INTRODUCTION

Every investment project generates effects or impacts of diverse nature, direct,

indirect, external and intangible. The latter far exceed the possibilities of monetary
measurement and yet not considering them is harmful because of what they represent in
the mood and ultimate satisfaction of the beneficiary or harmed population.

A project arises from the need to solve problems, an investment project arises from
the need of some individuals or companies to increase sales of products or services.

There are currently many tools such as project evaluation, which allow to establish
advantages and disadvantages, as well as to establish whether it is profitable or feasible.

In the economic assessment there may be elements that are perceptible to a

community as harm or benefit, but which when weighed in monetary units, are impossible
or highly difficult to materialize. In contemporary economics, attempts are made to
approach measurement methods that address qualitative elements, but always subject to
a subjective appreciation of reality.

The term project management is sometimes used to describe an organizational

approach to managing successive operations. This approach, more properly called project
management, treats many aspects of successive operations as projects so that project
management can be applied to them. Although an understanding of project management
is obviously critical for an organization that is managing by projects, a detailed discussion
of this approach is beyond the scope of this document.

INVESTMENT PROJECT

It is a proposal for technical-economic action to resolve a need using a set of

available resources, which may be human, material and technological resources, among
others. It is a written document made up of a series of studies that allow the entrepreneur
who has the idea and the institutions that support him to know if the idea is viable, can be
carried out and will make a profit.

Its objective is to take advantage of resources to improve the living conditions of a

community, which may be in the short, medium or long term. It ranges from the intention or
thought of executing something to its completion or putting into normal operation.
It responds to a decision on the use of resources with one or more of the objectives of
increasing, maintaining or improving the production of goods or the provision of services.

INVESTMENT PROJECT PLANNING

According to the General Methodological Guide for the Preparation and Evaluation of
Projects of the Latin American and Caribbean Institute for Economic and Social Planning,
ILPES, "an investment project is a proposal for action that involves the use of a specific set
of resources to achieve expected results."

An investment project can be understood as: "a discrete package of investments,

inputs and activities, designed to eliminate or reduce various restrictions to development,
to achieve one or more products or benefits, in terms of increased productivity and
improved quality of life for a group of beneficiaries within a given period of time." (Colin
Bruce, 1982).

Taking these concepts into account, an Investment Project can be defined as the
proposal for the contribution of capital for the production of a good or the provision of a
service, through which a subject decides to link liquid financial resources in exchange for
the expectation of obtaining benefits, also liquid, over a period of time called useful life.

The formulation of Investment Projects constitutes a broad and extremely complex

object of study, which demands the participation of various specialists, that is, it requires a
multidisciplinary approach.

Within this formulation process, the stages that make up an investment project must
first be considered, since these constitute a chronological order of project development in
which progress is made on its formulation, execution and evaluation. And secondly, the
http://www.monografias.com/trabajos14/comer/comer.shtmlprojected documents that will
provide the basic primary information needed for the project to be evaluated, coming from
the estimation of the main financial statements.

In this way, a project arises from the identification of needs. It consists of a set of
technical, legal, economic (including
markethttp://www.monografias.com/trabajos13/mercado/mercado.shtml) and financial
background information that allows for qualitative and quantitative judgment of the
advantages and disadvantages of allocating resources to that initiative. Its goodness
therefore depends on its efficiency and effectiveness in satisfying these needs, taking into
account the social, economic, cultural and political context. An investment project begins
with the identification of the project and culminates when the investment is liquidated.

The transformation of simple investment ideas to their implementation is what is

called the project cycle. Each stage of this transformation requires human, financial, and
information resources, which add value to ideas. This cycle is
http://www.monografias.com/trabajos11/tebas/tebas.shtmlshown schematically in Figure 1.

Figure 1: Life cycle of an investment project

The PRE-INVESTMENT stage covers the entire process carried out to identify a
problem or need, formulate the project and evaluate the initiative with the objective of
determining whether it is appropriate to execute it or not.
 This is the phase in which needs are identified; market data is obtained; the
investment strategy and objectives are developed and determined; and technical
documentation of conceptual ideas and preliminary projects is developed, which forms the
basis for pre-feasibility and
http://www.monografias.com/trabajos5/esfa/esfa.shtmltechnical-economic feasibility
studies.

