grill menu Restaurant-entertainment 28 km New Obuhovskaia route, 150-300 v. Pidgirsi (Кiev, Suburban Ukrainian 3 complex UAH «The Three Musketeers» area) Countryside Tavern 28 km New Obuhovskaia route 150-300 4 Ukrainian «Love and hunger» (Кiev, Suburban area) UAH. Capital Highway, 70 300-600 Armenian, 5 Recreation center for the (Кiev, Suburban area) UAH Russian,Ukrainian

39 http://lasoon.com.ua

city «Razgulyaevo » Exclusive, Restaurant for the city February, 58а, Zhukov island 300- UAH Ukrainian, 6 (Кiev, Gidropark -islands «Mayachek» European Restaurant for the city Peter and Paul Borshchagovka 300-600 Armenian, Uzbek 7 «Sim-Sim» (Кiev, Suburban area) UAH Ukrainian, Hotel-restaurant complex Boryspil highway 18 km 150-300 European, 8 (Кiev, Suburban area) UAH «Cossack camp» Mediterranean Georgian, Restaurant for the city Boryspil highway, 9-й km 150-300 Ukrainian, 9 (Кiev, Suburban area) UAH «Tiflis - Liubava» Restaurant for the city Smt. Vorzel, st. Gorkogo, 4 10 75- UAH European «Skipper» (Кiev, Suburban area) 26 km New Obuhovskaia route, Restaurant for the city v. Pidgirsi 150-300 American, 11 «Ranch «Wild West» (Blue Lake) UAH European (Кiev, Suburban area) Ukrainian, Suburban complex route Кiev-Оdessa, 32 km 150-300 European 12 (Кiev, Suburban area) UAH «Myslyvsky hutor» Koncha-Zaspa, v. Golden Gate, Restaurant for the city 150-300 Ukrainian, French, 29 km Metropolitan highway 13 UAH French-Alsatian «Horseshoe» (Кiev, Suburban area) Suburban complex 14 c. Irpen, str. Sovetskaya, 116 150-300 Ukrainian, «Admiral Club» (Кiev, Suburban area) UAH European

3.3.3. Characteristic of Competitiveness and Pricing Thus, the advantages offered by new complex as compared to its existing and potential competitors include:  proximity of the complex to Kyiv with population of more than 3 million people, i.e. to major customers;  good location;  ecologically clean area with convenient transport accessibility;  comprehensive proposal of products and services (health + entertainment);  high level of presentation (good equipment, high level management);  beautiful landscape and modern design;  project is originally intended for use as the recreational complex with elements of water park that is missed in its major competitor. In these conditions, when there are practically no measurements of demand elasticity at service price for complexes of such format, as basic method of pricing we chose the method of ―pricing based on the level of current market prices‖. According to this method, as the basis for calculations we chose average prices of competitive services in the region with due regard to exclusive activities of the complex.

3.4. Marketing Plan 3.4.1. Marketing Policy In the analysis of competitive environment and market information, management of the complex will be guided by the following list of questions: who are major competitors; strategy of competitors; organizational structure and management; financial condition; marketing and advertising strategies of competitors; methods used in competition; range of services; analysis of gathered information; adjustment of pricing policy. Study of competitors, their strengths and weaknesses (―SWOT-analysis‖) will allow to avoid many mistakes in formation of components of these services – pricing and assortment policy, use of a particular channel of advertising and marketing information distribution, location, design, use of that or another equipment. In the future, when gathering market information one shall draw up a list of the most prospective activities which may satisfy needs of potential consumers as much as possible. Documentary evidence of expected sales volumes Since major consumers of these services and customers of future sports complex with indoor water park will be individuals, no documentary evidence of expected sales volumes is required. Impact of investments on development of the complex Income generated from implementation of this project upon return thereof is expected to be invested for replenishment of available range of services, as well as in creation of new activities. Promotion of revenues from services and lease To promote revenues from services and lease of areas the following marketing and advertising activities will be conducted for promotion of concerned services:

