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Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste
doi: 10.1016/S2212-5671(15)01502-6
ScienceDirect
Available online at www.sciencedirect.com
Emerging Markets Q
u
Assessment of decision maki
n
investment projects – Cas
e
LaurenĠiu Dr
o
a
Faculty of Economics, University of Oradea,
Abstract
Decision making, in case of an investment project devel
o
challenges for the top management and shareholders of
a
identification, evaluation and selection of the best oppor
t
could bring the most significant positive impact over
t
decision making moment is a critical one since a wrong t
a
to its high costs, loss of resources and/or loss of opport
u
also bring the company in a very good strategic position
current world economic crisis, proper decision making b
e
into consideration these aspects the current study propos
e
The comparison will include quantitative and qualitativ
e
the findings the authors will propose a decision making s
y
of Romanian or foreign companies to support their i
n
European/National financing. The proposed system was
d
for the investment projects proposed to be financed
w
competitiveness at the level of private companies.
© 2015 Published by Elsevier Ltd. Selection an
d
Queries in Finance and Business local organization.
Keywords: decision making; European funded investment proje
c
* Corresponding author. Tel.: +40-259-408-287.
E-mail address: laurentiu.droj@gmail.com.
u
eries in Finance and Business
n
g for analysis of European funded
e
study on Romanian companies
o
j
a,
*, Gabriela Droj
a
1 UniversităĠii Street, Oradea – 410087, Bihor, România
o
ped by a private company, is considered to be one of the greatest
a
company. This process is a highly complex one and involves the
t
unity among different investments. This should be that one which
t
he company. In which concerns European funded projects, the
a
ken decision can bring the company in the brinks of downfall due
u
nity for the company. In the same time a well taken decision can
on the market. For the Romanian companies, especially under the
e
came an important factor for their success or failure. After taking
e
s to assess several decision making systems and to compare them.
e
aspects, as well as financial and non-financial aspects. Based on
y
stem which can be used by the top management and shareholders
n
vestment decisions, especially those investments which target
d
esigned to solve the bottlenecks in the current evaluation system
w
ithin European funding; especially those related to increasing
d
peer review under responsibility of Emerging Markets
c
ts; evaluation system.
© 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste
1249
Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
1. Introduction
In order to take investment decisions, the decision makers need appropriate tools for comparing costs and
benefits of various types: economic, social or ecological investment projects that are ongoing over several
years. These benefits and costs are more highly taken into consideration when public non-reimbursable funding
is available. When analyzing the decision making process taken by private companies, we must not omit the
fact that this process was and is used on daily basis by managers and stakeholders for current decisions and also
it is used from time to time to take strategic decision. These daily and weekly decisions were often taken based
on the business instinct, previous experience and knowledge or by try/error method. But in the last twenty years
things have changed substantially and the analysis of the financial and non-financial elements of investment are
performed in the decision making process, especially when concerning business infrastructure investments.
Under this circumstances the decision making process has become an important topic in the economic debate.
As presented by Alkaraan and Northcott, 2006, infrastructure investment projects may be considered by the
companies as operational or strategic business decisions. Asuman, 2012 based on the studies of Carr and
Tomkins, 1996 and Adler, 2000 continues developing this idea considering that “strategic investment decisions
have substantial effects on the long term financial and operational performance of companies and have a big
impact on the competitive advantage of firms”.
Otherwise, in the current economy, affected by world economic crisis and by high and aggressive
competition between companies(Asuman, 2012), establishment of a proper strategic decision making system, in
case of private developed projects, constitute a permanent concern for all categories: economic researchers,
scholars and practitioners. Limitation of financial and human resources available, globalization and
internationalization of the market transformed the decision making process as well. As mentioned before, in
case of private investment projects, taking the best possible decision is considered to be one of the greatest
challenges for the top management and shareholders of a company (Adler, 2013). This process is a highly
complex one and involves the identification, evaluation and selection of the best opportunity among different
possible investments as mentioned by Adler, 2013. This should be the choice which could bring the most
significant positive impact over the company and can bring a major strategic and operational advantage over its
competitors. In the same time a wrong taken decision can bring the company in the brinks of downfall due to its
increase in costs, possible loss of resources and/or loss of opportunity for the company. In case of companies
which intend to prepare European funded investment projects these decisions must take into consideration the
specific requirements of the financing programme and also the criteria for eligibility. Several authors including
Adler, 2013, Jovanovic, 1999 or Alkaraan and Northcott, 2006 highlighted the fact that the decision making
process is a classical Cost- Benefit Analysis Decision since it uses mainly historical information from the past
or information which are uncertain.