The assessment of these will allow a decision to be made on whether to continue

with the investment and the team that will undertake the investment will be selected. This
phase culminates with the completion of the Feasibility Study, which provides detailed
information on the investment with the aim of ensuring that the feasibility indicators used in
the economic-financial evaluation are as consistent as possible.

During the INVESTMENT stage, also called maturation by other authors, the
necessary equipment is acquired and the project is launched. This phase covers up to the
moment when the project enters into full operation. It is at this stage that previous
preparations, designs, plans http://www.monografias.com/trabajos11/metods/metods.shtml
- ANALITand analyses are put to the test. All the work in the previous stages is aimed at
ensuring that the project is a success.

The purpose of this section is to present some considerations that can lead to a truly
successful project, the potential problems that will arise, and some of the approaches that
have been developed to resolve them.

This Maturation phase can be divided into the following major phases:

 Final project: includes the preparation of schedules, the prospecting and evaluation
of sites, the preparation of master plans and technical designs for the plant, the detailed
technical organization of the plant and the final selection of technology and equipment.
 Negotiation and construction: this defines the legal obligations regarding project
financing, acquisition of technology, construction of buildings and service facilities, and
supply of machinery and equipment for the operational phase. It involves the signing of
contracts between the investor, on the one hand, and financing institutions, consultants,
architects, contractors, collaborators and suppliers of equipment, material inputs and
services on the other hand.

 Start-up: This is usually a short but technically

criticalhttp://www.monografias.com/trabajos901/praxis-critica-tesis-doctoral-marx/praxis-
critica-tesis-doctoral-marx.shtml stage of project development. It links the preceding phase
with the operational phase that follows it. Success at this stage will demonstrate the
effectiveness of project planning and implementation and will provide a blueprint for what
can be expected from future programme activities.

In the Maturation phase, considerable financial obligations are incurred and any
major modification to the project entails serious financial consequences. Poor scheduling,
delays in construction and delivery or in the start of activities, etc., inevitably lead to higher
investment costs and affect the viability of the project. In the pre-investment phase, the
quality and reliability of the project are more important than the time factor, but in the
Maturation phase the latter is decisive.

In the OPERATION or POST-INVESTMENT state, the investment has already been

completed and the project must begin to provide the goods and services for which it was
designed, although it may happen that the investment and operation occur simultaneously
for some period of time. It is important at this stage to provide the necessary funds for the
proper operation of the project since without them the project will not provide the expected
benefits.

Operational phase problems must be considered from two points of view: short term
and long term. The short run refers to the initial period after production has started, when
various problems may arise relating to issues such as the application of production
techniques, the operation of equipment or inadequate labour productivity, as well as the
lack of http://www.monografias.com/trabajos11/fuper/fuper.shtmladministrative and
technical personnel and qualified operators. However, most of these problems must be
considered in relation to the execution phase and the necessary corrective measures must
mainly relate to the execution of the project. The long term is related to production costs,
on the one hand, and http://www.monografias.com/trabajos7/cofi/cofi.shtmlincome from
sales on the other, and both are directly related to the projections made in the pre-
investment phase. If such projections prove to be wrong, the technical and economic
viability of an industrial activity will inevitably be undermined, and if such deficiencies are
identified only in the operational phase, corrective measures will not only be difficult but
also extremely costly.

Due to the importance of the pre-investment stage for this research, the levels that
comprise it are explored in depth. These are:

 profile or opportunity
 pre feasibility
 feasibility

The profile level is developed from existing information, common judgment and
experience. At this level, those idea options that appear most attractive for solving a
problem or taking advantage of an opportunity are frequently selected.

In addition, the specific characteristics of the product or service will be defined. The
different ways of solving a problem or taking advantage of a business opportunity will
constitute the project idea, however, this step is not limited to describing the project idea in
general terms; this idea must be refined and presented in an appropriate manner in order
to make the decision to continue with its studies; therefore, an effort must be made to
determine the possible solutions to the problem to be solved and discard those that are
clearly not viable.

