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1. Concepts of investments
Investitie- alocarea unei sume de bani, surse financiare, materiale, umane pentru obtinerea unui efect
(politic, financiar, cuantificat)
The general idea of investment is that the investor accepts not using the available resources today, so
that he could obtain a higher amount of resources in the future. So, the formal definition of investment can be
specified as a common commitment of money for a period of time, in order to derive future payments that will
compensate the inverstor, for first, the time that funds are commited, second- the expected rate of inflation
and the uncertainty of future payments.
In other words, investments represent the totality of financial, material and other resources allocated
to create modernized or expand the economic activity for the reason to earn profit.
An investment may be defined as a purchase by individual or an institutional investor of a financial or
real estate that produces a return proportional to the risk assumed over future investment period.
According to the law: investiie - totalitate de bunuri (active) depuse n activitatea de ntreprinztor pe
teritoriul Republicii Moldova, inclusiv pe baza contractului de leasing financiar, precum i n cadrul
parteneriatului public-privat, pentru a se obine venit

There can be identified the following elements:
1. the subject of investment (individual, companies, government)
2. the object (business real estate, buildings)
3. investment cost represents financial, material, human afford made for realization of project)
4. effects of investment can be the profit or other effect that are expected to be obtained at the end
5. the risk means the uncertainty of future payments- the possibility wouldnt receive his money or assets back
or will receive them at lower value.
6. the time funds are committed- represents the period of time during which the money or assets wouldnt be
available to the investor




























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2. Classification of Investments

2.1. By Natures object of investment:
- Financial investment any form of investing money for the purpose to obtain dividends, interest and other
profits by purchasing bonds, shares, opening bank account.
- Material and capital investment money paid to purchase fix assets. The basic characteristic is involvement
in production process, so these investments represent the building of a new economic objective and also the
modernization of this one.
- Non material or intellectual investment- are money placements for research and develop personal training
purchasing know how, new technologies, licensing.

2.2. To the way of participation:
1. Direct which supposes the possibility of control and decision over the enterprise
2. Indirect/ portfolio purchasing securities or other assets in order to cash some future profits. Do not intend
the direct control over firm

2.3. To the investment period:
-Long term more than 5 years
- Medium (1-5 years)
- Short term (to one year)

2.4. to the Investment purpose:
- for productive needs replacement, development
-strategic (mentinerea pe piata)
- mandatory investment (de lege)

2.5. To the residence:
- domestic
- foreign


2.6. Way of Financing:
- private/ corporate
- public
- individual
- foreign
- mixt

2.7. to the Risk Degree:
- Minimum risk
- low risk
- medium risk
- increased risk








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3. Main features of real investment
Investitiile de capital - /investitii reale/, reprezinta alocarea mijloacelor banesti nemijlocit in productie,
pentru constituirea activelor reale (achizitionare de bunuri, utilaje, intreprinderi in scopul sporirii
stocului de productie)
- Principala forma de realizare a strategiei de dezvoltare economica a intreprinderii
- Legatura reciproca cu activitatea operationala a intreprinderii
- Nivel mai mare de rentabilitate
- Risc sporit de uzura morala / progresul tehnologic/
- nivel inalt de protectie impotriva inflatiei
- Au un caracter novator, se asigura promovarea progresului tehnic si introducerea celor mai perfectionate
solutii tehnice
- Reprezinta cheltuieli certe in timp ce viitorul prezinta multe elemente de incertitudine
- Reprezinta economii la fondul de consum- cheltuielile trebuie sa genereze in viitor un efect care sa
compenseze atit o economie la fondul de consum, cit si un profit. Fiecare proiect trebuie sa fie bine fundamentat
pe baza unor calcule complete de eficienta economica
- Se realizeaza intr-o perioada de timp relativ scurta, iar efectele- long term
- Lichiditratea mai mica, decit cele financiare

4. The role of investments
- Sunt generatoare de bunuri si servicii prin sporirea ofertei si capacitatii productive, ceea ce conduce la obtinerea
unor profituri suplimentare
- Contribuie la cresterea de bunuri si servicii, care determina o dezvoltare a veniturilor tuturor agentilor economici.
Promovarea progresului tehnologic, in plan social- compensarea locurilor de munca, legatura dintre generatiile
societatii, adaptarea firmelor la piata
Viitoarele prevederi in domeniul investitiilor vor asigura un echilibru economic, vor impulsiona trecerea la
economia de piata, urmind sa contribuie la dezvoltarea economiei nationale.

Keynes le situeaza in lista categoriilor economice prioritare: Venit National, Investitii,Consum, Economii, fiind cel
mai instabil element in economie

Investment is of crucial importance because the capacity of production of the economy depends on the
capital available to produce. The existences of capital increase when the companies buy new tools, new
buildings, new computers, new machines etc, etc, in order to help produce consumption goods. Investment is a
flow that increases the existence of capital in the economy. But, of course capital runs out when it is used. One
part becomes rusted; another part gets damaged, while there is another that is thrown out when it is no longer
useful. Economists call all of the flows that reduce the existence of capital, depreciation.
Obviously compa
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nies need to make some investments alone to replace the capital that has depreciated. However any
other investment above depreciation makes the size of the existence of capital to increase, creating a greater
product potential so that people consume it. The flow of investment expenditure in any period of time depends on
the comparisons the companies do between the potential benefits and the costs of buying capital goods. The
potential benefits are measured in terms of the potential yield, and the buying costs are measured by the interest
rate, no matter if a company asks for a loan or doesnt in order to buy a given capital unit.
Why is the interest rate so important? If a company needs to ask for a loan in order to buy capital, it is
obvious that the higher interest rates make it less probable that you will ask for money because paying off
the debt would be more expensive. However, even if a company does have enough money in cash to buy a given
unit of equipment, higher interest rates force the company to decide if they should use the cash to buy the
equipment of borrow it from someone else. The higher the interest rates, the more attractive it is to give out the
cash as a loan. As a consequence, higher interest rates discourage investment no matter if the companies have
to ask for borrowed money in order to finance it.



5. Investment Process: definition and elements
All the activities, which are performed to fulfill and implement investment objectives, involve
material, financial, human, information resources.
Investments process is related both to the development of the national economy and to the level of enterprise.
At Macroeconomic level, the Investment Process emphasis the totality of investment activities realized
by the state and legal entties, expressed by the national policy, which has a prior objective: economic
development and population wealthware
At Microeconomic level, consists of a whole set of financial, material and human resources involved in
the realization of investment projects with the purpose to increase firms profitability and attain other useful
results.
The investment process performed in an enterprise consists of a set of actions and decision taking, which
suppose passing some chronological stages.
The elements:
1. subject of Inv. Process- are considered to be the participants, they can either be investors, either the receiver
or affiliated persons of the investment who can be designers, executors, suppliers, creditors, consultants, financial
institutions. As subject, also can be public administration institutions, other enterprise corporations, inviduals, all
foreign legal entities.
2. The object of IP- represented by the Investment Project
3 mechanism of the IP- are reflected in the Investment Policy of the sttae when choosing the Investment
Strategy
The Investment Policy is realized by the Investment Projects, which represent the fundamental document that
determine the necessity of capital investment realization and reflects both the main projects specific features amd
financial analysis related to this investment activity.







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6. Stages of Investment Process
According to the international practices, in order to evaluate the fundamental components of a business, the
investment project cycle is generally divided into three distinct phases:
the pre-investment,
the investment and
the operational (post-investment) phase.

The pre-investment stage - generally, includes: identification of investment opportunities, analysis of alternatives
and preliminary project selection, financing proposals, project preparation (including, the elaboration of pre-
feasibility and feasibility studies), project appraisal and investment decisions, finalizing with an appraisal report.
It begins with the determination of projects objectives and identification of possible investment opportunities.
Determination of the projects objectives results from the general policy of the company in accordance with its
investment strategy.
An important role at this stage does to getting information, which refers to possible alternatives and their way of
realization
The final aspect of this stage is to ensure that the investment is consistent with the organization's strategic goals.
An investment proposal may appear to be profitable but could shift the organization's emphasis away from
its primary purpose.
In case if the firm identifies or create an investment opportunity with a present value grater than its cost,
the value of the firm will increase.

Investment phase:
Establishing the legal, financial and organizational basis for the implementation of the project.
Technology acquisition and transfer.
Acquisition of land, construction works and installation.
Pre-production marketing.
Recruitment and training.
Plant commissioning and start up.
Cash and other resources are invested, and operations related to the investment begin.

It involves activities related to the decisions that are necessary to be taken:
Decisions referring to establishment of the legal, financial, and organizational base for the projects
realization;
Decisions referring to purchase and transmission of technologies;
Decisions regarding the optimal periods of realizing the projects;
Decisions regarding the purchase of land, realizing construction works and setting up of the equipment;
Decisions regarding hiring and training personnel;
Decisions regarding the period to start the activity.

III. The Operational phase can be divided into:
1. Initial period after start-up (short-term view), including:
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- Adaption of production techniques.
- Operational difficulties with equipment.
- Low labour productivity.
2. Full production (long-term view), including:
- Review of chosen strategies and related production and marketing costs as well as sales revenues.
- Comparison of projections made in the pre-investment phase with reality.

During and subsequent to the implementation stage, the investment project is monitored. The monitoring
process determines whether the investment proposal is fulfilling expectations; if it is not, the project may be
closed down before the planned termination. This activity supposes the control over all those parameters of the
investment objectives that had been foreseen in the investment decisions are respected in the exploration
process. Once the investment project is completed, an audit of the project is performed to evaluate the
performance of its managers and to determine appropriate adjustments to the investment process in the future.

The post-audit has three main purposes:

1. Improve forecast. When decision makers are forced to compare their projections to actual outcomes, there is a
tendency for estimates to improve. People simply tend to do every thing better, including forecasting, if their
actions are being monitored.
2. Improve operations. When a team has made a forecast about investment, its member are putting their
reputation on the line. If costs are above predicted levels, sales below expectations, and so on, executives in
production, sales and other areas will strive to improve operations and to bring results into line with forecasts.
3. Identify termination opportunities. Although the decision to undertake a project may be the correct one based
on real information, things dont always turn out as expected. If initial operating results indicate that a project is
not likely to achieve its expected profitability, it may be best for the firm to terminate rather than continue the
project (disinvestment). Furthermore, most projects at some point in their lives lose their economic viability and
should be terminated. Both post-audit and a continuing review of ongoing operations help identify the optimal
point for the termination of a project.
The disinvestment is a reduction in capital expenditure, or the decision of a company not to replenish
depleted capital goods. A company will likely not replace capital goods or continue to invest in certain assets
unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may
deplete certain capital goods and invest in other more profitable assets. Alternatively a company may have
to divest unwillingly if it needs cash to sustain operations.




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7. Investment project: concept and types
Investment project can be defined as the optimal set of actions of inestment, based on sector, global planning
on the basis of which a defined combination of human, material, financial resources leads to economic and social
development.
A properly and well developed investment projects, allows the managers and owners of the enterprise, and also,
outside investors to estimate its rational expectation and to foresee the expected results.
Investment project include: task, time identification, resources requirement projections and budget preparation.
For certain types of projects, a detailed analysis may be necessary, for others simplier procedures should be
used.
Firms generally categorize projects, than analyze both in each category something differently
To the amount of requirement resources:
- Small
- Middle
- Large

To time frame:
short,
middle,
long term

To the financing resources:
private,
public,
mixed

Degree of complexity:
simple,
complex- integrated projects

Level of implementation dependence:
- independent
- mutually exclusive (1as accept, 2nd- not accept)
- complimentary (not competitive, for reducing risk)
To their objectives:
- replacement (for maintainance of business)
- replacement for cost reduction
- expansing of existing products
- social projects
- research and development


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8. Definition and Structure of Feasibility Study
During, the first stage of an investment project lifecycle, project initiation, planners should focus whether to
proceed with the project or not. The feasibility study should be conducted during this stage, before the group
decides to implement or terminate the project. Planners need to know the requirements for a successful project.
The feasibility study serves as an important tool for the group's deliberations.
A preliminary study undertaken to determine and document a project's viability or the discipline of
planning, organizing, and managing resources to bring about the successful completion of specific
project goals and objectives
An analysis of possible alternative solutions to a problem and a recommendation on the best alternative.
It can decide, for example, whether order processing can be carried out by a new system more efficiently
than the previous one.
A logical tool to employ before any resources are invested in the new project

The feasibility study evaluates the projects potential for success
This analytical tool used during the project planning process shows how a business would operate under a set of
assumptions the technology used (the facilities, equipment, production process, etc.) and the financial aspects
(capital needs, volume, cost of goods, wages etc.). The study is the first time in a project development process
that the pieces are assembled to see if they perform together to create a technical and economically feasible
concept. The study also shows the sensitivity of the business to changes in these basic assumptions.
Contents of a Feasibility Study
I. Executive summary.
II. Project concept and history.
III. Market analysis and marketing concept.
IV. Raw materials and supplies.
V. Location, site and environment.
VI. Engineering and technology.
VII. Organization and overhead costs.
VIII. Human resources.
IX. Implementation planning and budgeting.
X. Financial analysis and investment appraisal.
XI. Economic cost-benefit analysis.