It is well known the fact mentioned by Jovanovic, 1999 that most of the problems of an enterprise are
coming from the fact that the company is implementing its investment policies in an uncertain environment
with absence “of a priori information” and with impossibility of predicting exactly future events. In this case
Jovanovic, 1999 also considers that the possibility to proper evaluate investment projects or to establish realistic
risk avoidance measures is hindered. The challenges for the decision makers comes from the necessity of
evaluating investment opportunities in real conditions and prepare suitable/appropriate solutions for the
problems which may arise in the process. For the Romanian companies, especially under the current world
economic crisis, proper decision making became an important factor for their success or failure. Taking into
consideration these aspects the current study proposes to assess several decision making systems and to
compare them. The comparison will include quantitative and qualitative aspects, as well as financial and non-
financial aspects. Based on the findings the authors will propose a decision making system which can be used
by the top management and shareholders of Romanian or foreign companies to support their investment
decisions.
1250 Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
2. Investment Decision making process
Decision making process is considered by Shank, 1996, cited by Adler, 2013 to be composed from four
steps:
• Identification of spending proposals;
• Realization of quantitative analysis of the incremental cash flows;
• Realization of assessment for qualitative issues that cannot be fitted into the cash flow analysis;
• Making the final decision.
The criteria for quantitative analysis of investments can be classified on two categories as mentioned by
Scholleova, Fotr and Svecova, 2010:
• Static criteria which are focused mainly on cash flows and are considering time only in constraint mode,
having a low focus over the risk. These methods include indicators concerned with the value of investment,
the annual return, the payback period, etc;
• Dynamic criteria which are including in the analysis factors such as cash-flow, risk assessment, economic
or social factors. Under these conditions the main indicators calculated are: Net Present Value (NPV),
internal rate of return (IRR), Profitability index (PI), Benefit-Cost Ratio (CBR), Discounted Payback
period (PP), Discounted Economic Value Added (DEVA), Annuity (AN), etc.
Several specialists (Carr & Tomkins, 1996, Adler, 2013) criticized the fact that most of the companies tend
to use mainly quantitative static data to justify their investments under “exceedingly narrow decision-making
lens”(Adler, 2013). As observed in several other studies including Droj, 2011 these decisions are often based
only on the quantitative data lack strategic vision and are unable to include non-financial information, which
are also important for the investment projects. In case of the strategic investments the impact of nonfinancial
factors arisen and became important in the implementation case, often causing bottlenecks, and in order to be
countered should be also quantified in the proposal of investment phase.
In Romania, in the last years, the decision making process especially regarding investment decisions has
been influenced by the numerous investment project proposed to be financed through European Structural
Funds. Most of these projects were developed, submitted for finance and later assessed by the financing
authorities without any real concern on their financial and real life sustainability. The decision makers, which
initially did not used very often financial instruments to plan their investments, only simple techniques are now
trying to generate financial data and cash-flows only to justify sustainability of the investment. The objectives
of these so called “sustainability investment analysis” were only to obtain European/national funding. Later in
the implementation or in the operation phases of these investments huge problems started to occur. In order to
assess this situation a questionnaire has been developed and submitted to companies which implemented
European/national funding projects and these companies were requested to mention the problems which they
considered that caused bottlenecks in the implementation of the projects. The goal of these steps was to identify
several criteria which can be used to assess private investments and to create an internal validation system at
the level of companies, especially for European funded investment projects.