Advertising activities aimed at notifying potential visitors and lessees of the new complex on the market where you can spend your leisure time, and of new areas by placing advertisements in the media of neighboring regions and Ukraine (including television, radio), as well as in specialized publications. Production and installation of billboards and banners describing the proposed range of services. Use of different (seasonal, family, children and other) discounts when purchasing tickets and season tickets to zones of the complex. Creation of price competition with other companies offering similar services. Involvement of various large companies of Ukraine and Kyiv in holding corporate (holiday) events. It should also be noted that the most important factor in successful market promotion of these types of services will be combination of all services into a single complex which has a very good location. 3.4.2. Marketing Plan Upon commissioning of the project it becomes technologically possible to achieve 90% of expected sales volumes, provided that a number of promotional events will be held to attract customers.

3.5. Operational Plan 3.5.1. Income plan and forecast of service supply behavior are available in appendice № 4. 3.5.2 Calculation of manufacturing and administrative costs

In the project all the expenses are divided into direct and general expenses. Direct expenses include variable expenses (hereafter costs) per unit of supplied service that will change in line with complex furnishing. General costs include expenses which do not depend on complex furnishing. From economic point of view costs and expenses are the main obstacle to reaching a key goal of an enterprise that is profit

maximization. On the basis of actual data research the costs for production of each service type have been estimated. a) Direct costs To calculate direct costs it is necessary to take into account complex requirements of disposable health aids, determine the need for food considering restaurants and bars attendance rate as well as the need for other maintenance accessories and tableware for a bar and restaurant. At determining the need for other maintenance accessories for the whole complex specificity of supplied services and techniques of their supply were taken into account. As part of other maintenance accessories the following principal items have been considered: bed sheets with 1 year service life, bed sheets with 5-year service life for a hotel, disposable health aids for a hotel, and tableware for a restaurant. As a result Total direct costs $ per year are:

2012 year 2013 year 2014 year 2015 year 2016 year 2017 year Summer area 213453,35 213453,35 213453,35 213453,35 213453,35 213453,35 Unit 1 134073,59 134073,59 134073,59 134073,59 Unit 1 350394,22 350394,22 350394,22 350394,22 TOTAL: 213453,35 213453,35 697921,16 697921,16 697921,16 697921,16

2018 г. 2018 г. 2019 г. 2020 г. 2021 г. Summer area 213453,35 213453,35 213453,35 213453,35 213453,35 Unit 1 134073,59 134073,59 134073,59 134073,59 134073,59 Unit 1 350394,22 350394,22 350394,22 350394,22 350394,22 TOTAL: 697921,16 697921,16 697921,16 697921,16 697921,16 b) General costs General costs are divided into three groups according to International Accounting Standards. Moreover some general costs appear at the very beginning of the project and some of them come up only during services supply. Over all period of the project realization the costs will be as follows: As a result Total general costs $ per year are:

2012 year 2013 year 2014 year 2015 year 2016 year 2017 year

TOTAL: 59248,36 59248,36 683664,13 683664,13 683664,13 683664,13

2018 year 2018 year 2019 year 2020 year 2021 year TOTAL: 683664,13 683664,13 1077882,26 683664,13 683664,13 c) Personal.

2012 year 2013 year 2014 year 2015 year 2016 year 2017 year TOTAL: 340107,06 507828,31 3258088,9 3 258 088,92 3258088,9 3258088,9

2018 year 2018 year 2019 year 2020 year 2021 year TOTAL: 3258088,92 3258088,92 3258088,92 3258088,92 3258088,92

Thus, common structure of costs for a period of project functioning can be presented as follows.