Opportunity study > feasibility study > business plan study
The information gathered and presented in the feasibility study is useful to:
List in detail all the things needed to make the business work;
Identify logistical and other business-related problems and solutions;
Develop marketing strategies to convince a bank or investor that the business is worth
considering as an investment; and
Serve as a solid foundation for developing a business plan.
A consultant often is hired to conduct the feasibility study. Time and money spent in choosing and using
a good consultant is an important investment that will pay dividends later.
The individual conducting a feasibility study should have the following characteristics:
Experience in conducting feasibility studies
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Fair and neutral with no prior opinion about what decision should be made. It is important that all
necessary data are collected and presented so that the best decision can be made.













9. Investment climate: definition and elements
The investment climate can be defined as system of factors, influence of which can interfere in the Investment
Process modifying the Investment Behaviour
Developing this idea, we can say that the investment environment is a component part of the economic situation
of one country, region or branch which is formed under the influence of political, economic, social, legal,
geographical and demographical factors, which determine the conditions of performing the investment activity in
an economy.
Investment environment can indicate the level of attractiveness of one country, region or branch for the
investment. It can also reflect the investment image of one country on the international level. Investement image
can be domerd under the influence of some real processes ad phenomena which are performed in the investment
area, field of one country.
The main elements that make the investment environment:
- investment potential meaning the objective opportunities for investors in one country, region or branch
- investment risk the conditions for investment activity.
These elements are very connected, thats why we should analyze both of them.

An attractive investment environment for the expanssion of investment activity and in order to attract potential
investors is a component part of the investment strategy and economic policy of one country, especially for
transition one.
The creation of a favourable investment environment is one of the necessary conditions for a sustainable
economic development.
In this case, a favourable investment environment encourages business to improve efficiency and productivity in
order to increase revenues ad capital available for investment. In also gives investors the confidence in the
market and encourages them to invest more capital.








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10. Assesment of Investment Environment: institutions
The assesment of Investment Environment includes a large classification from a favourable to a risky
investment environment.
The assesment of investment environment of one country on world wide frame is made by different institutions,
the most important are:

-Banking institutions City Bank, Bank of America, Security Bank
- Specialized rating agencies EuroMoney, Standard&Poor Rating Group, Moodys Investor Service, Fitch-
IBCH, COFACE)
- Evaluation companies (BERI- Business Environmental Risk Information, EIU- Economist Inteligence Unit,
Forbes)
- International financial institutions World Bank

Imixtiunea excesiv a statului n economie, oportunitile limitate ale pieei, capacitatea redus a
infrastructurii, corupia, accesul limitat la finanare, precum i instabilitatea macroeconomic, acestea sunt
constrngerile care determin strinii sau oamenii de afaceri locali s ezite s fac investiii n Moldova. n plus,
avem un rating sub pragul critic, Moody's B3, care arat c riscul de ar este nalt i semnific pierderea cilor
de acces la pieele de capital privat,
n Republica Moldova funcioneaz 3500 de companii cu fondatori strini. Stocul investiiilor strine se
ridic la 20 miliarde de lei, ns circa 80 la sut din aceste investiii au fost fcute n domenii care nu sunt
orientate spre export. Investiiile strine directe penetreaz economia cu viteza succeselor politicilor naionale din
domeniu i prsesc cu viteza crizelor regionale i internaionale", se constat n studiu.
Potrivit Doing business 2010" ara s-a clasat pe locul 94 din 183 de ri n termeni de performan
global. Forumul Economic Mondial a lansat Raportul global privind competitivitatea pe anii 2010-2011 n acelai
timp n toate rile lumii. Republica Moldova, care din 2008 se afl pe penultimul loc n Europa central i de Est,
n acest an a depit Armenia, Tadjikistan i Krgzstan. Dup cei 12 indici n baza crora competitivitatea a fost
calculat, Moldova a ocupat poziia 68 dup nivelul eficienei pieei muncii.
Cea mai proast situaie n Moldova este n domeniul inovrii (129). Pe primul loc n rating s-a clasat
Elveia. Aceasta este urmat de Suedia, Singapore, SUA i Germania. Indicele global al competitivitii este
recunoscut drept unul din cei mai importani factori, care servete conducerii, influeneaz asupra deciziei privind
investiiile att la nivel mondial, ct i la nivel regional. Raportul se bazeaz pe volumul de date statistice prezentat
pentru anul 2009 i pe mai multe sondaje complexe, efectuate n primvara anului 2010.

El arat c procesul reformei regulatorii este incomplet. Exist obstacole semnificative de reglementare
care penalizeaz n special cele mai dinamice companii, angajate n comerul transfrontalier. Reforma cadrului
regulatoriu a contribuit mai mult la sectoarele locale ale economiei, non-exportatoare.
BERD constat o stagnare general a procesului de reform structural n anii 2005-2009, nici o reform
structural nu a fost implementat n ultimii trei ani. OECD constat c climatul investiional n Republica Moldova
rmne sub calitatea medie a statelor sale directe concureniale n Europa de Sud-Est, cu excepia reformei
regulatorii. Decalajul de performan se datoreaz instabilitii politice i capacitii slabe a instituiilor publice,
calitatea politicilor de disponibilitate.

Agenia de evaluare financiar Moody's a retras toate ratingurile Republicii Moldova, deoarece
specialitii instituiei consider c nu dispun de informaii suficiente pentru a menine calificativele acesteia.

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La momentul retragerii, statul moldovean beneficia de ratingul suveran de "B3". Agenia de evaluare
Fitch evalueaz Moldova cu ratingul "B-". Este cea mai joas evaluare, dup iulie 2002, cnd agenia a redus
calificativul creditar pe obligaiunile externe pe termen lung i mediu de la Caa1 la Ca, dup ce Guvernul
moldovean nu a rscumprat n termenele stabilite obligaiunile plasate pe piaa extern i a fost nevoit s
nceap negocieri cu investitorii strini n vederea restructurrii eurobondurilor. O alt agenie financiar Fitch a
cobort atunci ratingul valutar al RM la nivelul de default.
Freedom House menioneaz implicarea forelor de securitate n politic (evenimentele din aprilie) i
lipsa de independen a justiiei (judectori pronunnd verdicte n arestul poliiei)
Organizaia Freedom House cu sediul la Washington a acordat Republicii Moldova cel mai mic scor din ultimii 10
ani ntr-un nou raport despre rile n tranziie, care analizeaz evenimentele anului trecut. Studiul publicat astzi
arat c Republica Moldova a obinut scorul de 5,14 pe o scar de la 1 la 7, unde 7 este punctajul cel mai slab.









11. Determinants of Investment Environment

The Investment Environment depends of several factors, that can be grouped to different criteria:
1. To the manifestation level:
-Macroeconomic level: institutions, legal framework, macroeconomic conditions, physical infrastructure
- Microeconomic level: accesul la resurse, costul de productie, rentabilittaea intreprinderii

2. On the nature:
- Economic stabilitatea economice
- Political stabilitate politica
- Social situatia demografica, gradul de cultura

3. On risk return:
- factors that determine countrys potential to attract investments
- that characterize investment risk

4. possibility to be influenced by the society:
- objective: nu pot fi influentati: pozitia geografica
- subjective: pot fi influentati: cadrul legal

Prile tari: Oportuniti:
- Amplasarea geografic avantajoas a rii
- Statut de ar vecin cu Uniunea European
- Notorietatea produselor moldoveneti pe
pieele n dezvoltare din regiune
- Condiiile climaterice favorabile pentru
dezvoltarea mai multor tipuri de producere i
servicii
- Mediul de afaceri bilingv (romn i rus)
- Stabilitate macroeconomic
- Factorii de producere relativ ieftini n
comparaie cu alte ri din regiune
- Sistemul bancar dezvoltat
- Existena preferinelor comerciale oferite de Uniunea
European C.S.I. Europei de Sud - Est

- Politica statului orientat spre integrarea European
Premisele transformrii rii ntr-un hub" regional ntre Est i
Vest
- Nivelul ridicat actual al consumului i
perspectiva meninerii acestuia pe piaa intern i pieele
principalelor parteneri comerciali
- Piaa de capital n dezvoltare
- Existena stimulentelor pentru investitori
- Existena unui regim stimulator pentru
dezvoltarea sferei de cercetare-dezvoltare
- Existena activelor de capital iz ae cu potenial de
dezvoltare, inclusiv n infrastructur
- Premisele pentru apariia noilor instituii i instrumente
financiare
- Accesul fr taxe vamale pe piaa Uniunii Europene n baza
preferinelor oferite de Comisia European
Accesul fr taxe vamale pe piaa rilor din Europa
de Sud-Est CSI
Prile vulnerabile: Constrngeri:
- Insuficiena resurselor materiale, inclusiv a celor
naturale
- Influena considerabil a factorilor externi
asupra economiei naionale
- Dependena mare de importul de resurse
energetice
- Creterea deficitului de for de munc calificat
- Creterea preurilor la resursele energetice
- Epuizarea surselor de finanare local a
investiiilor
- Prezena impedimentelor de ordin administrativ n
atragerea investiiilor
- Competiia regional sporit n domeniul
atragerii investiiilor
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- Nivelul insuficient de dezvoltare a pieei financiare
- Prezena disproporiilor regionale majore
- Nivelul insuficient de dezvoltare a transferului tehnologic
- Ritmuri joase de dezvoltare a ramurilor s c iento
intensive i avansate tehnologic Infrastructura slab
dezvoltat
- Competitivitatea joas a produciei Infrastructura calitii
subdezvoltat
- Echipament uzat din punct de vedere fizic i moral i
tehnologii depite
- Ratele dobnzilor nalte la creditele bancare i oferirea
creditelor preponderent pe o durat scurt de timp
- Diversificarea slab a pieelor de desfacere
- Dezvoltarea insuficient a servicilor de
consultan i informaionale n domeniul
atragerii investiiilor i promovrii
exporturilor
- Posibilitile reduse ale statului n domeniul
finanrii investiiilor n infrastructur
- Concurena acerb pe pieele de desfacere
externe pentru produsele moldoveneti
tradiionale
- Existena msurilor protecioniste pe pieele
de desfacere externe
- Meninerea n regiune a proceselor migraiei de munc




12. Investment Environment in RM
Business environment and competition
Moldovas investment climate has gradually improved over recent years, although effective implementation of
laws and regulations concerning construction permits, employment, investor protection, taxes and trading across
borders remain a challenge. Moldovan companies consider corruption, tax administration and the practices of
competitors in the informal sector as key obstacles to doing business. Overall, the economy remains non-
diversified.
Infrastructure - Energy
The energy sector continues to face financial difficulties due to accumulated debts, and progress in resolving
these problems remains slow.
Municipal infrastructure
In mid-September 2009 the Chisinau municipal council approved substantial tariff increases for water and public
transport. This measure is expected to improve the financial sustainability of the two municipal utilities, reducing
the need for less-efficient budget financing of water services and public transport.
Financial sector
The global financial crisis has indirectly affected Moldovas financial system, mainly because the limited access of
domestic banks to international capital markets. The banking system therefore remains generally sound,
although some banks have suffered temporary liquidity shortages and relatively large deposit withdrawals or
conversions of local currency into foreign-denominated deposits.
Lending to the economy has fallen significantly, most of which is attributable to the reduction in local currency
loans for consumer lending, but small and medium-sized enterprises (SMEs) also report substantial difficulties in
obtaining bank credit, partly related to the impact of the global crisis on the real sector. The National Bank of
Moldova (NBM) has announced a programme of funding to Moldovan banks for to provide liquidity and support
lending to the real economy at affordable interest rates.
At present one of the primary tasks of the Government is to attract investments and create a favorable business
climate for all investors both foreign and local ones.

In this connection, all necessary measures are being taken to stimulate the business activity and improve the
investment climate focusing on geographical position of the country, skilled labor resources, fertile soils and
participation of the country in free trade zones of the CIS countries and the countries of South Eastern Europe.

The investment attractiveness of Moldova is also due to the fact that since June 2001 the country is a member of
WTO and of the Stability Pact. The Republic of Moldova signed the Partnership and Cooperation Agreement with
European Union (EU). The country has access on the markets through the General System of Preferences
(GSP+) with EU, Switzerland, Japan and others. Therefore, the EU has given the free access, without payment of
the customs duties, on their own home markets of 7200 groups of goods.

Recently adopted legislative acts (the Law on investments in entrepreneurship activity, the Law on microfinance
organizations, the Law on electronic document and digital signature, the Law on electronic trade, the Law on
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Leasing) and the new drafts of the laws in the field of economy have one single purpose to ensure a more
balanced and more predictable economic policy of the state and simplify the establishment and the operation of
the enterprises, as well as stimulate new investments.

Attractive for the investment projects in the sphere of industry are the free economic zones, providing a range of
tax and customs privileges and state warranties to their residents. At present, the volume of the investments,
attracted in free economic zones has toped 76 mln. USD.

In addition, attractive to invest is "Giurgiulesti" International Free Port, that is now being built.

