Investment project can be defined as a set of interdependent tasks and activities, undertaken by company to achieve defined economic or financial goals. The investment project should include information on the purpose of the planned investment, the expenditure required for its implementation, funding, criteria and methods for assessing the effectiveness and risks of participants of the investment process and desired effects (results).
Types of investment projects
Investment projects can be divided with regard to the objectives and functions for several types.
- Expansive investment projects - are those whose purpose is the entrance to the hitherto unexplored markets or develop products in the current markets. In the case of projects that result with expansion of existing markets, the company typically launches new outlets and new channels of distribution. These projects require strategic analysis of the demand and are usually associated with high marketing expenses. They are among the most risky. For this reason, managers demand high minimum rate of return from that projects. Expansive projects are developmental in nature.
- Investment projects to preserve or replace current leading activities or cost reduction. Such project belongs to the most common investment decisions, since involve the consumption of machinery and equipment used in the production. If a company decides that it will develop current technology, managers perform evaluation of the bids submitted by suppliers of machines and equipment. In the second case, managers may find that the equipment used for the production is outdated and its further exploitation may lead to a reduction in profits. In this case, the company should make a detailed cost analysis. Examples of actions aimed at cost reductions are reducing price for the semi-finished products, direct lobar, the amount of waste.
- Fine-tuning investment projects – focus on adapting the business to new legal regulations relating to the protection of the environment. When deciding on adaptation social constraints are of great importance. The investment project must meet established standards, and this is the main purpose of the managers. Profit maximization for these projects is not a priority of the company, it focuses on the fulfilment of certain requirements.
- Innovative investment projects - involve use of new technologies, and thus help maintain the strong position of the company in the long run. These projects concern the introduction of new products or services (product innovation), as well as the introduction of new process, which aims to fulfill needs of new customers.
Risks of investment projects
The risk of investment projects can be divided into several criteria. According to the phase of the investment risk can be:
- preparation phase risk,
- risks associated with the acquisition and selection of appropriate financing of the project,
- risk of project implementation,
- risk of exploitation,
- risk of liquidation.
Other risks are:
- risk of the sponsor,
- risk of funding sources,
- risk of expenditure overruns.
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- Kerzner, H. R. (2013). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.
- Meredith, J. R., & Mantel Jr, S. J. (2011). Project management: a managerial approach. John Wiley & Sons.
- Raftery, J. (2003). Risk analysis in project management. Routledge.