Projected structure of expenses 2012 2013 2014 Item $ % $ % $ % Variable cost 213453,35 34,83% 213453,35 27,35% 697921,16 15,04% Direct costs 59248,56 9,67% 59248,56 7,59% 683664,13 14,74% Cost of 340107,06 55,50% 507828,31 65,06% 3258088,92 70,22% personnel TOTAL: 612 808,97 100,00% 780 530,22 100,00% 4 639 674,21 100,00%

2015 2016 2017 Item $ % $ % $ % Variable cost 697921,16 15,04% 697921,16 15,04% 697921,16 15,04% Direct costs 683664,13 14,74% 683664,13 14,74% 683664,13 14,74% Cost of 3 258 088,92 70,22% 3258088,92 70,22% 3258088,92 70,22% personnel TOTAL: 4 639 674,21 100,00% 4 639 674,21 100,00% 4 639 674,21 100,00%

2018 2019 2020 Item $ % $ % $ % Variable cost 697921,16 15,04% 697921,16 15,04% 697921,16 13,86% Direct costs 683664,13 14,74% 683664,13 14,74% 1077882,26 21,41%

Cost of 3258088,92 70,22% 3258088,92 70,22% 3258088,92 64,72% personnel TOTAL: 4 639 674,21 100,00% 4 639 674,21 100,00% 5 033 892,34 100,00%

2021 Item $ % Variable cost 697921,16 15,04% Direct costs 683664,13 14,74% Cost of 3258088,92 70,22% personnel TOTAL: 4 639 674,21 100,00%

3.6. Investment Plan ($ US)

Item 7.2011 8.2011 9.2011 10.2011 11.2011 12.2011 1.2012 2.2012 3.2012 Start up costs 11 826,54 Design of presentation 10 512,48 Concept formation of the project 50 085,09 48 469,44 development Heading work and lake improvement 10 512,48 10 512,48 10 512,48 131 406,04 131 406,04 Elaboration of design documents and 26 438,58 26 438,58 26 438,58 26 438,58 26 438,58 25 494,35 design approval Interior of building design, landscape 62 417,87 62 417,87 62 417,87 62 417,87 design Pipelines and networks 3 383,71 9 822,60 56 279,89 56 279,89 56 279,89 Design drawings Construction of summer area 132 287,96 132 287,96 132 287,96 132 287,96 TOTAL 11 826,54 10 512,48 87 036,16 85 420,51 102 752,64 230 967,02 277 424,31 407 886,12 319 973,90

Item 4.2012 5.2012 6.2012 7.2012 8.2012 9.2012 10.2012 11.2012 12.2012 Pipelines and networks 53 722,73 52 896,19 52 896,19 49 028,91 49 028,91 3 383,71 3 383,71 Design drawings 131 406,04 26 281,21 Construction of summer area 127 878,37 Civil and erection works, including unit 1 69 621,31 90 685,15 83 320,34 385 812,49 1 237 887,7 1 348 943,1 1 690 541,9 1 616 671,2 981 023,92 1 239 571,0 58 557,82 144 333,11 322 671,00 491 493,53 742 792,10 Civil and erection works, including unit 2 5 Civil and erection works, including unit 3 10 173,37 51 631,53 131 196,80 162 833,23 162 833,23 Landscape gardening and land improvement Commissioning of the Complex Staff recruitment and training, etc Opening of the Complex TOTAL 251 222,41 143 581,34 136 216,53 493 399,2 1 572 829, 1 749 526, 2 313 232,2 2 525 680,2 2 386 811,9

Item 1.2013 2.2013 3.2013 4.2013 5.2013 6.2013 7.2013 8.2013 Civil and erection works, including 525 700,98 224 672,14 159 949,16 10 663,28 unit 1 Civil and erection works, including 1 202 401,2 1 158 566,9 974 318,98 443 159,28 303 661,31 88 118,83 unit 2 Civil and erection works, including 180 046,10 240 481,38 220 561,59 173 749,89 170 159,39 157 805,80 38 264,87 unit 3 Landscape gardening and land 203 022,34 293 254,93 293 254,93 improvement Commissioning of the Complex Staff recruitment and training, etc 5 363,51 5 363,51 Opening of the Complex TOTAL 1 908 148,3 1 623 720,4 1 354 829,7 627 572,45 676 843,04 245 924,63 336 883,31 298 618,44