The domestic tax legislation in force provides for a series of investment-related facilities concerning:
a) income tax;
b) value added tax (VAT);
c) excises, and
d) customs duties.
13, 14, 15- 16 carte


17. Internal sources of financing

The decision to financing represents the enterprises option for covering their needs or their necessities with
financing sources

Internal financing has several categories of sources:
- investors and his partners savings;
- part of companys undistributed profit,
- reserves, etc.
Internal funding is based on resources generated in the economy of the economic agent, namely: a
part of net profit intended to be invested for the investment, reserves formed after distribution of profits, money
from sales and disposal of fixed assets.
In enterprises that are already active, investments can be financed from the following 4 internal sources:
1. Net profit which follows to be reinvested. Net profit is formed from positive difference in income over
expenditures which are supported in entrepreneurial activities. For investment is usually distributed only a part of
net profit as it can be distributed for other destinations: shareholders dividends, bonuses for employees, etc.
2. Depreciation of fixed assets during the period the realization of investments. Depreciation is the
amount of money to be recovered from the income resulting from production and realization of rendering services,
in accordance with moral and physical wear of fixed assets. Depreciation serves as a way of gradual recovery in
the value of fixed assets input, by providing resources necessary funding replacement of fixed assets used, as
well as upgrading their.
3. Assets assigning is a occasional source of internal financing that occurs especially when enterprise
renews their fixed assets by selling the old. The feed value of the transfer of assets is subject to taxation. The
revenues of sale machines removed from service feeding development fund from which investment are financed.
4. Reserves consist of profit which the enterprise collects in order to its activities. Reserves form of profit
which remains to the company, this means the net profit left after the payment of dividends to shareholders. There
are more types: reserves stipulated by the legislation, reserves provided by statute, other reserves. These funds
are used for self financing the activity of the enterprise.
Self financing implies that the enterprise ensure the development with their own forces, call for the
following sources of financing: initial capital (if it is intended for fixed capital), part of the profits obtained in the
expired exercise (called forced savings) and the depreciation fund, covering both the needs of replacement and
development of fixed assets as well as increase circulating assets.
Managers option for self financing is influenced by various legal and financial market restrictions and
taxation.
Thus, relative to the legal constraints are countries where the legislative framework require enterprises a
minimum self financing and banks providing credit to only those companies that have own equity in a certain
amount. Opportunities for access to funds from the financial market are limited for unlisted companies in stock
market which are forced to call to self financing or to some sources attracted. Regarding taxation observes that a
big taxation increase the self financing because capitalization of profit reduces taxes owed to the state while fiscal
policies that increase the deductible base with expenditures of depreciation, reimbursement of credits or interest
payment will diminish the interest for self financing.
The weight of this resource depends on company policy to distribute dividends and forming of own
funds.
Financing only from internal sources has some advantages and disadvantages.
Advantages are:
- represents a sure way of covering the financial needs of the enterprise
- maintain financial independence and autonomy because dont create additional obligations (interests,
warranties)
15

- gives a greater degree of independence and control over the actions of the enterprise because the
company does not require someone to be justified
- funds invested do not need to be reimbursed
Disadvantages are:
- the limited financial resources
- lack of possibilities for extending the investment activity in a favorable conjuncture of investment market
- the restriction of entrepreneurs ability to develop business
- the possibility of losing some opportunities for investment due to insufficient financial resources at the
right time
- the entrepreneur will have to accept an increased level of personal risk









The main factors in taking the decision of financing are:
- profitability, if it is higher than the interest rate, then it is opportunely to call the loans, in this case
will increase profits and return on equity;
- solvency, the decision by financial indebtedness has a positive influence on the solvency, but in
case of loss it diminishes quickly;
- liquidity, financing through indebtedness has positive effect on liquidity, but it have to take into
consideration the fact that the borrowed resources are offered on a limited period.
Any investment in essence involves an important restraint capital to be purchased and provided at the
right time in order not to process too late the investment process.
Financing investments represents one of the most important stages of the investment process
materialized through the establishment sources of financing, the proportion of funding from its own sources and
loans, the combination of sources that minimizes the total cost of funding.
Financing investment is a significant step in the investment process following the decision of
investments; financing sources are included in investment budget and can be used to pay for achieving the
project. Investment funding mechanism involves actions regarding: determining the necessary funding,
establishing appropriate structure of the permanent capital, evaluate the cost of financing sources for medium and
long term.
Through a financing plan investments are put in a balance report the investment portfolio which consists
in investment projects which are to be done and resources that the investor has or can mobilize. It is essential if
the investor can mobilize the necessary resources from external funding or internal financing.
The main sources of financing investments available to economic agents can be classified according to
several criteria.
From the point of view of effort to obtain it, sources of funding can be grouped into two categories:
- financing from firms own sources (self financing by net income, depreciation, transfer of assets etc.).
- financing from attracted sources: equity
- financing from borrowed sources:
a. debenture loans
b. bank loans
c. leasing
d. loans from specialized financial institutions
e. growth of capital by incorporating reserves to capital through debt conversion.








16











18. External sources
External financing is an alternative for investors when capacity of self financing is below the investment
programs. Aims at the establishment by supplementing the budget required for financing the investment program
adopted. This is provided by banks, investment institutions, public sector bodies and as well as private. Select any
external sources of funding should have a serious arguments, the investor has to predict the consequences of
debt payment made and impact on the final results of its activity.
The main attracted sources are:
- shareholder capital subscription
- loans
- leasing
Subscribing shareholder equity is a form through which small savings of individuals and legal entities
are transformed into investments.
Increase capital by issuing shares is suitable for companies whose business is quoted in the stock market and
that can be anticipated an increase of quotations.
Creating of statutory capital by issuing shares at the present moment becomes one of the most
important leverage of external funding. Under the technical aspect can be achieved either through the issue of
new shares (simple or privileged) or by increasing the nominal value of existing shares. As shareholders and
potential resources can be invested in other projects or submitted to the bank, their mobilization is possible only in
conditions when the investment is quite attractive in financial terms. Because resources of potential shareholders
can be invested in other projects or can be deposited to the bank, their mobilization is possible only in conditions
when the investment project is quite attractive in financial terms.
Capital increases is a way of financing through own equity, with the objective of developing economic
activity and increase of profitability. When a firm takes such a decision it must first decide whether to try to raise
the capital from the firms existing stockholders or whether to seek new investors. Private companies usually raise
additional equity capital by increasing the nominal value of the existent stocks or selling new shares to exi sting
common stockholders. This generally satisfies these stockholders because they continue to exercise complete
control over the firm. However, when a large amount of equity capital must be raised, the existing stockholders
may to sell shares of the firms stock to the general public. A firm that sells its private shares of stock to the
general public goes public. The issuance of common stock to the public for the first time is known as an initial
public offering.
Raising the capital of an enterprise may be the result of several types of financial transactions and
namely:
- capital increase in cash,
- capital increase as a result of merger, acquisition, public exchange offer
- capital increase through debt conversion
- capital increase by incorporation of reserves
Increasing the capital by new contributions in cash is an operation of direct financing because brings for
the company new sources for financing in comparison with other growth of capital which only change the judicial
nature of liabilities. This operation is different from self financing because is based on own equity brought by
shareholders outside the company.
Financing from own equity seems to be cheaper because the costs directly related to achieving those
investments are lower. These costs include the amount paid to suppliers of goods and services necessary to
achieve the investment and series of charges and fees (which are found in other forms of financing). But besides
these costs in the case of financing from own equity it should be considered the implications of immobilization of
necessary sum for investment, reducing the liquidity of the company, a possibility to invest these sums in other
activities, may be with a higher rate of profit.
17

The conversion of securities in stocks represents the issuance and distributions of stocks to the
companys creditors. Convertible securities are bonds or preferred stocks that can be exchanged for common
stock at the option of holder, but it need also the creditors agreement too. Conversion does not bring in additional
capital debt (or preferred stock) is simply replaced by common stock. Of course, this reduction of debt or
preferred stock will strengthen the firms balance sheet and make it easier to raise additional capital. But also the
increase of stocks number can affect the companys position on the capital market, by diminishing stock
exchange rate of this, because it will be reduced the net profit per share.
The joint stock companies can own at a given moment cash for a long term, sums of money liberated as
a result of a favorable economic conjuncture. These sums can be placed in investment portfolio, in case if the
Council of Administration does not have investment projects for the respective enterprise. The company can
obtain investment revenues under the form of dividends, interest rate or exchange rate differentials. These
revenues can be used for the own investment financing in the moment when become actual the projects of
extension, modernization, renewal included in the long term strategy of the company.
Loans. Although it seems the most expensive source of financing investments, borrowing - in all its
forms is used in major proportions in this purpose.
There are several ways of lending for medium or long term, mobilized or non mobilized, participative, debenture,
etc.
Among these the most used are:
-call on public savings-debenture loans
-call on specialized financial institutions -bank loans, leasing
Debenture loans. Recourse to public savings is an alternative to attract financial resources necessary to
assure economic growth and observance of obligations assumed payment.
Access to debenture loans can be supported by strong companies individually or grouped through
association of several economic agents with the condition that each one of them guarantees the loans or through
several institutions or collective investment using attracted sources in the form of loans to enterprises with
financing needs.
Usually for most of the enterprises is insufficient capital and increase of it present difficulties. On the
other hand the call to finance bank loans proves to be difficult to achieve as a result of high cost and restrictive
conditions of the credit. In consequence companies are forced to resort to debenture loans, which present the
essential advantage that remuneration it is deducted from taxable profit, making it more accessibl e. Debenture
loans grouped are recommended when large enterprises have reduced financing needs and do not want to
consume their capital from the public trust.
Lending for investment as an operation with financial character integrates the long-term financing
because credit usually appears as a complementary resource for coverage of the investment projects. The
companies appeal to bank loans when own resources are insufficient in some activities with less profitability and
in other cases with prosperous activity they propose large scale projects.
Credit conditions are negotiated between the bank and the borrower: interest rate, term of
reimbursement, possible grace period, penalties for failure to contract terms etc. The level of interest of bank
loans is higher than that used by the specialized financial bodies.
Bank credits for a medium term, 2-7 years, are intended for the purchase of production equipment with
relatively short operation period, lightweight construction, expenditures for innovation, research and export
operations.
Mobilized medium-term credits are materialized in financial effects which may discount at the bank or
rediscount by commercial banks at the central bank. Such credits can provide a grace period of 1-2 years given to
the debtor. If the loan is granted for a period between 5-7 years are called medium-term extended credits.
The credits for the development of exports, mainly machinery and equipment or for the execution of
works are included in this category.
Non mobilized medium-term credits differ from mobilized credits because it has guarantee of a
specialized financial institution, and the duration of the credit can be stretched up to 7 years.
Short-term credits are granted by banks for a period up to 12 months for businesses registered in the
Trade Register that provides firm guarantees, have accounts in the bank and work profitable.
When offering and for the whole period of utilization debtors must guarantee credits with material values
and financial resources foreseen to achieve in the amount at least equal to the received credit. The existence of a
guarantee is insurance for the bank - that they could recover the amounts borrowed in case of non reimbursement
in term the credit.
Another category of credit in developing is the mortgage. It consists in providing loans by mortgaging of
assets acquired through loan. Mortgage is the warranty for transferring ownership rights in case of nonpayment of
obligations arising from the loan contract.
Mortgage loans are the main form of finance real estate industry. Duration is usually 20-30 years and
carries fixed interest. After the degree of protection (the proportion of loan and property value), can be
distinguished mortgage loans:
- guaranteed which have variable interest
- insured which have trimmed interest
- conventional which have renegotiable interest
The possibility of contracting loans is determined by the activity of enterprise, its effectiveness, and
experience working with banks in investment projects.
Due to the uncertainties which represents an investment, enterprises manifest caution in connection with
bank credits, looking to use it in proportion as less as possible.
18

Reimbursement schedule of credits and afferent interest rate have an important influence on the
efficiency of the investment project. This indicator may be increased in the case when can be find an optimal way
to organize the reimbursement of credits by a graph under the availability of cash.
International experience shows that the share of bank credits is 20-30% when are financed new projects
which means that about 70% of financial needs should be met from other sources such as the issue of securities.
Leasing is a form of rent made by specialized financial companies (leasing companies) of capital
equipment to companies that do not have own funds or are unable or unwilling to use bank credits to buy them
from producers.
From economic point of view engagements arising from leasing take part from debts in the medium term
or long term. The enterprise obtains the utilization at the beginning then became owner of the fixed assets in
exchange for regular payments.
Leasing is an operation which does not change the financial structure of the enterprise (indebtedness)
but only its engagement annual payments. Own equity remains legally neutral and this creates the possibility of
the company for some bank loans.
From advantages of leasing may be mentioned that can be obtained integral financing of an investment
in case of lack of own resources, the technology contracting is simpler than in the bank credit, rates paid by the
leasing contract are deductible making the income tax paid by the company to be less.
Leasing applies only to finance the production of goods, investments that allow direct and indirect
increasing of efficiency of the company. From any other type of credit-leasing involves financing of a determined
good for investment and a big part of the financial characteristics of the operation are determined by the nature of
the asset financed.
Duration of operation match the economic life of the asset-based spread that is the reimbursement
amounts due leasing company. This correlation is indispensable to maintain the effectiveness of safeguards
available to the leasing company, represented by ownership of the property financed. It is a guarantee that
depreciates with loan repayment which guarantees it, but it does not have to depreciate very fast.
Method of financing for the company, leasing is for a leasing company lending operation, similar with a
loan. Therefore, leasing is entitled appreciation of the operation of credit guaranteed by a property right, because
the leasing company hires only funds in operation and does not assume any economic risk outside insolvency of
an enterprise.
Venture capital is investing in companies whose shares are not listed at the stock exchange but are
distributed among shareholders. Venture capital funds offer companies a way of financing in order to develop
them, usually done by changing the capital on a considerable part of the package of shares in a proportion which
can vary between 20-49%, or a certain share from the capital of the company. Also, capital may be granted in
form of investment credit for a period of 3 up to 7 years, the interest rate does not establish, but constitutes
LIBOR 2-4%. In practice, it is most often used mixed form of venture investment through which a part of
financing is allocated to capital and shareholder, another in the form of investment credit.
The investment is usually for medium-term and involves through its nature a high level of risk. As a
holder of shares or a package of shares, the investor with venture capital will share the afferent risk of the
business. This type of funding is made after the distribution of risk between owners of capital. Taking into account
the high degree of risk the investor will manifest itself interest only in case when he will be convinced that there
are real chances of obtaining a high profitability of its investments. For comparison may be noted that
shareholders with a simple low-risk profit every year obtain profit in size by 10-15%, while in case of venture
investment this indicator may reach 80%. Thus, the principle of the higher is the risk the higher the expected
profit fits with the essence of venture capital.
Foreign investment designates an investment entity of the economy of a country, called the foreign
investor, what is done in an enterprise belonging to the economy of another country to obtain a profit.
Foreign investments may have the following forms:
- loans or external credits that which are offered for a specified time by private companies or by a country to
other country or other firms from another country and/ or are returned with interest due.
- direct investments that are materialized in the placement of capital for starting industrial, agricultural,
commercial, transport, etc enterprises in other countries providing property rights over them and the right to
collect profits.
- investment portfolio that is made by buying shares of companies from other countries.
Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical
investment into building a factory in another country. Its definition can be extended to include investments made
to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship
consists of a parent enterprise and a foreign affiliate which together form a multinational corporation. In order to
qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The International
Monetary Fund defines control in this case as owning 10% or more of the ordinary shares or voting power of an
incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio
investment