The problems are linked mainly to lack of ability of the companies to carry on the proposed projects caused
by different reasons:
• Lack of management ability to carry on the proposed investments
• The company has been over optimistic with their capacity to implement the project. Some of the projects
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Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
had their value of investment situated way over the annual turnover of the company.
• The budget of the investment was not based on real market price, being based on internal estimation.
Another reason which caused the failure of the project operation was the improper realization of the cost-
benefit analysis. It is well known that Cost-benefit analysis is not an exact science, being seen as having many
limitations which are generally based on approximations, working hypotheses and estimates due to missing
data or due to inability providing all possible situations. One of the main key elements of the cost benefit
analysis is the financial analysis which is highly valued by both the financing organization and the banks or by
other financial institutions which will ensure the co-financing of the investment. The goal of the financial
analysis is to use the predictions such as cash-flows to calculate relevant indicators especially the Financial Net
Present Value (FNPV) and the Financial Internal Rate of Return (FRR), respectively in terms of return on the
investment cost, FNPV(K) and FRR(K).
While Cost-benefit analysis goes well beyond financial ratios considering the project, most project data on
costs and benefits is provided by financial analysis. This analysis provides towards the decision makers
information on inputs and outputs, their prices and the structure of income and expenditure over the analyzed
period (European Commission, 2008). The methodology used for the determination of the financial return is
the Discounted Cash Flow (DCF) approach. This implies some assumptions as are mentioned in the
methodology:
• Only cash inflows and outflows are considered;
• The project cash flows should be based on the incremental approach;
• After the aggregation of cash flows occurring during different years it is adopted an applied an appropriate
financial discount rate in order to calculate the present value of the future cash flows.
According to the methodology (European Commission, 2008) the Net Present Value of a project is the sum
of the discounted net flows of a project. The NPV is a very concise performance indicator of an investment
project: it represents the present amount of the net benefits flow generated by the investment expressed in one
single value with the same unit of measurement used in the accounting tables.
ܸܰܲ ൌ σܽ௧ܵ௧ൌௌబ
ሺଵାሻబ
௧ୀ ௌభ
ሺଵାሻభڮ ௌ
ሺଵାሻ (1)
The Internal Rate of Return (FRR) is defined as the discount rate that zeroes out the net present value of
flows of costs and benefits of an investment, that is to say the discount rate of the equation below (European
Commission, 2008:212):
ܸܰܲሺݏሻൌσሾܵ௧Ȁሺͳ ܫܴܴ௧ሻሿൌͲ (2)
Errors in the Cost benefit analysis caused by large approximations, wrong established working hypotheses
and estimates can inflict further problems in the implementation and operation phase of the investment project.
So re-evaluation of these criteria should be taken into consideration both at the level of the beneficiary and also
at the level of financing authorities. Other problems signaled by both management authorities and companies
implementing investment projects were linked with the financial indicators of the company itself. The
specialists signaled that only companies with “satisfactory” financial indicators should implement an
investment. These indicators were highlighted to be the following:
• Financial statements of the analysis should demonstrate a constant growth at the level of the company;
1252 Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
• Solvency analysis should prove that the company has a good solvency rate. This indicator it’s useful for
internal analysis ;
• Analysis of global financial autonomy;
• Self-financing reimbursement rate;
• Return on Equity;
• Trusted banking history of the beneficiary.
As mentioned by several authors inclusion of non-financial elements to the analysis is also compulsory for a
proper strategic decision making system:
• Analysis of target market / competition;
• Business Idea.
In this paper the main focus will be given towards the decision making process based on quantitative
analysis of the incremental cash flows which will combine both financial and non-financial indicators.
3. Proposal of a mixed investment decision making evaluation system
Based on the above mentioned bottlenecks and considerations the authors proposed several criteria for
evaluating an investment project to determine both the eligibility for EU funding as well as its bankability
system of evaluation for investment projects was proposed and later tested. As can be observed the maximum
possible score is 100 points. These points are grading different aspects of the investment project or aspects
which are related with the company itself and are split into four main groups of criteria called chapters. An
initial testing was realized and the indicators were calibrated (Droj, 2013). In this phase the indicators will be
tested on a large group of companies, mostly located into the North-Western region of Romania, which are
implementing European funded investment projects.