This stage aims to generate solutions and information to decide whether to

undertake further studies. It can therefore be said that the idea for a project, rather than
being a lucky idea on the part of an investor, generally represents the completion of a
diagnosis that identifies different solutions.

At the pre-feasibility level, research is furthered and is based mainly on information

from http://www.monografias.com/trabajos10/formulac/formulac.shtml - FUNCsecondary
sources to define, with some approximation, the main variables related to the market,
production techniques and financial requirements. In general terms, the probable
investments, operating costs and income that the project will demand and generate are
estimated.

The feasibility study is a process of successive approximations, where the problem

to be solved is defined; it is carried out from a level of knowledge about the investment and
the projection of its benefits; it constitutes the last opportunity to reduce the uncertainty of
the investment in question to a minimum state, and as a result of its evaluation, the
decision to invest is made.

This is done based on assumptions, forecasts and estimates, so the degree of

preparation of the information and its reliability depends on the depth with which market
studies, technical studies, as well as economic and financial studies, and others that are
required are carried out. At each stage or level, all aspects and variables that can improve
the project, that is, optimize it, must be specified. It may happen that the result of the work
might advise a revision of the original project, that its initiation be postponed considering
the optimal start time, and even the above should not serve as an excuse for not
evaluating projects. On the contrary, with preparation and evaluation it will be possible to
reduce the uncertainty that would be caused by variations in the factors, therefore the
feasibility study is the basis for the decision on the execution of the investment.

The entire dynamic system that integrates the activities and/or services carried out
by the different subjects participating in the investment project, from its initial conception to
its implementation, is called the investment process.

SIMULATION

Simulation is a specific type of modeling that attempts to represent reality in a

simplified way. As with mathematical-statistical models, simulation models have a series of
inputs or initial data that the researcher includes in the model and a series of outputs or
results that arise from it.
 Simulation is very useful for solving a business problem where all the values of the
variables are not known in advance, or are only partially known, and there is no way to
easily find out.

It consists of the construction of a certain type of mathematical model that describes

the functioning of the system in terms of individual events and components. In
addition, the system is divided into elements and their interrelations with predictable
behavior, at least in terms of a probability distribution, for each of the possible states of the
system and its inputs.

Misuse of Simulation.
The financial manager is like a detective who must use all the clues. Simulation
should be just another way to gain insight into expected cash flows and risk. But the final
investment decision applies only one figure, the net present value.

The financial manager is not given cash flow distributions, but rather net present
values or the internal rate of return. Isn't a complete distribution of net present values
better than a single number? But we will see that this more-is-better reasoning leads the
CFO into a trap. The cash flows from each iteration of the simulation model are converted
into a net present value by discounting them at the risk-free rate. Why are they not
discounted at the opportunity cost of capital? Because if you know what this is, you don't
need a simulation model, except perhaps to facilitate cash flow forecasting.

The risk-free rate is used to avoid prejudging the risk.

The expected net present value does not take risk into account. Risk is reflected in the
dispersion of the net present value distribution. Thus, the term net present value takes on
a very different meaning than usual. If an asset has a number of possible present values, it
makes little sense to associate the present value with the price at which the asset could
sell in a competitive capital market. If two unrelated projects are combined, the risk of the
net present value of the combined projects will be lower than the average risk of the net
present values of the two separate projects.

This not only goes against the principle of value activity, but also encourages
promoters of marginal projects to disrupt the system by submitting joint proposals.
 It is very difficult to interpret the distribution of net present values. Since risk-free
time is not the opportunity cost of capital, there is no economic basis for the discounting
process. Since the entire mechanics are arbitrary, managers can only be told how to
decide or what to do if inspiration never comes.

Some of these difficulties can be avoided by presenting a distribution of internal rates

of return. This avoids the use of an arbitrary discount rate at the cost of introducing
problems associated with the internal rate of return. Furthermore, management is again
left contemplating allocation without guidance regarding the appropriate balance between
expected profitability and profitability variances. However, the standard deviation of the
internal rate of return could be used as an approximation of the relative risk of projects in
the same line of business.

STEPS TO FOLLOW TO SIMULATE AN INVESTMENT PROJECT.