19











19. Methods of Investment financing
Metodele de finantare, spre deosebire de sursele de finantare, reprezinta mecanismul de mobilizare al surselor
financiare, precum si de monitoring al utilizarii si rambursarii acestora, cind e cazul surselor imprumutate. Sunt
cunoscute urm metode:
- autofinantare reprezinta o metoda raspindita de finantare a investitiilor si presupune ca intreprinderea isi
finanteaza proiectele investitionale din resurse proprii interne, care provin din excendentul de resurse financiare,
creat din activitatile intreprinderii. Astfel, autofinantarea se realizeaza din profitul net destinat reinvestirii, rezerve,
venituri din iesirea de imobilizari, sume obtinute din reevaluarea activelor pe termen lung, subventii pentru
investitii. Potentialul financiar se reflecta prin capacitatea de autofinantare CAF A CAF- Dividente

- finantarea prin mecanismele pietei de capital- cresterea capitalului are loc prin 2 metode: prin majorarea
valorii nominale a actiunilor existente sau emisiunea de obligatiuni noi

- finantarea prin mecanismele pietei creditului se integreaza in procesul de finantare pe termen lung si mediu,
fiind o modalitate complementara de acoperire financiara. Creditele trebuie sa fie acordate doar pentru proiectele
cu eficienta ridicata, pentru crearea de conditii optime de rambursare si dezvoltare. Creditele finanteaza in limita a
60% din necesarul total al proiectelor de investitii, de aceea inteprinderea contribuie cu surse proprii sau
imprumutate. Implica rambursari: la sfirsitul perioadei de creditare/ pe parcursul perioadei, prin rate constante/ pe
parcursul perioade, prin anuitati constante

- finantarea mixta

- alte metode de finantaare









20











21. Concept of the economic efficiency of investments

Eficienta economica reprezinta obtinerea unui rezultat dintre rationalizarea cheluielilor si
efectelor depuse
The efficiency can be computed as a relationship between effects value and the value of
made efforts and vice versa.
These two relations can be presented as:



The efficiency coefficient e help us to select a variant of a project investment from others taking as a
base the ratio effects/ efforts

The financial evaluation of the investment project generally has in view some objectives:
companys valuation in order to prove the capacity of the firm to make the project and to
payback the loans borrowed from the bank for investment set up;

insurance of comparison between competitive projects with the determination of their priority;

to analyse the costs of investment project. The forecasted costs are also taking into
consideration in order to find the total cost of the project.

estimation of the project value, thus to establish the return of the project by analysing some
economical and financial indicators : gross income, total spending, benefice-cost, discounted
cash flow, Net Present Value (NPV), Internal Rate of Return (IRR), breakeven point.

















minim
EFFECTS
EFFORTS
e = ' maxim
EFFORTS
EFFECTS
e =
21





















22. Traditional (static) methods for investment projects economic efficiency evaluation
There exist many methods of investment project financial evaluation that, generally, are classified
as:
Traditional methods (static);
Modern methods (dynamic).

A combination of the traditional and modern methods might be used for the evaluation of
short-run or middle-run investment project. But the dynamic analysis, based on rational modern
methods is recommended for the evaluation of important with large money amount projects.
Simple or accounting rate of return (ARR)
Method of estimating the Rate of Return from an investment using a straight-line approach (not
discounted or compounded).
The investment inflows are totaled and the investment costs subtracted to derive the profit. The
profit is divided by the number of years invested, then by the investment cost, to estimate an
annual rate of return
may be calculated according to the following methods:

ARR = Annual average net earnings after taxes X 100
Average investment over the life of the project

ARR = Annual average net earnings after taxes X 100
Original Investment
Average investment = (Initial investment-Salvage value)/2
Advantages of ARR method: considers the return over the entire economic life of the project.
the calculation is simple and straight-forward.

Disadvantages of ARR Method:
It does not take account of the timing of the profits from an investment. It implicitly assumes
stable cash receipts over time.
It is based on accounting profits and not cash flows. Accounting profits are subject to a
number of different accounting treatments.
It is a relative measure rather than an absolute measure and hence takes no account of the
size of the investment.
It takes no account of the length of the project.
it ignores the time value of money.
The payback period of the investment (PP)
The payback period represents the period during which the investment effort is recovered from
the annual net incomes.
PP can be computed:
ARR = Original Investment
Annual average net earnings after taxes X 100
22


Advantages:
it involves a quick, simple calculation and an easily understood concept.
There are two main problems with the payback period method:
1. It ignores any benefits that occur after the payback period and, therefore, does not measure
profitability.
2. It ignores the time value of money.
3. It is unable to distinguish between projects with the same payback period.
4. It may lead to excessive investment in short-term projects.











23. Dynamic methods of evaluating investments economic efficiency
1. Net present value (NPV);
2. Profitability index (PI);
3. Internal rate of return (IRR);
4. Discounted payback period (DPP);
5. Modified internal rate of return (MIRR).
The NPV method to evaluate a project is applied on several steps, in order to:
Determine the net investment required to initiate the project.
Select the discount rate.
Identify the costs/ benefits to be considered in analysis.
Establish the timing of the cost / benefits.
Calculate net present value of all cash flows.
Compare this investment with alternative investment opportunities and select that with the best net
present value.
The math relation for NVP will be:
In the case when the investments implementation period (d) is less 1 year, and the exploitation of
investments, equipment, services starts during the same year:



n = 1,2.De
where:
De exploitation period;
CF obtained cash flow;
r discount rate;
It value of total investments;
According to the NPV criterion, only those investment projects are to be accepted, that are
characterized by a NPV > 0.

=
+ =
e
D
n
t
n
n
I r CF NPV
1
) 1 (
23

From the economic and financial point of view a positive NPV means that:
the initial outlays are paid back and a surplus is obtained;
the project has a global capacity of the employed capital equal at least to the considered discount rate
(r);
the investment project generates high cash flows, ensuring the gain of a certain net value volume.
Disadvantages referring to this index:
NPV analysis is generally used to evaluate the projects cash flows rather than the income from the
project.
NPV determines whether the projects is profitable or not, but it doesnt reflect the comparative
importance of this project contribution.
NPV does not consider the payback period;
NPV badly depends on the discount rate value, thats why it must be settled in a proper way.
The Internal Rate of Return (IRR)
is the discount rate that makes the projects NPV = 0.
IRR rule is to accept a project if the IRR>cost of capital.
In general there is no form solution which is closer to IRR. One must find it iteratively.
The rule is that:
the acceptable difference between r min and r max shouldnt be higher than 5 points.
r min and r max are chosen in such a way to ensure a positive NPV for r min and a negative
NPV for r max ;
while r min and r max are determined by using the iteration method.
IRR acceptance criteria depends on the discount rate r:
accept if IRR > r, because Invt (cash outlays) are less than DCFt (returns) and NPV is positive;
reject if IRR < r; in this case Inv > DCFt and, respectively, NPV will be negative;
if IRR = r, the project is treated with no special interest because the cost of employed capital (Invt)
equates the income amounts (DCFt). So, NPV=0.
The profitability index (PI)
When resources are limited (capital is constrained or rationed) the profitability index (PI) provides
a tool for selecting among various project combinations and alternatives.
The highest weighted-average PI can indicate the right plan in these circumstances.
PI is expressed either as a percentage or a coefficient.

The following relation is used to calculate the profitability index as a coefficient.

An investment project will be accepted only if PI > 1. A project with the profitability index which will
generate a null NPV and the investor will treat this project with no interest.

Discounted payback period (DPP)
is defined as the number of years needed to recover the initial cash outlay from the discounted net
cash flows.
DPP gives equal weight to all cash flows even to those far in future, which is still short
sighted. Nevertheless, it is the easiest one to be computed.
The discounted payback period is determined, starting with the relation:
It' = Et' (T')
100 =
t
I
NPV
PI
t t
t
I
NPV
I
DCF
PI + = = 1
24

Modified internal rate of return (MIRR)
The modified internal rate of return is a return on the investment, assuming a particular return on the
reinvestment of cash flows.
Is similar to the IRR, but using a more realistic reinvestment assumption.
A way to think about the modified return is to consider breaking down the return into its two
components:
1. the return you get if there is no reinvestment, and
2. the return from reinvestment of the cash inflows.





24 The concept of the cost of capital and its importance in investment decision
The long-term investments made today will determine the value of the business tomorrow.
In order to make long-term investments in new product lines, new equipment and other assets,
managers must know the cost of obtaining funds to acquire these assets. The cost associated with
different sources of funds is called the cost of capital. Cost of Capital represents the rate a business
must pay for each source of funds - debt, preferred stock, common stock, and retained earnings. This
is from the firms point of view; where the cost of capital is what the firm must pay for the funds
needed to finance an Investment.
Also, the cost of capital represents the return that must be provided for the use of an
investors funds. If funds are borrowed, the cost is related to the interest that must be paid on the
loan. If the funds are equity, the cost is the return that investors expect, both from the stocks price
appreciation and dividends. So, from the investors point of view, the cost of capital is the same as
the required rate of return.
The cost of capital may be an explicit cost (for ex., the interest paid on debt) or an implicit
cost (for ex., the expected price appreciation of shares of the firms common stock).
The cost of capital is a critical element in investment decision. It acts as a major link between
the firms investment decision and the wealth of the owners as determined by investors. It is the
number used to decide whether a proposed investment will increase or decrease the firms stock
price. Only those projects expected to increase stock price would be accepted. The cost of capital is
the minimum rate of return that a project must yield in order to be accepted by a company. This
minimum rate of return is sometimes called the discount rate or the required rate of return.

The required rate of return is determined by the opportunity cost, which is the return which
could have been received on an investment with similar risk. In other words, the cost of capital
represents the investors' opportunity cost of taking on the risk of putting money into a company.


n
n
i
n
n
i
i
MIRR
r CIF
r
COFi
) 1 (
) 1 (
) 1 (
0
1
0
+
+
=
+

=
25









25 The opportunity cost of capital
The opportunity cost of capital is a term used to describe the forgone opportunity of using
cash. It depends on whether the cash has another use and whether it is replaceable. Cash always has
another use. If no other investments are available, it can be used to retire debt or pay dividends to
the owners. Therefore the opportunity cost of capital is the replacement cost of cash or the cost of
borrowing that is the interest payment or cost of issuing shares that is the expected return to
shareholders. It also represents the return that could have been received on an investment with
similar risk. The opportunity Cc is described in terms of percentage return or interest rate.
When we refer to the cost of capital for a firm, we are usually referring to the cost of
financing its assets. In other words, we mean the cost of capital for all the firms projects taken
together and, hence, the cost of capital for the average project risk of the firm.
When we refer to the cost of capital of a project, we are referring to the cost of capital that
reflects the risk of that project. So, determining the cost of capital for the firm as a whole it is
essential for two reasons.
First, the cost of capital for the firm is often used as a starting point for determining the cost
of capital for a specific project. The firms cost of capital is adjusted upward or downward depending
on whether the projects risk is more or less than the firms typical project.
Second, many of firms projects have risk similar to the risk of the firm as a whole. So the cost
of the capital of the firm is a reasonable approximation for the cost of capital of one of its projects
that are under consideration for investment.
A firms cost of capital is the cost of its long-term sources of funds: debt, preferred stock, and
common stock. And the cost of each source reflects the risk of the assets the firm invests in. A firm
that invests in assets having little risk will be able to bear lower costs of capital than a firm that
invests in assets having a high risk. Moreover, the cost of each source of funds reflects the hierarchy
(pecking order) of the risk associated with the seniority over the other sources.
The specific pecking order (in increasing order of their cost) is as follows:
1. Internal sources of capital income before taxes, depreciation
2. External sources of capital debt (credits, bonds, treasury securities)
3. Internal sources of capital- retained earnings
26

4. External sources of capital - preferred stock
5. External sources of capital - common stock
This hierarchy is determined by the risk of each source of capital, the priority in taking
promised interests and the size of required return.
The proportions of each source must be determined before calculating the cost of each
source since the proportions may affect the costs of the sources of capital.