Item 9.2013 10.2013 11.2013 12.2013 Civil and erection works, including unit 1 Civil and erection works, including unit 2 Civil and erection works, including unit 3 Landscape gardening and land 293 254,93 improvement Commissioning of the Complex 32 851,51 6 570,30 Staff recruitment and training, etc 5 363,51 5 363,51 4 827,16 Opening of the Complex 26 281,21 TOTAL 298 618,44 5 363,51 37 678,67 32 851,51

3.7. Financial Plan PROJECTED PROFIT AND LOSS Below is the Entertainment and Water Park Complex projected income statement for the next ten years. Projected Income statement (thousand US dollars)

Item 6-12 . 2012 y. 2013 y. 2014 y. 2015 y. 2016 y. 2011y. Sales revenues 1 007,54 1 365,42 11 523,65 12 339,95 12 795,54 Net sales 1 007,54 1 365,42 11 523,65 12 339,95 12 795,54 Gross profit 1 007,54 1 365,42 11 523,65 12 339,95 12 795,54 Administrative expenses 197,11 262,81 Production expenses 143,36 205,87 645,02 776,42 776,42 Marketing expenses 17,52 26,28 262,81 262,81 262,81 Salary of administrative 30,96 91,99 181,44 181,44 181,44 personnel Salary of production personnel 309,27 403,32 2 909,14 2 909,14 2 909,14 Salary of marketing personnel 12,68 65,19 65,19 65,19 Total operating expenses 698,23 1 002,95 4 063,60 4 195,00 4 195,00 Depreciation 622,48 1 103,19 1 014,94 933,74 Total non-operating expenses 622,48 1 103,19 1 014,94 933,74 Other expenses 440,43 1 295,99 978,98 Losses from prior periods 44,04 142,71 266,61 266,61 266,61 Profit before tax -440,43 -986,68 -1 238,99 6 356,86 7 130,01 7 666,79 Taxable profit 6 090,25 6 863,40 7 400,18 Tax on profit 1 522,56 1 715,85 1 850,05 Net profit -440,43 -986,68 -1 238,99 4 834,30 5 414,16 5 816,75

Item 2017 year 2018 year 2019 year 2020 year 2021 year Sales revenues 12 881,94 12 856,77 12 856,77 12 856,77 12 856,77 Net sales 12 881,94 12 856,77 12 856,77 12 856,77 12 856,77 Gross profit 12 881,94 12 856,77 12 856,77 12 856,77 12 856,77 Administrative expenses Production expenses 776,42 776,42 1 104,94 776,42 776,42 Marketing expenses 262,81 262,81 262,81 262,81 262,81 Salary of administrative 181,44 181,44 181,44 181,44 181,44 personnel Salary of production 2 909,14 2 791,80 2 791,80 2 791,80 2 791,80 personnel Salary of marketing personnel 65,19 65,19 65,19 65,19 65,19 Total operating expenses 4 195,00 4 077,67 4 406,18 4 077,67 4 077,67 Depreciation 859,04 790,32 727,09 668,93 615,41 Total non-operating expenses 859,04 790,32 727,09 668,93 615,41 Other expenses Losses from prior periods 266,61 266,61 266,61 266,61 266,61 Profit before tax 7 827,89 7 988,79 7 723,50 8 110,18 8 163,70 Taxable profit 7 561,28 7 722,18 7 456,89 7 843,57 7 897,09 Tax on profit 1 890,32 1 930,54 1 864,22 1 960,89 1 974,27 Net profit 5 937,57 6 058,24 5 859,28 6 149,29 6 189,42 68

PROJECTED CASH FLOW The Cash Flow projections are outlined below. We are anticipating that we will not need to invest any additional capital into the business with a healthy cash flow in place. Cash flow (thousand US dollars)