The logic to be followed to simulate an investment project is as follows:

1. Input data.
• Tax rate.
• Opportunity cost of capital.
• Project parameters and their probability distributions.
2. Random variable generator.
• Normal.
• Uniform.
• Exponential.
• Empirical.
3. Investment model.
Depreciation.
• It is calculated based on the type of asset and the industrial activity in which they
are used. Evaluation
Criteria.
• Internal Rate of Return.
• Net Present Value.
• Return on Investment.
 • Recovery Period.
4. Probability distribution of the selected evaluation criterion.
• Histogram.
• Cumulative histogram.
5. Statistical analysis.
• Media.
• Standard deviation.
• Range.
6. Decision.

ADVANTAGES AND DISADVANTAGES OF SIMULATION.

The advantages of using a financial simulation model to determine the viability of an

investment project is that these models are applicable to a multitude of products and
sectors. They can be adapted to the specific characteristics of the project under study.

A financial simulation model allows you to focus your attention on making the
decision of whether or not to invest in the project, or to concentrate on improving those
aspects that can make it more profitable. Instead of wasting time designing complex
financial models, you just use them.

Improve your decision-making process because when your provisions have a high
financial impact, a simulation model allows you to change the key points of your
investment and evaluate multiple scenarios. You will immediately see the effects, and you
will be able to reach optimal decisions quickly and easily.

Advantages
 It provides a simpler method of solution when the mathematical procedures are
complex and difficult.
 By applying simulation it is not necessary to reach the interruption of operations in the
company.
 Provides different alternatives that can be explored.
 It provides complete control over time, because a phenomenon can be accelerated.
 It is often cheaper to improve a system through simulation than to do so on a real
system.
 Simulation methods are easier to visualize and understand than analytical methods,
with the former generating a deep understanding of the system.
 By building a simulation model, it can be quickly modified by analyzing different
policies or scenarios. Simulation models allow sensitivity analysis.
 Simulation is often the only way to achieve a solution in some cases.
 Solve problems without analytical results.
 Simulation methods provide an analysis of systems with greater complexity and less
detail, as opposed to analytical methods, which are generally simple and involve a
large number of assumptions.
 Analyzes the effect on the overall performance of a system of small changes made to
one or more of its components.
 It is used as a pedagogical perspective to illustrate and facilitate the understanding of
the results obtained through analytical techniques.
 Analyzes a system by transmitting suggestions for possible improvements to be made
to the real system, as well as detecting which variables most influence the
performance of this real system.
 It contributes to reducing the risk inherent in decision-making.

Disadvantages
 The simulation is imprecise, and the degree of its imprecision is immeasurable.
 When creating a good simulation model, many costs are incurred, because the
process involved is long and complicated.
 The solutions and inferences from a simulation model cannot be transferred to the
solution of other problems, because each simulation model is unique.
 Simulation models do not generate optimal solutions.
 Solving a simulation model can give the analysis a false sense of security.
 A large number of computational runs are required to find solutions, incurring loss of
time and high costs.
 Simulation does not generate optimal solutions to quantitative analysis problems, in
techniques such as economic order quantity, linear programming or PERT.
 Simulation results are numerical, so there is a danger of attributing a greater degree of
validity and precision to numbers.
 If the problem has many variables, certain variables must be left out that can
completely change the real-life outcomes that the simulation did not anticipate; in
engineering, one “minimises risks, not avoids them”.
 Simulation requires long development periods.

SIMULATION MODELS

Experimentation can be field or laboratory work. The method model used for the
simulation would be theoretical, conceptual or systemic.
After confirming the hypothesis we can then design a theorem. Finally, if this is admitted, it
can become a theory or a law.

Theoretical Model
The 'theoretical model' must contain the elements required for the simulation. An
example with laboratory work is a computer statistics program that generates random
numbers and contains the statistics of the mean and its different versions: quadratic-
arithmetic-geometric-harmonic. In addition, it must be able to determine the normality in
terms of probability of the generated series. The working hypothesis is that the mean and
its versions also determine the normality of the series. It is an experimental laboratory
work. If the hypothesis is true we can establish the sequence theorem, theory, law. It is the
main model of all scientific research, thanks to which we can define or conclude the
hypothesis, predictions, etc.