26.The Weighted Average Cost of Capital. The marginal cost of capital and investment decisions

The weighted average cost of capital (WACC) is the average of the costs of these sources of
financing, each of which is weighted by its respective use in the given situation. By taking a weighted
average, it can be seen how much interest the company has to pay for every monetary unit it
finances.
WACC is normally used as the firm's cost of capital for a number of reasons. First, if a single
component cost is used as a criterion for acceptance, projects with a low rate of return may be
accepted while projects with a high rate of return may be rejected. Some low-return projects would
be accepted because they could be financed with a cheaper source of capital, such as debt. Some
high-return projects would be rejected because they have to be financed with an expensive source of
capital, such as equity. Second, if a firm accepts projects that yield more than its WACC, it can
increase the market value of its common stock. In this situation, the market value of the common
stock increases because these projects are expected to earn more on their equity-financed portion
than the cost of equity.
Investors use WACC as a tool to decide whether or not to invest. The WACC represents the
minimum rate of return at which a company produces value for its investors.
Let's say a company produces a return of 20% and has a WACC of 11%. That means that for
every dollar the company invests into capital, the company is creating nine cents of value. By
contrast, if the company's return is less than WACC, the company is shedding value, which indicates
that investors should put their money elsewhere.
All capital sources - common stock, preferred stock, bonds and any other long-term debt -
are included in a WACC calculation in which each category of capital is proportionately weighted.
Also, each of capital components has a cost.
WACC is calculated by multiplying the cost of each capital component by its proportional
weight and then summing: WACC = Wd Kd+ Wps Kps+ Wcs Kcs

Or WACC =
=
m
1 i
i iK W
, where W is the share of each source i in total capital
K is the component cost of each source i.


Example 6.
27

Suppose that Cantor Company has a target capital structure calling for 30% debt, 10%
preferred stock, and 60% common equity with respective costs.
Capital Component Cost % of capital structure Total
Common Equity 14.5% 60% 8.70%
Preferred Stocks 10.3% 10% 1.03%
Bonds 6.6% 30% 1.98%
TOTAL 11.71%

So the WACC of this company is 11.71 %
By taking a weighted average, we can see how much interest the company has to pay for every dollar
it borrows.
The WACC is the weighted average cost of each new, or marginal, money unit of capital. The cost of
the new money that will be invested is the relevant cost. On average, each of these new dollars will
consist of some debt, some preferred, and some common equity.
The appropriate cost of capital. The inflation-adjusted discount rate may have to be used as an
appropriate cost of capital if the analyst wishes to reflect inflation for projects. However, inflation
tends to be built into the cost of debt and equity for a company because the WACC reflects such
anticipated price changes. When lenders and equity holders anticipate price increases, they will
demand a rate of return higher than in ordinary cases so that the WACC reflects inflation. Thus, the
company should not add an increase to the discount rate derived from the cost of capital in order to
adjust for inflation.
The cost of capital is a marginal cost the cost of an additional money unit of new capital at a
given level of financing. When companies raise funds for new investment projects and in determining
the optimal amount to spend on investments, they are concerned with the marginal cost of new
funds. Investment in a project is allowed until the marginal cost of funds to invest is equal to the
marginal benefit the project provides. The benefit of an investment is its return; which refers to as its
internal rate of return.























28

















27. The cost of each capital components
Most firms employ several types of capital, called capital components, which have one feature in
common: The investors who provided the funds expect to receive a return on their investment. The required rate
of return of each capital component is called its component cost, and the cost of capital used to analyze
investment decisions should be a weighted average of the various components costs.
Cost of Retained Earnings (Ke) After paying off creditors and preferred shareholders, the remained
funds are owned by the common shareholders. The firm may either retain these funds (investing in assets) or pay
them out to the shareholders in the form of cash dividends.
If some earnings are retained, then the stock holders will acquire an opportunity cost. Thus, the firm should earn
on its reinvested earnings at least as much as its stockholders themselves could earn on alternative investments
of equivalent risk.
The cost of retained earnings within a capital structure is similar to the cost of common stock. Generally, the cost
of retained earnings is slightly less than the cost of common stock since no issuance cost is incurred.
Cost of Common Stock (Kcs): The cost of issuing common stocks is more difficult to estimate because of
the nature of the cash flow streams to common shareholders. They receive their return in the form of dividends
and the change in price of the share they own and these streams of payments are difficult to determinate and to
estimate.
There are three methods commonly used to estimate the cost of common stock.
1. Dividend Valuation Model. This model states that the required rate of return on equity is the discount
rate that equates the present value of all expected future dividends per share with the current net price per share.
kcs =
f) - (1 P
D
t
1 t

+

Dividends paid to common shareholders along with the overall expected growth rate is used to calculate
a cost for the common stock. The formula for calculating the cost of common stock is: (Dividends expected on
the stock / Current Price of the Stock) + Overall Growth Rate or
k
cs
=
0
1
P
D
+ g,

This is called dividend growth model or Gordon-Shapiro model.
Example 1- Calculate the Cost of Common Stock based on Dividend Growth Model
Cantor Corporation expects to pay a $6.00 dividend this year to common shareholders. Historically, dividends
have grown by 2% each year. Cantor's common stock is currently selling for $45.00 per share.
Cost of Common Stock = ($6.00 / $45.00) + 0.02 = 15.3%.
29

2. An alternative approach to the dividend valuation model for the cost of capital is the Capital Asset
Pricing Model (CAPM). This is the most commonly accepted method for calculating cost of equity. The CAPM
specifies the expected return on an asset in terms of the expected return on the risk free asset plus a premium for
market risk.
If a market is in equilibrium, the expected rate of return on an individual security (j) is stated:
kcs = Rf + (Rm Rf) * j
where kcs - the cost of common stock or the expected rate of return on security j;
Rf - riskless rate of interest;
Rm - expected rate of return on the market, (such as the Standard & Poor's 500 Composite Index)
j - is the beta coefficient which expresses the risk of the common stock j in relation to the market.
+ Rf Risk-free rate - This is the amount obtained from investing in securities considered free from credit
risk, such as government bonds from developed countries. The interest rate of U.S. Treasury Bills is
frequently used as a proxy for the risk-free rate.
+ Beta - This measures how much a company's share price reacts against the market as a whole. A
beta of one, for instance, indicates that the company moves in line with the market. If the beta is in excess
of one, the share is exaggerating the market's movements; less than one means the share is more stable.
Occasionally, a company may have a negative beta (e.g. a gold-mining company), which means the share
price moves in the opposite direction to the broader market. For public companies, you can find database
services that publish betas of companies.
+ (Rm Rf) = Equity Market Risk Premium - The equity market risk premium (EMRP) represents the
returns investors expect to compensate them for taking extra risk by investing in the stock market over and
above the risk-free rate. In other words, it is the difference between the risk-free rate and the market rate.
Once the cost of equity is calculated, adjustments can be made to take account of risk factors specific to the
company, which may increase or decrease company's risk profile of the company. Such factors include the size of
the company, pending lawsuits, concentration of customer base and dependence on key employees. Adjustments
are entirely a matter of investor judgment and they vary from company to company.
Example 2 - Calculate the Cost of Common Stock based on CAPM
Cantor Corporation has common stock with a listed beta of 1.35. The estimated market return is 12% and the risk
free rate based on Treasury Bonds is 6.5%.

Kcs = 6.5% + 1.35 (12% - 6.5% ) = 13.9%
3. Bond Yield Plus Model - A simple approach to calculating the cost of common stock is to add a risk premium
to the cost of debt. The formula is Kcs = Kd + risk premium. The risk premium is the additional rate that must be
paid to common shareholders above what is paid to bond holders. It consists of 3 to 5 points to the interest rate of
the firms own long-tern debt.
Example 3 - Calculate the Cost of Common Stock based on Bond Plus
Referring back to Example 1 we calculated a cost of debt of 6.5%. We have estimated a market risk
premium on common stock of 4%.
Kcs = 6.5% + 4.0% = 10.5%

Cost of Preferred Stock (Kps) - If the capital structure includes preferred stock, the cost of preferred stock is
calculated by the amount of dividends in relation to the market price of the preferred stock. The formula is Kps =
Dividends of ps/ Net issuing Price of ps.
Example 4 - Calculate the Cost of Preferred Stock
Assume we have preferred stock selling for $100 per share and dividends per share are $10. The cost of
preferred stock is:
Cps = $10 / $100 = 10%
If it would imply flotation cost of $ 2.50 per share (net $ 97.50), the cost of ps is 10.3%.
Cps = $10 / $97.5 = 10, 3%
30

The company can raise common equity in 2 ways: by issuing new shares and by retaining earnings.
There are costs associated with both internally and externally generated capital.
Cost of Debt (Kd). The explicit cost of debt for a firm may be defined as the discount rate that equates the net
proceeds of the debt issue with the present value of interest and principal payments. The rate applied to
determine the cost of debt (Kd) should be the current market rate the company is paying on its debt.
As companies benefit from the tax deductions available on interest paid, the net cost of the debt is
actually the interest paid less the tax savings resulting from the tax-deductible interest payment. Calculate the
after tax cost of debt based on the effective interest rate. Therefore, the after-tax cost of debt is Kd = I (1 -T), I -
interest rate, T - corporate tax rate.
Example 5 - Calculate the Cost of Debt
Cantor Corporation borrowed $100,000 at an interest rate of 10%. The tax rate is 35%.
Cost of Debt = 10% x (1 - 0.35) = 10% x 0.65 = 6.5%.
If it would imply flotation cost, then Kd = I (1 - T)/ (1-f),

28 the optimum capital structure for investment decisions
The point where marginal cost of investment funds equals marginal benefit from investment
(at this point total profit is maximized), results in the optimal capital budget. The optimum capital
budget is defined as the amount of investment that maximizes the value of the company.
Every company has a capital structure - a general understanding of what percentage of debt
comes from common stocks, preferred stocks, and bonds. Companies should always expand their
capital budget by raising funds in the same proportion as their optimum capital structure. The
optimum capital structure is defined as the combination of debt and equity that yields the lowest
cost of capital. In this situation, the amount of capital to be obtained is fixed, but the debt ratio is
changed to determine the optimum capital structure.
The company's optimum capital structure simultaneously (a) minimizes the company's
WACC, (b) maximizes the value of the company, and (c) maximizes the company's share price. When
making financial decisions, firms could first analyze a number of factors, and then establish a target capital
structure. The target may change over time as conditions change, but at any given moment, management
should have a specific capital structure in mind. If the actual debt ratio is below the target level, expansion
capital should generally be raised by issuing debt, whereas if the debt ratio is above the target, equity should
generally be issued.
However, as their capital budget expands in absolute terms, their marginal cost of capital
(MCC) will eventually increase. This means that companies can tap only the capital market for some
limited amount in the short run before their MCC rises, even though the same optimum capital
structure is maintained.
31

Managers should choose the capital structure that maximizes the firms stock price, and this
generally calls for a debt ratio that is lower than the one that maximizes expected earnings per share.
The maximum value occurs with the capital structure that minimizes WACC, assuming the capital
structure doesnt change the free cash flows. Because it is usually easier to predict how a capital
structure change will affect the WACC than the stock price, many managers use the predicted
changes in the WACC to guide their capital structure decisions. It is necessary to mention that the
component cost of equity is always higher than that of debt, using only low-cost debt would not
maximize value because of the feedback effects on the cost of debt and equity. Finally recall that the
capital structure that minimizes the WACC is also the structure that maximizes the firms stock price.

29 Identifying the relevant cash flows of an investment project
When we refer to capital investment, we are referring to the firms investment in its assets.
Managers must evaluate a number of factors in making investment decisions. Not only to estimate
how much the firms future cash flows will change if it invests in a project, but also must evaluate the
uncertainty associated with these future cash flows.
The first step in investment analysis process is to identify the relevant cash flows, defined as
the specific set of cash flows that should be considered in the decision. The relevant cash flow for a
project is the additional free cash flow that the company can expect if it implements the project. The
value of a project depends on its free CFs.
First, it is necessary to understand better the origin of these future cash flows. They come from:
assets that are already in place, which are the assets accumulated as a result of all past investment
decisions, and
future investment opportunities.
The projects cash flows are the investment outlays and the annual net cash inflows after an
investment project does into operation. Some of these cash flows are estimated in the initiation
phase, others in the exploitation phase and others after the exploitation, in the liquidation step of
the investment.
In evaluating a project, it is necessary to focus on those cash flows that occur if and only if the
investment project is accepted. These cash flows, called incremental cash flows, represent the change
in the firm's total cash flow that occurs as a direct result of accepting the project. This fact supposes
the differentiation in the analysis process between the investment project and the company that
realizes these investments.
A potential project creates value for the firm's shareholders if and only if the net present
value of the incremental cash flows from the project is positive. In practice, however, estimating
these cash flows can be difficult.
Incremental cash flows are affected by whether the project is an expansion project or a
replacement project. A new expansion project is defined as one where the firm invests in new assets
to increase sales. Here the incremental cash flows are simply the project's cash inflows and outflows.
In effect, the company is comparing what its value would be with and without the proposed project.
32

By contrast, a replacement project occurs when the firm replaces an existing asset with a new one. In
this case, the incremental cash flows are the firm's additional inflows and outflows that result from
investing in the new project. In a replacement analysis, the company is comparing its value if it takes
on the new project to its value if it continues to use the existing asset.