Item 6-12.2011 2012 year 2013 year 2014 year 2015 year 2016 year Cash receipts from 1 209,0 1 638,5 13 828,3 14 807,9 15 354,6 customers General expenses paid 429,5 593,9 1 089,4 1 247,0 1 247,0 Salary paid 246,9 368,6 2 290,1 2 290,1 2 290,1 Total operating expenses 676,5 962,5 3 379,5 3 537,1 3 537,1 Taxes paid 93,3 139,3 2 267,2 3 647,8 5 045,9 Net cash from operating 439,2 536,5 8 181,6 7 622,8 6 771,5 activities Purchase of property, 11 022,5 6 272,2 plant and equipment Other start-up expenses 528,5 1 555,1 1 174,7 paid Net cash from investment -528,5 -12 577,7 -7 447,0 activities Proceeds from debt 21 576,9 Repayment of debt 21 576,9 Net cash from financing 21 576,9 -21 576,9 activities Cash at beginning of 21 048,3 8 909,8 1 999,3 10 180,9 17 803,8 period Cash at end of period 21 048,3 8 909,8 1 999,3 10 180,9 17 803,8 2 998,4

Item 2017 year 2018 year 2019 year 2020 year 2021 year Cash receipts from customers 15 458,33 15 428,13 15 428,13 15 428,13 15 428,13 General expenses paid 1 247,08 1 247,08 1 641,30 1 247,08 1 247,08 Salary paid 2 290,11 2 204,96 2 204,96 2 204,96 2 204,96 Total operating expenses 3 537,19 3 452,04 3 846,26 3 452,04 3 452,04 Taxes paid 5 121,90 5 101,82 5 142,07 5 008,88 5 170,18 Net cash from operating 6 799,23 6 874,27 6 439,81 6 967,21 6 805,91 activities Purchase of property, plant and equipment Other start-up expenses paid Net cash from investment activities Proceeds from debt Repayment of debt Net cash from financing activities Cash at beginning of period 2 998,47 9 797,70 16 671,97 23 111,78 30 078,99 Cash at end of period 9 797,70 16 671,97 23 111,78 30 078,99 36 884,90

PROJECTE D BALANCE SHEET

The following is a projected Balance Sheet showing sufficient growth and a very acceptable financial position.

Projected balance sheet (thousand US dollars)

Item 6-12.2011 2012 year 2013 year 2014 year 2015 year 2016 year

Cash 21 048,38 8 909,82 1 999,33 10 180,95 17 803,82 2 998,47 Prepaid expenses (Short 88,09 217,37 3 121,56 877,43 term) Total current assets 21 136,47 9 127,20 5 120,89 11 058,38 17 803,82 2 998,47 Fixed assets 14 412,40 14 412,40 14 412,40 14 412,40 Accumulated 622,48 1 725,68 2 740,61 3 674,36 depreciation Net fixed assets: 13 789,91 12 686,72 11 671,78 10 738,04 Buildings 13 789,91 12 686,72 11 671,78 10 738,04 Investments in progress 11 022,59 TOTAL ASSETS 21 136,47 20 149,79 18 910,80 23 745,10 29 475,60 13 736,51 Accrued taxes 316,34 337,40 Short term loans 21 576,90 Total current liabilities 21 893,24 337,40 Long term debt 21 576,90 21 576,90 21 576,90 21 576,90 Retained earnings -440,43 -1 427,11 -2 666,10 2 168,20 7 582,36 13 399,11 Total shareholders equity -440,43 -1 427,11 -2 666,10 2 168,20 7 582,36 13 399,11 TOTAL LIABILITIES 21 136,47 20 149,79 18 910,80 23 745,10 29 475,60 13 736,51

Item 2017 year 2018 year 2019 year 2020 year 2021 year

Cash 9 797,70 16 671,97 23 111,78 30 078,99 36 884,90 Prepaid expenses (Short term) Total current assets 9 797,70 16 671,97 23 111,78 30 078,99 36 884,90 Fixed assets 14 412,40 14 412,40 14 412,40 14 412,40 14 412,40 Accumulated 4 533,40 5 323,72 6 050,81 6 719,74 7 335,15 depreciation Net fixed assets: 9 879,00 9 088,68 8 361,58 7 692,66 7 077,24 Buildings 9 879,00 9 088,68 8 361,58 7 692,66 7 077,24 Investments in progress TOTAL ASSETS 19 676,69 25 760,65 31 473,36 37 771,65 43 962,14 Accrued taxes 340,02 365,73 219,16 368,16 369,23 Short term loans Total current liabilities 340,02 365,73 219,16 368,16 369,23 Long term debt Retained earnings 19 336,68 25 394,92 31 254,20 37 403,49 43 592,91 Total shareholders equity 19 336,68 25 394,92 31 254,20 37 403,49 43 592,91 TOTAL LIABILITIES 19 676,69 25 760,65 31 473,36 37 771,65 43 962,14