The above mentioned four levels correspond to four chapter of analysis, each containing different sub-
chapters:
• The ability of the company to carry out the proposed investment;
• Financial analysis of the project (based on CBA criteria);
• Financial analysis of the company (based on diagnostic analysis);
• Analysis of the non-financial elements of the investment.
Table. 1. Criteria for evaluating an investment project
No. Criteria / Sub-criteria Maximum
points
1. Applicant's ability to implement the project 30
1.1. Applicant's ability to carry out the proposed investment 10
1.2. The ratio between the value of investment and annual turnover 10
1.3. Project budget 5
1.4 Level of warranties of the beneficiary 5
2. Financial analysis of the project 25
2.1. Financial indicators(NPV, FRR) 10
2.2. Projected cash flow 8
2.3. Economic analysis and risk assessment 7
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Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
3 Financial analysis of the company 35
3.1 Analysis of financial statements 10
3.2. Solvency analysis 5
3.3. Analysis of global financial autonomy 5
3.4 Self-financing reimbursement rate 5
3.5. Return on Equity 5
3.6 Banking history of the beneficiary 5
4. Analysis of non-financial elements of the investment 10
4.1. Analysis of target market / competition 5
4.2. Business Idea 5
Source: Proposed by author
The first chapter of analysis is dealing mostly with the ability of the company to implement investment
projects: European funded or not. This chapter contains four extremely important criteria. The first one:
Criterion 1.1 considers the ability of the applicant to deal with the project both considering the financial,
technical and managerial ability to carry out the proposed investments. The criterion 1.2 the ratio between the
value of investment and annual turnover is comparing the historical financial evolution of the company with the
actual value of investment, since the previous financial results can offer significant information regarding the
ability of the company, from the financial point of view to carry out a new investment. The third criterion 1.3,
important both for beneficiaries and for the banking sector is analyzing the way in which the project budget is
built especially considering its clarity, realism and the proposed time-schedule. Another criterion, mostly
important for the banking system which often ensures co-financing of the project, is criterion 1.4 Level of
warranties of the beneficiary which analysis to possibility of the beneficiary to access loans or letters of
guarantee. The obtained results, as it can be seen in the picture below, suggest that all companies which
successfully implemented European funded projects in Romanian North-Western region obtained maximum
scores at criteria 1.1 and 1.3.
Fig. 1. Applicant's ability to implement the project Source: Data processed by author
1254 Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
The results were mostly positive in criterion 1.2 where only 10% of the applicants did not fulfil the
requirements. Also below average results were obtained by 20% of the applicants at criterion 1.4. As observed,
most of the beneficiaries of funding (about 80%) achieved good scores on all four criteria which can be
explained by the fact that both the initial assessment criteria proposed by Financing Authorities, and also the
newly proposed evaluation criteria have high relevance to the success of the investment project
implementation.
The second chapter deals with the financial analysis of the project (according to requirements of the
European Commission - CBA). This it is an important chapter in project investment analysis and is composed
from three other sub-criteria: 2.1 Financial Indicators – which are important to be determined by the banking
system and the management authorities as well since contains the calculation of NPV, FRR and their
correlation with the sustainability elements. 2.2 Projected cash flow – it is necessary to be positive in both
analysis and being considered an essential condition for the financial sustainability of the investment. The third
criterion 2.3 Economic and risk analysis – is particularly important especially regarding major infrastructure
projects. In case of simple investment projects is recommended to be realized only a brief analysis and risk
control strategy.