Conceptual Model
The conceptual model aims to establish, through a questionnaire and field work, the
importance of discrimination or rejection in a community and to do so by means of a
questionnaire in the form of a simulation with an attitude scale. After seeing if the
population is representative or adequate, now the simulation is the application of the
questionnaire and the model is the questionnaire to confirm or reject the hypothesis of
whether there is discrimination in the population and towards which group of people and
on what issues. Most of the simulations are of this type with conceptual models.
 Systemic Model
The systemic model is built using Systems Dynamics as a methodology. The social
system is simulated in one of its total representations. Systems analysis is a total
representation. A development plan in the transport segment with a human ecology model,
for example. The emphasis on general systems theory is appropriate in this type of
simulations. This method, which is for a complex system, is extremely abstract; it is not
limited to the description of the system, but must include in the simulation the energy
inputs and outputs and processes of homeostasis, autopoiesis and feedback.

Both the statistics program, the attitude scale and the entire system are perfect
simulations of reality and modernize all the elements in their respective working
hypotheses. They are also a microclimate and the environment or setting in
simulation/experimentation processes. Other properties that simulations must contain is
that they are repeatable indefinitely. They should avoid the learning effect that encourages
the interviewer to fill out the questionnaires themselves and that can be avoided with some
control, they should be flexible or improvable and they should not be invasive or change
the population of successive samples.

RANDOM NUMBERS

A random number is an outcome of a random variable specified by a distribution

function. When no distribution is specified, it is assumed that the continuous uniform
distribution on the interval [0,1] is used. On personal computers, it is easy to simulate the
generation of random numbers, using pseudo-random number generation mechanisms,
which, without being random (following a formula), appear to be so.

A random number is one obtained by chance, that is, every number has the same
probability of being chosen and the choice of one does not depend on the choice of the
other. The most commonly used classic example to generate them is the repetitive toss of
an ideal, unrigged coin or die.

Random numbers allow mathematical models to represent reality. In general, when

unpredictability is required in certain data, random numbers are used.
 Humans live in a random environment and our behavior is random too. If we want to
predict the behavior of a material, a climatic phenomenon or a human group, we can make
inferences from statistical data. To achieve a better approximation to reality, our predictive
tool must work in a similar way: randomly. Simulation models emerged from this need.

In everyday life, random numbers are used in situations as diverse as gambling, in

the design of the fall of snowflakes, in computer animation, in tests for locating errors in
chips, in data transmission from a satellite or in finance.

Logic makes us think that people are imperfect random generators. There are
studies that show that there are clear tendencies in humans to create biased sequences
and they are related to personal characteristics, prior knowledge or information or
age. We can take advantage of real situations to obtain a table of random numbers, such
as the list of National Lottery numbers that have been awarded throughout its history,
since they are characterized by the fact that each digit has the same probability of being
chosen, and its choice is independent of the other extractions.

Manual methods, coin tosses, dice tosses, mechanical devices, electronic devices.

Analog computing methods are methods that depend on certain physical-random

processes, for example, the behavior of an electric current.

Digital computing methods, when the digital computer is used. Library

tables are published random numbers; lists of which can be found in books on probability
and mathematics tables. These numbers were generated by one of the analog computing
methods.

MONTE CARLO SIMULATION

Monte Carlo simulation is a quantitative technique that uses statistics and computers
to imitate, through mathematical models, the random behavior of real, non-dynamic
systems (generally, when dealing with systems whose state changes over time, either
discrete event simulation or continuous system simulation is used).
 Monte Carlo simulation provides the decision maker with a range of possible
outcomes and the probability of their occurrence based on the actions taken. It shows the
extreme possibilities (risky and conservative) as well as all the possible consequences of
intermediate decisions.

Monte Carlo simulation performs risk analysis by modeling possible outcomes by

substituting a range of values—a probability distribution—for any factor with inherent
uncertainty. Then it calculates the results over and over again, each time using a different
set of random values from the probability functions. Depending on the number of
uncertainties and the ranges specified, thousands or tens of thousands of calculations may
be required to complete a Monte Carlo simulation. Monte Carlo simulation produces
distributions of values of possible outcomes.