Annex № 2 Profit and Loss ($ US)

Annex № 3 Repayment schedule (NPV), ($ US)

Annex № 3 Sales volume ($ US)

CONCLUSION The author in the context of this work defined theoretical aspects of investment project reasoning, analyzed the main point of the investment project and its role in the making of investment decision, phases and general order of project's working up, risks of the project as well as investment needs of the projects and the source of its financing. Furthermore, it was emphasized the main phases, objectives and tasks of the business planning as an important instrument for planning an enterprise business activity and investment appetite reasoning as well. As a result of the study the author proved a reasonability of establishing of a new enterprise ―BeoGrad‖ LLC. for the realization of the project of construction and operation of Entertainment and Water Park Complex located in the Belogorodka village at the west part of Kievo-Svyatoshinskiy district of Kiev region. The study based on actual commission aimed to attract investment for the construction of commercial and entertainment facilities with total area up to 13600 sq.m and located in the Belogorodka village on a 2 hectares’ land plot that bordering with a natural lake. The planned complex was included the following components: 57 room hotel (total area 4000 sq.m), restaurant for 200 places (total area 2600 sq.m), sports and health improving complex (total area 3700 sq.m), shopping and consumer services centre (total area 6000 sq.m), car services station (total area 1000 sq.m). Having got out the preliminary calculation of the architectural report provided by the Principal it’s become clear that the conception provided is unprofitable. So the author’s deduce was following – the format and the structure of the complex were chosen without any marketing analysis of the corresponding services. In view of the above the author proposed to the Client to make some changes to the conception and make quality marketing analysis. For the reason of research the author was determined: - average daily price rate and seasonal occupancy, concentration on specified group of customers in segments, services and infrastructures analysis, competitive strength and potential appearance of a new operators in this segment of the market in future; - competitive environment, economic basis of the region being investigated and availability in this region a ―generators‖ of transit travels;

- supply, i.e. availability in close proximity to the projected complex of other entertaining facilities, hotels, restaurants; analysis of its activity including level and scope of the services being provided. As a result of the research the author determined the type of the object – entertainment and rest complex with concept of ―wellness‖ - condition of being in good physical and mental health - for the visitors and residents of Kiev city. The main difference from competitors is: good location; availability of multifunctional child’s centre with educational programs for the children from 1 and up to 12th year old; providing the customers with new scope of services meet with world standards in this field; Concentration the services being provided in one place. The author got evidence that it’s very important to make quality and quantitative marketing research that is one of the main project development stage as a result of which the Investor makes a decision either to start up the project or give up it. The following stage of study was working on business-plan in the process of which was defined a scope of services being provided and service prices, was estimated risks, was calculated construction costs and was made operations schedule of construction. For the purpose of project realization is established the Limited Liability Company ―BeoGrad‖ with 1’200’000 USD authorized capital and 100 % shares of the company will be owned by the Client. In case of need the Investor of the project may be the one of the shareholders of the company with the share not less the 60% of shares capital. Total value of investments under this project amounts to 21 576 900,13 US dollars, including:  construction costs – 20 553 352,13 US dollars;  maintenance costs of building owner services – 551 905,39 US dollars;  advertising expenses – 52 562,42 долл. США;  other expenses (electricity, transport, communication, staff training, etc.) – 419 080,15 US dollars. Beginning of the project – June, 2009, beginning of construction works – April, 2010, opening of the Complex is planned at January, 2012. Duration of the investment

phase of the project is 31 months from the beginning. For this period will be completed construction of the Complex as well as purchased and assembled all necessary equipment. At closing stage of study was defined an optimal source of financing and was developed financial plan of the project. For the financing of capital expenditure is planned to obtain an investments in amount of 21 576 900,13 US dollars for 5 year and 2 months. The amount of investment were determined as value of aggregate investment costs under proposed project. Return of the whole amount of investment to the Investor is planned at 62nd month of the project, i.e. in a 5 year and 2 months from the moment of granting of investment.