30 Financial elements of an investment
Efortul i efectul unei investiii pot fi surprinse prin urmtoarele elemente financiare ce caracterizeaz o
investiie:
1. Cheltuielile iniiale cu investiia
2. Cash-flow-urile generate de proiectul de investiii
3. Durata de exploatare
4. Valoarea reziduala
5. Rata de actualizare
1. Cheltuielile initiale cu investitia reprezinta marimea net a capitalului necesar pentru nceperea exploatrii
investiiei
Elementele componente ale sumei iniiale de investiii sunt:
cost de cumprare al activelor fixe, fizice sau financiare (maini, instalaii, licene) = preul de
cumprare, in funcie de care se stabilete schema de amortizare;
cheltuieli de instalare-montaj a echipamentelor i instalaiilor noi;
cheltuieli de specializare a personalului n exploatarea noii tehnologii;
creterea nevoii de fond de rulment, respectiv creterea stocurilor i a creanelor-clieni minus
creterea datoriilor de exploatare, determinate de noua capacitate de producie;
preul de vnzare (corectat cu impozitele suplimentare) aferent activelor dezinvestite sau nlocuite prin
noua investiie, inclusiv plus sau minus valoarea rezultat din aceast cesiune.

2. Cash-flow-urile generate de investitie. n aprecierea performantelor privind investiia realizat se analizeaz
fluxurile marginale (suplimentare) generate de investiie.
3. Durata de exploatare a investitiei - este la rndul ei, o noiune cu semnificaii diverse rezultate din diferite
unghiuri de interes pentru acest element financiar.
n primul rnd, se face referire la durata fiscal, contabil, adic durata normat de serviciu a
mijloacelor fixe in care activul se amortizeaz integral.
n al doilea rnd, se face referin la durata tehnic de funcionare a mijloacelor fixe rezultate din
investiii, durata determinat de caracteristicile tehnice funcionale, specifice fiecrui mijloc fix. Sunt situaii n care
durata contabil este mai mare dect cea tehnic, n condiii deosebite de utilizare intensiv (n dou schimburi,
cu viteze sporite, etc.) sau n condiii deosebite de exploatare (mediu umed, temperaturi ridicate, etc.). Sunt, ns,
i situaii n care, dimpotriv, durata tehnic este mai mare dect cea contabil, ca urmare a unei expl oatri i
ntreinerii atente a mijlocului fix respectiv.
n al treilea rnd, rezultatul unei investiii prezint interes numai pe durata comercial, determinat de
durata de via a produselor fabricate cu respectiva investiie.
n sfrit, investitorii pot fi interesai numai de durata juridic a investiiei, respectiv durata proteciei
juridice asupra dreptului de concesiune a unei exploatri, asupra unui brevet, licen, mrci, etc.
Evaluarea eficienei investiiei va ine cont de durata de via care intereseaz cel mai mult gestiunea
financiar a ntreprinderii. Peste aceast durat obiectivul de investiii va genera cheltuieli i deprecieri mai mari
dect veniturile realizate.

33

4. Valoarea rezidual valoarea posibil de recuperat in momentul dezinvestirii (la sfritul ultimului an de
exploatare)
prin vnzarea investiiei sau prin vnzarea componentelor acesteia si
prin recuperarea investiiilor suplimentare n capitalul de lucru.
Astfel ea este determinat de valoarea de pia la care se poate vinde investiia (sau valoarea pieselor de
schimb) i de alte elemente cu caracter rezidual (de exemplu, valoarea activelor circulante nete a cror valoare
se va recupera).
Pentru cazul n care prognoza nu se realizeaz pentru ntreaga durat de via a utilajului, valoarea
rezidual va reprezenta efectiv valoarea de pia estimat pentru momentul n. n aceste condiii, pentru un
echipament aceast valoare va fi determinat prin scderea din valoarea iniial a uzurii.
Impactul valorii reziduale asupra VAN este cu att mai mare cu ct mrimea estimat a valorii reziduale este mai
mare i cu ct momentul dezinvestirii este mai aproape de momentul investirii.

5. Rata de actualizare este considerat un element financiar al investitiei deoarece trebuie sa tinem cont de
valoarea banilor in timp: 1 leu astazi reprezinta mai mult decat 1 leu maine.

Rata de actualizare exist trei tehnici de determinare a ratei de actualizare a proiectelor de investiii,
care au n vedere factori diferii:
costul de oportunitate;
rata fr risc i o serie de prime de risc;
costul mediu ponderat al capitalului.
Rata de actualizare cost de oportunitate.
Acest cost de oportunitate este deci, costul de finanare al investiiei din capitaluri proprii i va fi apreciat ca o rat
de rentabilitate cerut de investitori. De cele mai multe ori, persoanele fr o pregtire n domeniul financiar i
fac judecile de valoare pentru proiectele de investiii n funcie de alte oportuniti de pe pia, comparnd
rentabilitatea pe care orice investiie o ofer (ipotetic) cu alte posibiliti de remunerare.
Spre exemplu, pot fi utilizate drept rate de actualizare:
rata inflaiei,
rata rentabilitii fr risc,
rata dobnzii la depozite,
rata de rentabilitate a sectorului de activitate,
rata de rentabilitate medie din economie etc.

Rata de actualizare rata fara risc plus prima de risc
Rata de actualizare calculat ca o sum ntre o rat fr risc i o prim de risc constituie un rspuns oferit de
teoria i practica financiar la dezavantajul major al ratelor din categoria costurilor de oportunitate.
Acest tip de rat de actualizare se calculeaz pe baza relaiei:
( ) risc de ima baza de Rata e actualizar de Rata Pr 1+ =

Rata de baz exprim randamentul ateptat de investitor ca rezultat al unui arbitraj pe care acesta l
efectueaz n raport cu alte plasamente financiare sau bursiere. n general rata neutr se stabilete pornind de la
dobnda pieei care are un caracter obiectiv fa de agentul economic. Mrimea ratei de baz, corespunztoare
unor plasamente fr riscuri, este selectat n raport cu mai multe baze de referine, cum ar fi:
1) rata medie de emisiune a obligaiunilor din sectorul public, considerndu-se c statul este solvabil
i-i respect obligaia de plat a dobnzilor datorate;
2) rata de refinanare a Bncii Naionale;
3) rata dobnzilor practicate de bnci, pentru depunerile n conturile curente, fie o medie a acestora,
fie limita lor maxim;
4) randamentul atins de plasamentele financiare fr risc pe piaa bursier;
5) rata medie de rentabilitate pe economie considerat normal;
6) rata profitului net al investiiilor, n domeniul afacerilor imobiliare;
34

7) costul capitalului investit.
Prima de risc este determinat subiectiv, alegerea diferiilor factori de risc, precum i a importanei
acestora fiind la latitudinea analistului.
Prima de risc este determinat prin nsumarea unui anumit numr de prime pariale, cuantificnd impactul
anumitor factori de risc asupra proiectului de investiii adoptat.
Astfel de prime de risc pot fi:
apariia unui concurent puternic n sectorul de activitate sau n zona n care firma i desfoar activitatea,
modificarea structurii cererii solvabile,
eventuale incidente ce pot afecta imaginea firmei,
posibilitatea scderii nivelului de trai al populaiei,
creterea preurilor la materii prime, materiale, mrfuri,
pierderea unei persoane cheie etc.
Riscul luat n calculul ratei de actualizare evideniaz randamentul suplimentar pretins de acionari, ale
crui cauze i au originea, pe de o parte, n nesigurana realizrii ntregii activiti industriale i comerciale
comparativ cu un plasament financiar fr risc, iar pe de alt parte, n incertitudinea legat de punctele tari i
slabe ale ntreprinderii. Estimarea riscului este o operaiune delicat.
Rata de actualizare cost mediu ponderat al capitalului
Ideea de baz a utilizrii acestei metode este dat de faptul c fiecare furnizor de capitaluri utilizate n finanarea
proiectelor de investiii solicit o anumit rentabilitate, ce se constituie ca un cost pentru firm.


31 The time value of money
To value an investment it is necessary to determine how much this package of cash flows is worth today.
This process employs a fundamental finance principle the time value of money.
To calculate the future value of a single amount we must first understand how money grows over the time. Once
money is invested it earns an interest rate that compensates for the time value of money and for default risk,
inflation and other factors. Often the interest earned on investment is the compound interest, which is interest
earned on interest and on the original principal. In contrast, simple interest is interest earned only on the original
principal.
The idea that money available at the present time is worth more than the same amount in the future is
due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest
and any amount of money is worth more the sooner it is received. The time value of money is based on the
premise that one will prefer to receive a certain amount of money today than the same amount in the future,
because Money received today is more valuable than money received in the future by the amount of interest we
can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to
be received one year from now is $90.
Also, investment decisions should consider the opportunity cost of capital. It gives money the time value.
An investor receiving money in the future will want to be compensated for sacrificing the opportunity to use that
money for current purchases or for making investments that provide a return. Opportunity costs are always
present because there are always alternative uses for money.
The time value of money establishes a relationship between cash flows received at different times. Time
value means that cash on hand is worth more than cash in the future because of the opportunity to earn a return.
Financial managers adjust for the time value of money by calculating the future value and the present value.
Formulas for the present value and future value of money quantify this time value, so that different investments
can be compared. Future value and present value are mirror image of each other. Future value is the value of
starting amount at a future point in time, which represent the initial amount plus interest that is earned during the
interim period. Present value is the value of a future amount today assuming a specific required interest rate for a
number of years until that future amount is realized.
Money that are paid or received at two different points in time is different, and this difference is
recognized and accounted for by the time value of money analysis. This includes compounding and discounting.
To calculate the Future value (FV) and Present value (PV) of a single amount there can be used algebraic, table
or calculator methods.

Compounding is the process of determining the FV of a single amount, a cash flow or a series of cash flows.
Future value can be computed by the following formula:
FV = PV (1+r)
n
= PV(FVIF r,n), where
r required rate of return of investor (interest rate) per period;
n number of time periods
PV present value of a single amount or the cash flow and
FVIF future value interest factor (which can be found in financial tables).

The (r+1)
n
component of equation, called compounding factor, is the value time component because it
compounds the rate of interest.
So, Future Value is value in the future of a present cash flow compounded at a specified interest rate.
35

Discounting is the process of finding the present value of a future a single amount, a cash flow or a series of
cash flows. Present value is a todays money value of a specific future amount. With an investment in new plant
or equipment certain cash receipts are expected. When the present value of a future promised or expected cash
payment is calculated, it is discounted because it is worth less if it to be received later.
In present value analysis the interest rate used in this process is known as discount rate. The PV formula is:
PV = FV
n
r) (1
1
+
= FV PVIF i,n, , where
r discount rate per period;
n number of time periods, and
PVIF present value interest factor (which can be found in financial tables).
The discount factor,
n
r) (1
1
+
, is the number by which a future cash flow to be received at time n must be
multiplied in order to obtain the current present value.
Discounting is the inverse to compounding. Compound factor causes the value of beginning amount to
increase at an increasing rate, because it is always grater than 1 and discounting causes the present value of a
future amount to decrease at an increasing rate because the discount factor is always less than 1.
Ex: $1000 compounded for 1 year at 4 % interest rate: FV1= 1000(1+0.04)
1
=1040
$1000 discounted back for 2 years at 4 % interest rate: PV2= 1000(1/ 1+0.04)
2
=924, 60

In cases when the discount rate differs from year to year, the discount factor is calculated as follows:
) r (1 ... ) r (1
1
t 1 + +

Compounding more than once per year
An investment's annual rate of interest is necessary when compounding occurs more often than once a year. In
this case raises the effective annual interest rate. It is calculated as the following:
re= (1+
m
rnom
)
m
-1
rnom nominal interest rate;
m number of compounding periods per year;
Ex. Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100. However, if
compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year, rendering an effective
annual interest rate of 10.47%. 10 % is the nominal rate.

In all formulas that compute either the present value or future value of money or annuities, there is an interest rate
that is compounded at certain intervals of time. This interval of time is assumed to be 1 year, but, if it is less than
1 year, as it frequently is, then there are 2 adjustments that must be made to the formulas:
1. The number of time periods must be changed to represent the number of times that interest is
compounded. The number of years must be multiplied by the number of compounding periods within a year.
Thus, Periods = Years Periods per year.
2. The interest rate itself must be changed to reflect the interest rate per time period. The annual
interest rate must be divided by the number of compoundings in a year. Thus,
i per = Annual rate / Periods per year.
Note also that most of the solutions to these formulas are rounded.
In this case the previous formula for computing FV and PV become the following:
FV = PV(1+
m
rnom
)
mn
,
PV = FV
mn
nom
)
m
r
+ (1
1
, where
rnom nominal interest rate;
m number of compounding periods per year;
n number of years.



36












32 The discount rate and its establishment for investment analysis

During the investment process the cash flows are delivered across the time with varying degrees of
uncertainty. That why future cash flows are discounted at a rate that represents investors assessments of the
uncertainty that these cash flows will flow in the amounts and the timeframe expected.
The discount rate is defined as the expected rate of return that the market requires in order to
attract funds to a particular investment. It reflects the lost opportunity to spend or invest now
(opportunity cost) and the various risks assumed because we must wait for the funds.
The appropriate discount rate for valuing any asset is the yield that could be earned on alternative
investments with similar risk and maturity.
So, as a discount rate is used the RRR determine as: RRR=Emin+ I+r, where
Emin minimal rate of return, considered USA government bonds of 4-5% annual income,
I - inflation rate,
r investment risk rate.
Thus, as a discount rate, which determines the time value of money, depending on the situation can
participate the following: interest rate on bank deposits, interest rate of creditor, interest rate on financial market,
return on firms assets, WACC, average rate of return of industry.
The discount rate selected for the financial analysis is critical to accurate valuation. On the level of
discount rate depends the amount of the present value of cash flows, thus this, in fact, represents the cost of the
done business. So, the discount rate serves as a criterion used to select profitable investment proposals and to
reject those unprofitable.