Steps to perform the method:

1. Design the decision logic model

2. Specify probability distributions for the relevant random variables.
3. Include possible dependencies between variables.
4. Sampling values of random variables
5. Calculate the model output based on the sampling values (iteration) and record the
result
6. Repeat the process until you have a statistically representative sample.
7. Obtain the frequency distribution of the result of the iterations
8. Calculate mean, deviation and cumulative percentile curve

Advantages:

 Probabilistic results. The results show not only what can happen, but how likely an
outcome is.
 Graphic results. Using the data generated by a Monte Carlo simulation, it is easy to
create graphs of different outcomes and the chances of them occurring. This is
important for communicating the results to other interested people.
 Sensitivity analysis. With only a few outcomes, in deterministic analysis it is more
difficult to see the variables that most affect the outcome. In Monte Carlo simulation, it
 is easier to see which introduced variables have the greatest influence on the final
results.
 Scenario analysis. In deterministic models it is very difficult to model different
combinations of values of different input values, in order to see the effects of truly
different situations. Using Monte Carlo simulation, analysts can see exactly what
values each variable has when certain outcomes occur. This is very valuable for
further analysis.
 Correlation of input variables. In Monte Carlo simulation it is possible to model
interdependent relationships between different input variables. This is important to find
out precisely the real reason why, when some factors rise, others rise or fall in parallel.
 Using Hypercubic Latin Sampling: Samples more accurately from a full range of
distribution functions.

INVESTMENT AND FINANCING

Project implementation involves the use of a series of resources, which must be

identified in detail, because this is what determines whether problems arise when
implementing the project, which could ultimately undermine the implementation of the
project. For this reason, it is important that those who promote an investment have a
thorough understanding of what they intend to do or, in any case, go into more depth on
the subject if there is not complete knowledge.

Investment
Investment refers to the resources (whether material or financial) needed to carry out
the project; therefore, when we talk about investment in a project, we are referring to the
monetary quantification of all the resources that will allow the project to be carried out.

Therefore, when determining the amount of investment, it is necessary to identify all

the resources that will be used, establish the chastities and, based on this information,
perform the monetary quantification.

Financing
Once the investment required to carry out a particular project has been determined,
the question we ask ourselves is: where do I get those financial resources? In other words,
we have to think about financing. Financing in a project consists of the sources of
financing that will be used to obtain the resources to finance the project; through financing
we can establish the financing structure of the project, which implies determining the
degree of participation of each source of financing.

The balance between Investments and Financing.

A company is in financial equilibrium when it can pay off debts as they become due.
The two variables that we are going to use to analyze the economic-financial situation of a
company are the following:

To analyze the solvency at short notice: Cash Flow; that is Cash + Banks c/c.

To analyze long-term solvency: Working Capital; this is the excess of permanent K

over fixed assets. It is a type of solvency fund or financial stock that allows for offsetting
any potential mismatches between the flow of collections and payments generated by the
operating cycle.
FM = (PF + N) - AF = AC - PC >0

The different financial situations that can arise through the study of the Working
Capital sign can be observed in the transparency below, which we explain below:

Maximum stability: This situation occurs at the time of the company's incorporation,
NP = AC + AF.

Normal Situation: The FM is positive, and the AC is greater than the PC. The NP is
also positive.

Technical suspension of payments: The FM is negative, the PC is greater than the

AC and the NP is positive. This occurs in companies that, for example, pay suppliers in 90
days and collect from clients in 30 days, with the amount in the “suppliers” account being
greater than that of the “clients” account on their balance sheet. This is not a real
suspension of payments, although it can become one if you do not make the relevant
payments after receiving payment and this situation continues cyclically over time.
 Technical bankruptcy: Occurs when there are continued losses. The company needs
a capital injection, or the technical bankruptcy eventually turns into a real bankruptcy.

THE ISSUANCE OF SHARES AND BONDS.