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22. R. Garrison, E. Noreen. Managerial Accounting: Concepts for Planning, Control, Decision Making. IRWIN, Seventh Ed. 1994 23. "Risks in modern business" / P.G. Groboviy, S.N. Petrova, S.I. Poltavtsev etc. - M.: Alans, 1994." 24. Serdyukov I.D.Methods of analysis of financial risks // Accounting— 1996, №6. 25. Collection of materials on economic issues. http://www.finekon.ru/jetapy%20razr%20invest.php). 26. Business Information Portal. http://market-pages.ru/realnieinvist/6.html 27. Analysis and risk assessment. http://www.risk24.ru/analiz.htm 28. Risk Management. http://artkmv.ru/page.php?p=manag_084 29. Insurance risk - Wikipedia." http://ru.wikipedia.org/wiki 30. Production risk. http://www.addere.ru/rm24.htm. 31. Financial Director. http://www.fd.ru/. 32. Financial analysis. http://financial-analysis.ru/methodses/ metIASensitivityAnalysis.html 33. Assessment methodology and management of investment risk. Elena Shvetsova. Доступно на: http://www.tsi.lv/ResTech/2007/v2-2/7.pdf. 34. Evaluating the effectiveness of investment projects, business journal. http://bizkiev.com/content/view/1015/205/. 35. Analysis of project risks. I. Volkov, M. Grachev. "http://www.elitarium.ru/2007/07/04/ocenka_jeffektivnosti_investicionnykh_proek tov.html. 36. http://pacug.org/?p=21. 37. http://www.investplans.ru/index.php/business-planning-info/investment- financing/79-2009-06-05-12-26-27.html. 38. Economic evaluation of investment – V.I. Chekshin, http://www.uamconsult.com/book_703_chapter. 39. Investment Project Evaluation, Galina Sergeyevna Staroverova, http://www.elitarium.ru/2007/07/04/ocenka_jeffektivnosti_investicionnykh_proekt ov.html

Vysoká škola: BANKOVNÍ INSTITUT VYSOKÁ ŠKOLA, a. s.

Katedra: Bankovnictví a pojišťovnictví Akademický rok: 2010/2011

ZADÁNÍ DIPLOMOVÉ PRÁCE (PROJEKTU, UMĚLECKÉHO DÍLA, UMĚLECKÉHO VÝKONU)

pro Dmytra Tereshchenka stud. obor FINANCE

Název tématu: "Hodnocení investičního projektu založení nového podniku“

Název tématu v angličtině: "Evaluation of investment project of new enterprise establishment“

Cíl práce: Popsat teoretické a praktické aspekty udržitelného rozvoje investičních projektů a mechanismus pro získání potřebných finančních prostředků pro nutné investice.

Osnova práce:

Teoretické aspekty investičního projektu

Řízení výkonnosti investičního projektu

Zdůvodnění investičních projektů - vytvoření nového podniku pro vybudování a fungování rekreačního komplexu Belogorodka, Sviatoshynsky Kyjev, Kyjevská oblast

Zásada pro vypracování:

Zásady pro vypracování diplomové práce jsou dále specifikovány v „Metodických pokynech pro vypracování bakalářské resp. diplomové práce na Bankovním institutu vysoké škole v Praze“.

Rozsah grafických prací: min. 60 stran

Seznam odborné literatury: viz diplomová práce

Vedoucí diplomové práce: Ing. J. Fingerland

Datum zadání diplomové práce: 30. 11. 2010

Termín odevzdání diplomové práce: 30. 4. 2011

L. S.

…………………………………….. ………………………………………. Vedoucí katedry Rektorka

V Praze 31. 1. 2011