# The Financial Model of The Project

## The Financial Model of The Project

The Financial Model of The Project – Its planning and control of its implementation. Often the main task of the financial model of the project is precisely to assess the effectiveness of investments. The financial model of the project allows you to structure the calculation of the criteria of investment assessment. Use universal tools to speed up the work and reduce the probability of errors.

#### How to assess investment attractiveness with the help of the financial model of the project?

Conducting an investment valuation requires an understanding of the concept of the value of money over time. Or 1000 rubles in a year decision is obvious money today is better. So, the money has a value in time and 1000 rubles in a year must correspond to a certain amount of current cash. Normally, this current amount is less than the denomination of the future value.

For example, at a discount rate of 100% per annum, the future 1000 rubles is equal to the current 500 rubles. This statement is easy to verify by the “reverse” method. If now we take 500 rubles and invest them under 100% per annum, then in a year on top of the initial investment of 500 rubles will receive an income of another 500, that is, on hand will be 1000 rubles. To calculate some of them, you need to know the discount rate.

#### Key investment criteria calculated in the financial model of the project include:

NPV is net present value. This is the amount of discounted cash flow.
“IRR is the internal rate of return. Mathematically, this is a discount rate at which NPV is 0. IRR is measured in percentages and is usually given per annum percentages. PbP is a payback period. This is the period for which positive cash flows reach such a value that their amount covers both current costs and investments in the implementation of the investment idea. This indicator has a temporary metric – years, quarters, months.
– DPbP – discounted payback period. Consequently, it, like NPV, depends on the discount rate.

#### How to make a cash flow plan in the financial model of the project?

The formation of a cash flow plan is one of the most labor-intensive parts of the financial model of the project. Creating such a plan often requires a lot of additional calculations, when a certain set of baseline data and hypotheses form different plans, further aggregated to the budget of cash flow (BDDS).

The financial model of the project may require the calculation of such budgets as investment (or capital expenditures), operating, working capital investment budget, tax, fundraising and repayment of financing, income and expenditure budget (BDR), balance sheet budget and BDDS.

However, the larger methods of the formation of the BDDS can be reduced to two fundamental areas:

1. Direct method. In this method, the formation of BDDS is based on the knowledge of the exact dates in which. The receipt or expenditure will take place, and such amounts.
2. Indirect method. This method assumes that a shipment plan can be formed.

#### Resume

The financial model of the project is a tool used to create a plan of income and expenses for the project. To assess the attractiveness of investments based on such a plan. To use the received plan in the course of its implementation to set goals and monitor their implementation.

This requires the formation of various budgets in the financial model, including capital expenditures, operating capital, working capital investment, tax, financing and repayment, income and expenses, balance sheet and BDDS.