The issuance of shares is a way for the company to obtain long-term financial
resources, either for the creation of share capital when the company is established, or for
the expansion of the same when the initial capital is insufficient. Shares represent aliquot
parts of the share capital, and the creation of shares that do not respond to an effective
contribution of assets to the company is void. Shares may be registered or bearer. Until
they have been fully disbursed, they will be in nominative form.

Shares may be issued below par, at par or above par, depending on whether the
issue
price is lower, equal or higher than the nominal value. The difference between the issue
price and the nominal value is called the issue premium, which when negative represents
an issue loss. Generally, corporate laws prohibit the issuance of shares below par.

Depending on the rights they confer, shares may be ordinary or privileged. Holders
of preferred shares have priority in collecting dividends and participating in the distribution
of assets resulting from the liquidation. In the event of bankruptcy, preferred shareholders
come after creditors, but before ordinary shareholders. The payment of dividends to
preferred shareholders does not constitute a legal obligation for the company, as is the
case with the interest on bonds, but when the economic and financial situation of the
company allows it, said shareholders must be paid before ordinary shareholders and in the
manner established in the company's bylaws, the modification of which is mandatory when
issuing shares of this type.

Preferred shares are a hybrid form of financing, which have the characteristics of
both ordinary shares and bonds. The main drawback with regard to bonds is that dividends
on preferred shares are not deductible from the corporate tax base, unlike what happens
with interest on debts. But in the face of this inconvenience, the privileged ones present
advantages in relation to the obligations. They do not have a fixed maturity, and there is no
legal obligation to pay dividends when the company's financial situation is not good.
 Furthermore, since the issuance of preferred shares increases the volume of equity,
this implies an increase in the degree of financial autonomy of the company (financial risk
is reduced), and thus the possibility of incurring debt is left open.

The Issuance of Bonds

Bonds represent aliquot parts of a debt contracted by a company. Ownership of a
bond confers on its holder the status of creditor of the company. Bonds may be registered
or bearer. They can be issued at par, above par and below par. The issue of bonds, like
shares, will be recorded in a public deed, which must be registered in the commercial
register.

The difference between the nominal value and the issue price of the bonds, when
positive, is called “issue premium,” and when negative, it is called “issue loss.” The
“reimbursement premium” is an advantage granted to the bondholder, consisting of
reimbursing an amount greater than the nominal value of the obligation. The lots are prizes
that are raffled among bondholders.

A bond is said to be convertible when, if the bondholder so desires, it can be

transformed into an ordinary share of the same company. The difference between the
issue price of a bond and its conversion value is what is called the conversion premium.
Convertible loans are normally considered deferred equity capital. Investors tend to
welcome the issuance of convertible bonds, especially in growing companies, as the
company can therefore offer a lower interest rate. Bondholders may resist conversion in
the hope that the market price will rise and the conversion premium will therefore be lower,
or they may also hope that the price of the bonds will rise in order to obtain more shares
for each bond. Society can force conversion by threatening repayment.

Constant inflation and, therefore, the resulting loss in the value of money, has made
investment in bonds increasingly less attractive. To encourage savers, companies have
created a series of incentives such as: issuance below par, redemption premiums, lots and
convertible bonds, "indexed" bonds (in which the redemption value, the interest rate or
both are related to some index that is representative of the rise in the cost of living) and
"participating" bonds, which give their holder the right to participate in the benefits of the
company. It is, therefore, a financing formula that is intermediate between shares and
bonds, as is the case with convertible bonds.

INTERNAL FINANCING AND EXTERNAL FINANCING

Internal financing consists of resources generated by the company itself. We find 2

types of internal financing (or self-financing): Self-financing of enrichment: Profits after
taxes and dividends to shareholders. Maintenance self-financing: Amortizations +
provisions. External financing is that which the company obtains from sources outside of it.

It can occur in the short term and long term:

Short Term

Commercial Credit: It is the automatic source of financing that suppliers and other
creditors provide to the company, due to the time that elapses from when the merchandise
is delivered until payment is made for it.

Credit or Monetary Market:

Commercial Discount: Companies usually have collection rights over their clients,
materialized in commercial effects, which, in case of need for liquidity, can be discounted
by the company in financial institutions, where the company has an open line of credit
(classification and discount accounts) limited to a maximum risk, it will never be unlimited.