When we refer to capital investment, we are referring to the firms investment in its assets. Managers
must evaluate a number of factors in making investment decisions. Not only to estimate how much the firms
future cash flows will change if it invests in a project, but also must evaluate the uncertainty associated with these
future cash flows.
The first step in investment analysis process is to identify the relevant cash flows, defined as the specific
set of cash flows that should be considered in the decision. The relevant cash flow for a project is the additional
free cash flow that the company can expect if it implements the project. The value of a project depends on its free
CFs.
First, it is necessary to understand better the origin of these future cash flows. They come from:
assets that are already in place, which are the assets accumulated as a result of all past investment decisions,
and
future investment opportunities.
The projects cash flows are the investment outlays and the annual net cash inflows after an investment
project does into operation. Some of these cash flows are estimated in the initiation phase, others in the
exploitation phase and others after the exploitation, in the liquidation step of the investment.
In evaluating a project, it is necessary to focus on those cash flows that occur if and only if the investment project is
accepted. These cash flows, called incremental cash flows, represent the change in the firm's total cash flow that
occurs as a direct result of accepting the project. This fact supposes the differentiation in the analysis process
between the investment project and the company that realizes these investments.
A potential project creates value for the firm's shareholders if and only if the net present value of the
incremental cash flows from the project is positive. In practice, however, estimating these cash flows can be
difficult.
37

Incremental cash flows are affected by whether the project is an expansion project or a replacement
project. A new expansion project is defined as one where the firm invests in new assets to increase sales. Here
the incremental cash flows are simply the project's cash inflows and outflows. In effect, the company is comparing
what its value would be with and without the proposed project. By contrast, a replacement project occurs when
the firm replaces an existing asset with a new one. In this case, the incremental cash flows are the firm's additional
inflows and outflows that result from investing in the new project. In a replacement analysis, the company is
comparing its value if it takes on the new project to its value if it continues to use the existing asset.








33 Annuities: definition, types and working with annuities

The present value and future value of an investment is a lump sum payment. A series of equal lump sum
payments over equal periods of time is called an annuity. Like the present value and future value of a single
amount, the present value and future value of an annuity allows comparing investments. Understanding annuities
is crucial for understanding investments that require or yield periodic payments.
An annuity is a series of equal payments in equal time periods. Usually, the time period is 1 year, which is why it
is called an annuity, but the time period can be shorter, or even longer. These equal payments are called the
periodic rent. The amount of the annuity is the sum of all payments.
An annuity due is an annuity where the payments are made at the beginning of each time period; for an ordinary
annuity, payments are made at the end of the time period. Most annuities are ordinary annuities.
Analogous to the future value and present value of a unit, which is the future value and present value of a lump-
sum payment, the future value of an annuity is the value of equally spaced payments at some point in the future.
The present value of an annuity is the present value of equally spaced payments in the future.
The Future Value of an Annuity is simply the sum of the future value of each payment.
The equation for the future value of an ordinary annuity is the sum of the geometric sequence:
FVOA = A(1 + r)
0
+ A(1 + r)
1
+ ...+ A(1 + r)
n-1
.
The future value of an annuity is the sum of the geometric sequences shown above, and these sums can be
simplified to the following formulas:
The future value of an ordinary annuity is:
F V OA= A
(1 + r)
n
- 1

r
r
1 - r) (1
n
+
is called future value interest factor of an annuity and is used to find the future value of annuity with
the table method, for different combinations of i and n. So, FVA = A x FVIFA i,n
The Present Value of an Annuity is the sum of the present value of each annuity payment. Since the present
value of a lump sum payment is simply the future value of that payment divided by the interest factor (1 + r)
n
, the
present value of an annuity is the sum of the present value of each of those payments:
P V A= A


r
r) (1
1
1
n
+

PVA - Present Value of Annuity Amount
A - annuity payment
38

r - discount rate per time period
n - number of time periods.
The financial table also can be used for the present value interest factor for an annuity (PVIFA) to solve
present value of annuity problems. So, PVA = A x PVIFA
It is known that for annuity due, in contrast to ordinary annuities, annuity payment occur to the beginning to each
period. Annuities due are more likely to occur when doing future value of annuity problems than when doing PVA
problems. Evaluating the present value of a promised or expected series of annuity payments that began today
would be a present value of an annuity problem. This is less common because annual car or real estate payments
usually start at the end of first period, making them ordinary annuities.
A perpetuity is an annuity in which the periodic payments begin on a fixed date and continue indefinitely.
Permanently invested (irredeemable) sums of money are prime examples of perpetuities. Scholarships paid
perpetually from an endowment fit the definition of perpetuity.
Perpetuity contains an infinite number of annual payments



34 Investment risks: concept and types
Risk is an inherent part of investing. Generally, investors must take greater risks to achieve greater
returns. Those who do not tolerate risk very well have a relatively smaller chance of making high earnings than
do those with a higher tolerance for risk.
The Risk means a situation in which the projects objectives havent been reached partially or totally
because of different causes such as economical, social, political, technological evolution or environmental to
which the probability of appearing may be estimated or is already known.
Uncertainty has the same definition as risk has, with the difference that the probability of appearance of
up mentioned causes (economical, environmental, human, social, political, technological etc.) is not known.
Risk is defined as an exposure to loss and injury. Thus risk refers to chance that some unfavourable events
will occur. If you invest in something you are taking a risk in the hope of making an appreciable return.
Every investor understands that investment risk is inextricably linked to potential returns. While we all
want to find that perfect zero risk, high return investment, we know that in order to make money, we need to
speculate a little. There is an inescapable trade-off between investment performance and risk: Higher returns are
associated with higher risks. At the other extreme, short-term cash investments are among the safest of
investments when it comes to price stability, but they have provided the lowest long-term returns.
Risky assets rarely produce their expected rates of return generally, risky assets earn either more or
less than was originally expected. Indeed if assets always produced their expected returns, they would not be risky.
No investment should be undertaken unless the expected rate of return is high enough to compensate the investor
for the perceived risk of the investment.
So, investment risk is related to the probability of actually earning a different return. The grater the chance
of a low or negative return - the riskier is the investment.
An assets risk can be analyzed in two ways: (1) on a stand-alone basis, where the asset is considered in
isolation, and, (2) on a portfolio basis, where the asset is held as one of a number of assets in a portfolio. Thus, an
assets stand alone risk is the risk an investor would face if he held only this one asset. Obviously, most assets are held
in portfolios, thats why it necessary to understand risk in a portfolio context.

-2-
All the investments risks can be divided on 2 major groups:
- Macroeconomic risks, which do not depend on investor or enterprise and
- Microeconomic risks that include production risks, financial risks, marketing risks, legal risks, default risk
and informational risk.
39

According to the level of appearance there are three separate and distinct types of risk that can be
identified:
+ Stand-alone or individual risk is the projects risk disregarding the fact that it is but one asset
within the firms portfolio of assets and that firm is but one stock in a typical investors portfolio of stocks. Stand-
alone risk is measured by the variability of the projects expected returns. It is a correct measure of risk only for
one-asset firms whose stockholders own only one stock.
+ Corporate or within-firm risk is the projects risk to the corporation, giving consideration to the fact
that the project represents only one of the firms portfolio of assets, hence some of its risk effects will be diversified
away. Corporate risk is measured by the projects effect on uncertainty about the firms future earnings.
+ Sector risk;
+ Market or beta risk is the riskiness of the project as seen by a well-diversified stockholder who
recognizes that the project is only one of the firms assets and that the firms stock is but one part of his total
portfolio.
+ Regional risk;
+ International risks.
These risks can be also classified under the reasons of appearance criteria. Here can be distinguished
diversifiable (specific, corporate) and nondiversifiable (market, systematic) risks.
Diversifiable risk means that the result of investment project may be affected by the management of the
company or by the project management team, a non adequate policy and strategy of the company, time delaying
in project activities, overcosts, overpays etc. It is caused by such random events as lawsuits, strikes, successful
and unsuccessful marketing program, wining or losing a major contract, and other events that are unique to a
particular firm. Because these events are random, their effects can be eliminated by diversification bad events in
one firm will be offset by good event in another.
Nondiversifiable (market risk) stems from factors that systematically affect most firms. This mean that
the result of investment project could be affected by factors such as the modification of the interest rate, inflation
with direct influence in prices changing, changes in demands on the internal and external markets for certain
products and services, climate change, earthquake, flood, wars, raw material and energy resource depletion, new
restrictions from laws changes, new eco-efficient and cheaper technologies that makes existent technologies to
be morally obsolete etc. Since most investment projects are affected by these factors, market risk cannot be
eliminated by diversification.
According to the levels of risk, in management and economic books concerning risks there are
mentioned three levels of risk: low, medium and high, as well as five categories of risk (very low, low, medium,
high, very high). The categories of risk are:
- Very low risk (5-7%) for example the risk of governmental bond acquisitions,
- Low risk (10 %) investments in making known products from food industry,
- Medium risk (15%) investments in developing the range of existent products (passing from Pentium 4
to Pentium 5 microprocessors),
- High risk (20-25 %) the launch of a new product on the market (i.e a new type of car),
- Very high risk (over 25-35 %) research and development activities for new products or fundamental
research, new inventions.
Also, investment risk can be classified in dependence on the level of threats (danger) for the participants of the
investment project. It can be: minimal, medium, acceptable, critical and shattering (devastating).










40














35 Techniques for measuring stand-alone risk

There are three analytical techniques for assessing a project's stand-alone risk: (1) sensitivity analysis, (2)
scenario analysis, and (3) Monte Carlo simulation.
Sensitivity analysis. Intuitively, we know that many of the variables that determine a project's cash flows
could turn out to be different from the values used in the analysis. We also know that a change in a key input
variable, such as units sold, will cause the NPV to change. Sensitivity analysis is a technique that indicates how
much NPV will change in response to a given change in an input variable, other things held constant.
Sensitivity analysis begins with a base-case situation, which is developed using the expected values for each input.
Sensitivity analysis is designed to provide decision makers with answers to questions such as What if ..
In a sensitivity analysis, each variable is changed by several percentage points above and below the expected value,
holding all other variables constant. Then a new NPV is calculated using each of these values. Finally, the set of
NPVs is plotted to show how sensitive NPV is to changes in each variable.
If we were comparing two projects, the one with the sheerer sensitivity lines would be riskier, because for that project
a relatively small error in estimating a variable such as unit sales would produce a large error in the project's
expected NPV. Thus, sensitivity analysis can provide useful insights into the riskiness of a project.
Scenario Analysis. Although sensitivity analysis is probably the most widely used risk analysis technique, it
does have limitations. Scenario analysis provides these extensions - it brings in the probabilities of changes in the
key variables, and it allows us to change more than one variable at a time. In a scenario analysis, the financial
analyst begins with the base case, or most likely set of values for the input variables. Then, he or she asks marketing,
engineering, and other operating managers to specify a worst-case scenario (low unit sales, low sales price, high
variable costs, and so on) and a best-case scenario. Often, the best case and worst case are set so as to have a
25 percent probability of conditions being that good or bad, and a 50 percent probability is assigned to the base-case
conditions. Obviously, conditions could actually take on other values, but parameters such as these are useful to get
people focused on the central issues in risk analysis.
Scenario analysis provides useful information about a project's stand-alone risk. However, it is limited in that it
considers only a few discrete outcomes (NPVs), even though there are an infinite number of possibilities.
Monte Carlo simulation represents a more complete method of assessing a project's stand-alone risk. It
ties together sensitivities and probability distributions. While Monte Carlo simulation is considerably more complex
than scenario analysis, simulation software packages make this process manageable. Many of these packages are
included as add-ons to spreadsheet programs such as Microsoft Excel.
In a simulation analysis, the computer begins by picking at random a value for each variablesales in units, the sales
price, the variable cost per unit, and so on, Then those values are combined, and the project's NPV is calculated and
stored in the computer's memory. Next, a second set of input values is selected as random, and a second NPV is
calculated. This process is repeated perhaps 1,000 times, generating 1,000 NPVs. The mean and standard
deviation of the set of NPVs is determined. The mean, or average value, is used as a measure of the project's
expected NPV, and the standard deviation (or coefficient of variation) is used as a measure of risk.
41

Excepting these methods there can be used such methods as: break - even point, method of decision
tree, cash flows coefficients of correlation, Bayes-Laplace criteria, Maximin criteria, Maximax criteria, Hurwicz
criteria etc.
Another approach is the CAPM, which assumes that the expected rate of return on an investment (Ri) is stated as
follows: Ri = R min + (R average R min)
i
|
R average average rate of return on similar investments;
R min risk free rate;
| - coefficient, that expresses risk.