Fig. 2. Financial analysis of the project, Source: Data processed by author
As observed in the figure above, below level scores were obtained in chapter: "The financial analysis of the
project" and this can be explained by the fact that funding bodies require, as basic conditions, IRR values well
below those considered acceptable by banks. This seems to be the most significant difference between the
scoring of the European Commission and the scoring proposed by the banking system. Also in this aspect of
the analysis, were realized corrections due to the different methodologies used in practice. Increased attention
should be paid towards bankability of projects. In which regards the analysis of the project cash flow, all of the
projects obtained excellent and median results. Most of the successfully implemented projects obtained median
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Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
and excellent scores in which concern criterion 2.3 Economic analysis and risk assessment of the projects. The
third chapter deals with The financial analysis of the company which contains six criteria: 3.1 Analysis of
financial statements. 3.2. Solvency analysis 3.3 Analysis of global financial autonomy 3.4. Self-financing
reimbursement rate, 3.5 Return on equity. These are mostly calculated using the last 5 years financial
information of the company and are used on large scale by both managers of the companies, the banking
system and also by the financing authorities and are considered to offer a clear image over the financial health
of the company. The last criterion 3.6 Banking history of the beneficiary is considered to be a key element in
the analysis of a company both when contracting new loans but also when monitoring the level of financial
discipline at the level of beneficiaries.
Fig. 3. Financial analysis of the company, Source: Data processed by author
Financial analysis of a company, as can be observed from the above table provides very clear results about
the financial potential that companies which contract EU funding must benefit to implement their projects.
Thus just 10% of the analyzed companies registered scores in the lower thresholds, criteria 3.3 and 3.4.
Excellent results were obtained on Criterion 3.2 Solvency ratio and median results were obtained in all others
criteria. In this context we can consider accurate the assumption of the specialists which highlight the fact that
European funds are useful for companies which already obtained good financial results and are not designed for
beneficiaries “with no money'".
For the last chapter: the analysis of non-financial elements of the investment are allocated only 10 points
divided equally on two simple criteria to evaluate: 4.1 Analysis of target market / competition and 4.2
Evaluation of business ideas. These elements may indicate mostly qualitative aspects of the business proposals.
As shown in the above lines were not proposed criteria and allocation of scores to the socio-economic elements
of project: number of jobs created, equal opportunities, sustainable development, utilization of local resources.
In the analysis of non-financial items we can observe that the winning projects received higher scores on the
scale proposed by the author.
1256 Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
Fig. 4. Analysis of non-financial elements of an investment
For this criteria: 77% of the projects reviewed have achieved scores above 7 points which shows that better
construction of non-financial elements at the level of applicant companies is imperative to be achieved and later
measured during the selection process.
4. Conclusions
Decision making, in case of an investment project developed by a private company, is considered to be one
of the greatest challenges for the top management and shareholders of a company. This process is a highly
complex one and involves the identification, evaluation and selection of the best opportunity among different
investments. This should be that one which could bring the most significant positive impact over the company.
In which concerns European funded projects, the decision making moment is a critical one since a wrong taken
decision can bring the company in the brinks of downfall due to its high costs, loss of resources and/or loss of
opportunity for the company. In the same time a well taken decision can also bring the company in a very good
strategic position on the market. For the Romanian companies, especially under the current world economic
crisis, proper decision making became an important factor for their success or failure. The authors proposed a
decision making system which can be used by the top management and shareholders of Romanian or foreign
companies to support their investment decisions, especially those investments which target European/National
financing. The proposed system was designed to solve the bottlenecks in the current evaluation system for the
investment projects proposed to be financed within European funding; especially those related to increasing
competitiveness at the level of private companies.
The proposed system used four selection criteria and, as observed from the previous chapter, successful
implemented European funded investment projects record above average results in the proposed investment
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Laurenţiu Droj and Gabriela Droj / Procedia Economics and Finance 32 ( 2015 ) 1248 – 1257
decision making evaluation system, so it can be validated for a larger usage. Of course this proposed model
should be based on the specifics and extension of each proposed programme: major infrastructure projects
business / tourism / industrial cannot be assessed in the same way as those involving minor investments or
those developed by micro-enterprises. It should also be separated the investments which require bank financing
for those who do not need it. The risk in the development and successful completion of an investment financed
by EU structural funds can be reduced by using modern methods of integrated financial and non-financial
criteria which should be introduced and applied in the analysis and selection of beneficiaries of EU funding.
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