Credit Policies: The bank provides the company with a credit account to be used in
the stipulated amount and time frame, and the company uses it according to its financial
needs, paying interest only on the amounts it actually has available.

Factoring: This involves selling the collection rights that the company has over its
clients to a factor at a given price. The factor assumes the management of the collection
and the risk of possible non-payment. It has two important advantages: you obtain liquidity
immediately once sales have been made, and you save the administrative costs of
deferred collection. Its biggest drawback is its high cost.
 Sale and Lease-Back: A financially distressed company may sell part of its assets to
a leasing entity for a price similar to market value, and then re-dispose of those assets by
leasing them back to the leasing company. Leasing is not only a form of long-term
financing, but is also a residual source of financial resources.

Self-financing
Self-financing consists of those resources that are generated by the company itself,
without having to resort to external sources.

By enrichment: It is that part of the profit once the taxes and the shareholders'
dividends have been settled. It increases the company's PN, that is, it makes it richer. In
principle, there is no due date, so the self-financing funds for enrichment can be used by
the company without a time limit.

For maintenance: It does not produce variations in the company's PN. However, self-
financing for maintenance will eventually become payable, that is, the company will need
to use the funds it generated.

Self-financing by Enrichment: Reserves

Formed by all those reserve accounts that actually represent an increase in NP for
the same amount.

Multiplier Effect of Self-Financing: Self-financing of enrichment, in addition to

producing a function of internal origin, allows for an increase in the company's external
financial resources. This is known as the “self-financing multiplier effect.”

Advantages and Disadvantages of Self-Financing

Advantages of self-financing:

Greater autonomy and freedom of action for the company: The company's directors
will be in charge of deciding where the self-financing will go.
 It is a source of financing that does not require remuneration: Because it is
generated by the company itself and does not need to pay abroad to obtain financing.

For SMEs, it is the only way to obtain long-term financial resources: Financial
institutions are not very keen on giving funds to these companies, therefore it is the SMEs
themselves that help themselves.

Amortization reduces the company's tax burden: Amortization is considered a tax

burden for the company, therefore, the faster the amortization occurs, the lower the
financial burden.

Disadvantages of Self-Financing:

For the shareholder:

Self-financing is contrary to the company agreement, which establishes that the

profits derived from the company's activity will be distributed. What is reinvested is not
distributed.

For the company:

Making unprofitable investments.

It prevents profitable investments from being made: Self-financing is generated

throughout the year, the greater the self-financing, the lower the dividend, which is why the
profitability of the shares is lower and so is their value on the stock market, therefore, no
one wants to buy them and their sale price will be lower and lower.
 CONCLUSION

It has been rightly said that strictly monetary valuations to define the social economic
feasibility of an investment is a restricted option for measuring the impacts generated by it.

Projects often promise "states of mind" or opinions that can only be verified in terms
of subjective perception about the consumer universe and that can ultimately be the
decisive factors in the approval or rejection of a project idea. These are the cases in which
intangibles must be taken into account, but from the perspective of their real and effective
estimation and not on the basis of a voluntary empirical judgment of the evaluator or
decision-maker.

Considering intangible effects imposes the need to systematize a method, through

indirect measurement by surveys such as the one illustrated in this work to try to find a
necessary and fair assessment reference. The incorporation of intangible effects in
investment projects, when measuring their social and economic viability, can represent
important nuances and policy considerations that impact final changes in approved and/or
rejected investments.

The method developed in this work allows us to verify that it is possible and
convenient for the purposes of selecting an investment alternative, to consider the
subjective or intangible aspects as well as the objective or calculable aspects in monetary
terms such as the different concepts of costs associated with investments.

BOLIVARIAN REPUBLIC OF VENEZUELA

MINISTRY OF POPULAR POWER FOR HIGHER EDUCATION
CABIMAS UNIVERSITY INSTITUTE OF TECHNOLOGY
OJEDA CITY EXTENSION
 PREPARED BY:
KARINA PARRA
YELIZETH GARCIA
Mirethzis Parra
MAYERLI GONZALEZ
Silvia Davida

CIUDAD OJEDA, MARCH 2014