36. Incorporating risk into investment projects analysis

According to the level of appearance there are three separate and distinct types of risk that
can be identified:
+ Stand-alone or individual risk is the projects risk disregarding the fact that it is but one
asset within the firms portfolio of assets and that firm is but one stock in a typical investors portfolio of
stocks. Stand-alone risk is measured by the variability of the projects expected returns. It is a correct
measure of risk only for one-asset firms whose stockholders own only one stock.
+ Corporate or within-firm risk is the projects risk to the corporation, giving
consideration to the fact that the project represents only one of the firms portfolio of assets,
hence some of its risk effects will be diversified away. Corporate risk is measured by the
projects effect on uncertainty about the firms future earnings.
+ Sector risk;
+ Market or beta risk is the riskiness of the project as seen by a well-diversified
stockholder who recognizes that the project is only one of the firms assets and that the firms stock is
but one part of his total portfolio.
+ Regional risk;
+ International risks.

Two methods are used to incorporate project risk into investment analysis. One is called
the certainty equivalent approach. Here every cash inflow that is not known with certainty is scaled down,
and the riskier the flow, the lower its certainty equivalent value. The certainty equivalent (o ) is the
relation between the required cash flows, as being known (CF
k
) and expected cash flows, considered
unknown (CF
uk
) at a specified moment (t), so
t
t
t
uk
k
CF
CF
= o
, after that
t
f r
n
h
t t
r
CF I NPV
) 1 (
1
) ( ) (
1
+
+ =

=
o o
The other method is the risk-adjusted discount rate approach, under which differential project
risk is dealt with by changing the discount rate. Average-risk projects are discounted at the firm's
average cost of capital including a risk premium. Higher-risk projects are discounted at a higher risk-
adjusted discount rate, and lower-risk projects are discounted at a rate below the firm's average cost
42

of capital. Unfortunately, there is no good way of specifying exactly how much higher or lower these
discount rates should be.
The nature of the individual cash flow distributions, and their correlations with one another,
determine the nature of the NPV probability distribution and, thus, the project's stand-alone risk. An
objective method that can measure the risk of an investment project aiming on probability is the method
of standard deviation and coefficient of variation.
Standard deviation is a statistical measure that uses past performance of an investment to
determine the potential range of future performance and assess the probability of that performance.
Standard deviation expresses the degree that a single value of investment efficiency in a group of
values varies from the mean (average) of the distribution. Risk may be measured by the dispersion of
alternative returns around the average (probabila) return. The average expected result ( R ) is the value
of projects efficiency indicator multiplied on probability if that situation appears, i.e. R =
) (
1
Ri Pi
n
i
E

=

Standard deviation, being a measure of dispersion, can be calculated using the formula:

=
=
n
i
i i
P R R
1
2
) ( o ., where
n number of observations,
R
i
annual returns for the project i;
R - the average expected annual return;
P
i
probability, corresponding to R and it is determined as follows:

=
=
n
i 1
i
i
K
K
Pi , here K
i
number of happenings of respective situation;
n- total number of analysed results.
Standard deviation is an absolute measure of dispersion. It shows the amount of risk per 1
monetary unit of average return. A relative measure of dispersion is the coefficient of variation,
which is the standard deviation divided by the average return, thus
R
CV
o
= . This method is
preferably to use when assessing risk of 2 or more projects. It measures risk. Higher is the variation,
higher is the average divergence, i.e. higher is the uncertainty and risk.
If variation equals 0, than efficiency doesnt diverge from the expected value, meaning that
risk do not exist.
There are three analytical techniques for assessing a project's stand-alone risk: (1) sensitivity
analysis, (2) scenario analysis, and (3) Monte Carlo simulation.





43














37 Risk Management Strategies
Management of investment Risk supposes the following activities:
1. Risk identification;
2. Analysis and assessment of risk;
3. Elaboration of strategies to manage the risk.
Depending on results obtain on the first 2 stages, there can be undertaken the following Risk supervise strategies:
- Refuse the investment project, so eviting the risk,
- Accept the risk
- Decrease the risk
- Anticipate the investment risk.
Anticipate the investment risk includes:
a. Measuring country risk
- Country risk ratings: Euromoney Magazine's Country Risk ratings and the Business
Environmental Risk Index (BERI) rank countries according to the weighted average of a large number of factors.
There is a large amount of analysis on country risk (and opportunities). For example, those provided by the
Economist Intelligence Unit and the Political Risk Services (PRS) Group.
- b. Credit ratings (Moody, Standard and Poor): These rank the creditworthiness of the
government.
- c. Corruption indices. Transparency International publishes corruption rankings
b. Project evaluation: when deciding on new projects, require higher returns on investments for risky projects.
The Decrease Risk Strategy includes the following strategies:
1. Diversification of investment portfolio
2. Distribution of risk between partners
3. Limitation of investment expenditures
4. Hedging of financial risks
5. Making reserves
6. Insure the investment risk.
A company might buy insurance for specific events. The World Banks Multilateral Investment
Guarantee Agency (MIGA), the U.S.s Overseas Private Insurance Corporation (OPIC) and Canadas the
Economic Development Corporation, EDC, (Canada) are government agencies providing insurance.
MIGA, EDC and OPIC insurance cover inconvertibility of funds, expropriation, and political violence. MIGA also
covers non-payment by a foreign government. The EDC will only insure projects that benefit Canada, OPIC only
U.S. nationals. MIGA provides insurance to World Bank Members (154 countries).
44

Also there is a small private insurance market covering political risk. Insurance is expensive and unavailable in
some places. There can be made insurances that cover the deterioration of equipment, production stagnation,
commercial risks, health and life of employees etc.

Aciunile manageriale de reducere a gradului de expunere la risc aplicabile de investitorii naional i
internaionali cuprind:
a) n faza pre - investiional:
- Obinerea mai multor informaii despre ara gazd;
- Evitarea rilor cu risc ridicat;
- ncheierea unor polie de asigurare;
- Negocierea cadrului de aciune,
- Adaptarea proiectului de investiii,
- Diversificarea sectorial sau geografic a investiiei;
- Alegerea formei adecvate de internaionalizare a investitiilor.
b) n faza post - investiional:
- Monitorizarea permanent a nivelului de risc;
- Adaptarea investiiei la schimbrile ulterioare de mediu;
- Promovarea unor relaii bune cu operatorii sau instituiile locale;
- Dezinvestirea;
- Maximizarea profitului.


38 Main risks that faces investors in the Republic of Moldova
Moldova continues to take small steps toward developing a stronger economy, reforming a cumbersome
regulatory framework, combating corruption and adopting reforms aimed at improving the business climate. Poor
physical infrastructure, cumbersome licensing procedures, excessive permit requirements, and proliferation of
fee-for-services to public authorities and commercial organizations all contribute to a business environment that
remains among the most challenging in the region. For example, in the Doing Business Dealing with Construction
Permits indicator, Moldova ranks 158th out of 176 economies and requires twice as many procedures as the
average for OECD countries.
Corruption is a serious concern and "unofficial payments are widespread. An American investor recently
encountered numerous bureaucratic obstacles in attempting unsuccessfully to renew a license. Government tax
authorities conducted an extensive audit of the investor's company during the same period, in a reminder of the
government's power to harass existing investors and keep them in suspense. The company was found to be in
compliance with tax laws but had to invest staff time and effort to comply with the audit. The Embassy has also
received reports of targeted actions by politically connected individuals against profitable businesses. These
measures include abusive inspections and opaque administrative sanctions. Major foreign investors have also
complained about the government's lack of willingness to engage in constructive dialogue on important issues
affecting the business community.
After a prolonged recession in the 1990s, GDP has grown for seven straight years and inflation has decreased.
Moldova, which is consistently ranked among the poorest countries in Europe, relies heavily on investments,
foreign trade, and remittances sent by Moldovans working abroad, for economic growth. Remittances equaled 38
percent of GDP in 2007. Recent years have seen an increase in foreign direct investment (FDI) as investors have
taken advantage of the eastward expansion of the European Union (EU), which now borders Moldova following
the January 1, 2007, accession of Romania. The Government of Moldova (GOM) has made efforts to tackle some
obstacles to investment, such as corruption and red tape. Furthermore, Moldova has declared European
integration a strategic objective. The country had an Action Plan with the EU that set out a roadmap for
democratic and economic reforms and the harmonization of Moldovan laws and regulations with European
standards.
Moldova has been a member of the WTO since 2001 and has signed free trade agreements with countries of the
former Soviet Union (CIS) and Southeast Europe. In December 2006, Moldova joined the Central European Free
Trade agreement (CEFTA). Moldova benefits from an extended generalized system of preferences (GSP-plus)
with the EU. Starting in March 2008 the EU unilaterally granted Moldova autonomous trade preferences, which
45

expanded the duty-free access of Moldovan goods to EU markets. Moldova also seeks to further deepen its
preferential trade arrangements with European markets in the negotiation of a new EU agreement.
The GOM has created an adequate legal base, including favorable tax treatment for investors. Under Moldovan
law, foreign companies enjoy the same treatment as local companies (national treatment principle). The GOM
views investments as vital for sustainable economic growth and poverty reduction. However, the amount of
foreign direct investment (FDI) is far below the countrys needs. In attracting FDI, the GOM continues to add
incentives. In 2008 the GOM introduced zero tax on business profit reinvested in a business.
After years of low FDI due to a weak business climate, FDI inflows have been steadily increasing since 2004. In
2007, FDI inflows amounted to USD 537.7 million, representing almost half of total FDI stock since Moldova's
independence in 1991. In the first nine months of 2008, FDI amounted to USD 627.4 million. Recent years have
seen large investments by Germany's Metro Cash & Carry, Germany's Draexlmaier, Frances Societe Generale,
Austria's Grawe insurance company, Austrias Raiffeisen Investment, the Netherlands' Easeur Holding B.V.,
Italy's Veneto Banca, and the U.S. investment fund NCH Capital.
The GOM states on its website that one of its primary tasks is to attract investments and create a favorable
business climate for all investors both foreign and local ones. The GOM claims it taking measures to stimulate the
business activity and improve the investment climate focusing on the country's geographical position, labor
resources, fertile soils and participation in free trade agreements with the CIS countries and the EU. American
investments in Moldova are primarily in the wine and food industry, cosmetics, telecommunications, banking and
real estate.
Despite some GOM efforts to lower tax rates, strengthen tax administration, increase transparency and simplify
business regulations, decision-making remains opaque and the application of regulations inconsistent.
Additionally, on occasion, government officials interfere in business decisions in favor of a protected individual,
use governmental powers to pressure businesses for personal or political gain, and selectively apply regulations.
Since the judicial system remains weak, recourse to the courts does not guarantee citizens and foreign investors
an impartial ruling on alleged governmental misdeeds.
In December 2007 the Moldovan Parliament adopted the National Development Strategy (NDS).The NDS
succeeded the Economic Growth and Poverty Reduction Strategy (EGPRSP) of 2004-2007. The NDS was
developed in broad-based consultations with stakeholders and civil society. The NDS defines the GOM's
developmental objectives and will guide the budgetary process over the period 2008-2011. Attracting FDI is
critical to enhancing one of the pillars of the NDS, namely enhancing the competitiveness of the national
economy. This pillar focuses on policies to improve the business environment in order to encourage more
investment activity, technological innovation and modernization; promote the expansion of the small- and
medium-enterprise sector; increase labor productivity; improve state asset management; promote inclusion into
international networks; address Moldovas deteriorating physical infrastructure; and reduce its energy
vulnerability. In 2006, after a five-year intermission, the GOM resumed financial relations with the IMF by signing
a Memorandum of Economic and Financial Policies that included criteria for the improvement of macroeconomic
indicators, infrastructure development and better state property management. In coordination with the IMF, the
GOM has introduced budgets with low deficits and made reducing inflation a goal. In 2008 the GOM held inflation
under ten percent for the first time since 2002. The memorandum expires in June 2009 and the GOM has not
decided whether to renew its cooperation with the IMF.
The Constitution of the Republic of Moldova guarantees the inviolability of investments by all natural and legal
entities, including foreigners. Key constitutional principles include the supremacy of international law, a market
economy, private property, provisions against unjust expropriation, provisions against confiscation of property,
and separation of powers among government branches. The Constitution provides for an independent judiciary;
however, government interference and corruption remain problems in the application of laws and regulations and
in the impartiality of the courts.
Current investment legislation is based on nondiscrimination between foreign and local investors. Moldovan law
ensures full and permanent security and protection of all investments, regardless of their form, although
application of the law remains spotty. There are no economic or industrial strategies that have a discriminatory
effect on foreign-owned investors in Moldova, and no limits on foreign ownership or control, except in the right to
purchase and sell agricultural and forest land, which is restricted to Moldovan citizens.
International treaties and Moldovan law regulate business activity, including foreign investments. Such laws
include, but are not limited to, the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship,
the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business
Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on
Licensing Certain Activities, and the Law on Insolvency.
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The Law on Investment in Entrepreneurship came into effect on April 23, 2004, superseding the previous Law on
Foreign Investment. It was designed to be compatible with European legislative standards and defines types of
local and foreign investment. It also provides guarantees for the respect of investors' rights, non-application of
expropriation or actions similar to expropriation, and for payment of damages in the event investors' rights are
violated.
There is no screening of foreign investment in Moldova and legislation permits 100 percent foreign ownership in
companies. By statute, special forms of legal organizations and certain activities require a minimum of capital to
be invested (e.g., Moldovan Lei (MDL) 5,400 for limited liability companies, MDL 20,000 for joint stock companies,
MDL 15 million for insurance companies and MDL 50 million for banks). The current rate of exchange is 10.4 MDL
per USD.