This first chapter describe principle of the pre-investment studies for a project and the bbasic steps

1. PART1: THE PRE-INVESTMENT
STUDIES
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Taibah University – College of Engineering; Industrial Engineering Department.
IE423: Feasibility Studies
Dr. Mohamed ben hassen
Reference: main textbook pg. 9-22

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What is a feasibility Study ?
An analysis and evaluation of a proposed
project to determine if it (1) is technically
feasible, (2) is feasible within the estimated cost,
and (3) will be profitable.
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The development of an industrial investment project from
the stage of the initial idea until the plant is in operation can
be shown in the form of a cycle comprising three distinct
phases:
- The pre-investment
- The investment and
- The operational phases.
Each of these three phases is divisible into stages, some of
which constitute important consultancy, engineering and
industrial activities.
A. Investment project cycle and types of pre-investment
studies

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The pre-investment phase (figure I) comprises several stages:
- Identification of investment opportunities (opportunity studies);
- Analysis of project alternatives and preliminary project
selection
- Project preparation (prefeasibility and feasibility studies);
- Project appraisal and investment decisions (appraisal report).
- Support or functional studies
1. The pre-investment phase

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Figure I. Pre-investment, investment and operating phases of the project cycle

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The main instrument used to quantify the parameters, information
and data required to develop a project idea into a proposal, which
should analyse the following:
• Natural resources with potential for processing and manufacture,
• Future demand for certain consumer goods
• Imports, in order to identify areas for import substitution
• Environmental impact
• Manufacturing sectors successful in other similar countries
• Possible interlinkage with other industries
• Possible extension of existing lines of manufacture
11 Opportunity studies

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1.2 Pre-feasibility studies
Formulation of a feasibility study that enables a definite decision
to be made on the project is a costly and time-consuming task.
Therefore, before assigning larger funds for such a study, a further
assessment of the project idea might be made in a pre-feasibility study.
A pre-feasibility study should be viewed as an intermediate stage
between a project opportunity study and a detailed feasibility
study, the difference being in the degree of detail of the
information obtained and the intensity with which project
alternatives are discussed.
Why to do a pre-feasibility study ?

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The principal objectives of a pre-feasibility study are to determine
whether:
- All possible project alternatives have been examined;
- The project concept justifies a detailed analysis by a feasibility
study;
- Any aspects of the project are critical to its feasibility and
necessitate in-depth investigation through functional or support
studies such as market surveys, laboratory tests or pilot-plants
tests;
- The project idea, on the basis of the available information,
should be considered either non-viable or attractive enough for a
particular investor or investor group;
- The environmental situation at the planned site and the
potential impact of the projected production process are in line
with national standards.
Objectives of a pre-feasibility study

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1.3 Support (functional) studies
Support or functional studies (figure I) cover specific aspects
of an investment project, and are required as prerequisites for,
or in support of, prefeasibility and feasibility studies,
particularly large-scale investment proposals.
Examples of such studies are :
• Market studies of the products to be manufactured,
• Raw material and factory supply studies
• Location studies, particularly for potential projects where
transport costs would constitute a major determinant;
• Environmental impact assessment,
• Equipment selection studies,

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1.4 Feasibility studies
A feasibility study should provide all data necessary for an
investment decision (figure I).
- The commercial, technical, financial, economic and
environmental prerequisites for an investment project
- Central objective and possible marketing strategies,
the possible market shares, the corresponding
production capacities, the plant location, existing raw
materials, appropriate technology and mechanical
equipment and, if required, an environmental impact
assessment.
- The financial part of the study covers the scope of the
investment, including the net working capital, the
production and marketing costs, sales revenues and
the return on capital invested.

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1.5 Appraisal report (figure II)
When a feasibility study is completed the various parties involved in
the project will carry out their own appraisal of the investment project
in accordance with their individual objectives and evaluation of
expected risks, costs and gains.
The better the quality of the feasibility study, the easier will be the
appraisal work.
The appraisal report will prove whether these pre-production
expenditures were well spent. Project appraisal as carried out by
financial institutions concentrates on the health of the company to
be financed, the returns obtained by equity holders and the
protection of its creditors.

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2. The investment phase
The investment phase can be divided into the following stages:
- Establishing the legal, financial and organizational basis for the
implementation of the project
- Technology acquisition and transfer, including basic engineering
- Detailed engineering design and contracting, including
tendering, evaluation of bids and negotiations
- Acquisition of land, construction work and installation
- Pre-production marketing, including the securing of supplies
and setting up the administration of the firm
- Recruitment and training of personnel
- Plant commissioning and start-up

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3. The operational phase
Need to be considered from both a short- and a long-term
viewpoint.
- The short-term view relates to the initial period after
commencement of production when a number of problems
may arise as the application of production techniques,
operation of equipment or inadequate labour productivity
owing to a lack of qualified staff and labour
- The long-term view relates to chosen strategies and the
associated production and marketing costs as well as sales
revenues. These have a direct relationship with the
projections made at the pre-investment phase.

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B. Basic aspects of pre-investment studies
1. Strategic orientation
Strategic orientation of business planning is an increasingly
attractive and useful instrument of modern management.
One of the reasons for this development is that management
instruments are needed in a rapidly changing business world to
cope with the risks associated with management decisions.
Investment decisions are critical for the success and even the
survival of an enterprise when the relative volume of financial
commitments is significant.

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1.1 Characteristics of strategic orientation
The strategic orientation of business planning may be best
characterized by the approaches outlined below:
- Doing the right things: the search for the right investment
- Understanding change (figure III)
- Development of skills
- Importance and utility of a strategy

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1.2 Basic strategic principles
The development of successful strategies can be based on the three
generally accepted principles outlined below, which remain valid
irrespective of the type of industry and the type or size of a project.
- Concentration of forces (Forces may be concentrated on selected
product-market combinations and the development of essential
skills, as well as the provision of the necessary financial, personnel,
material and managerial resources).
- Risk balance(resources are not completely concentrated on one
strategy, the project design requires a sound balance between the
various risks, including those relating to the market, supply,
technology and political matters)
- Cooperation (loose agreements to partnerships, joint ventures,
holdings and the acquisition or merger of enterprises).

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1.2 Developing a strategy
The development of any strategy should be organized in accordance
with the steps outlined in the strategic planning procedure presented
below:
- Formulation of the general objectives of the investment project
- Determination of the immediate project objectives
- Choosing the project strategy
- Determining the functional objectives and strategies
- Development of the right (competitive) mix of functional
objectives and strategies (figure IV)
- Planning of strategy implementation
- Checking and adaptation of the strategy during implementation
and operation

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2. Scope of the project
The "scope of the project" should embrace: all activities scheduled to
take place at the plant site:
- The auxiliary operations relating to production…;
- Off-site transport and storage of inputs and outputs (including
final products, by-products, wastes and emissions)
- Off-site activities such as housing schemes and educational,
training and recreational facilities…
The main reason for this arrangement is to force the project planner
to look at the material and product flow not only during the
processing stage but also during the preceding and succeeding stages.

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3. Data for pre-investment studies
Investment cost estimates, are made by the following means:
- Using prices from similar projects to calculate costs based on
specifications
- Using the unit cost parameters derived from comparable
operational projects
- Annual inflation rates; changes in foreign exchange rates
- Differences in local conditions, such as the climate, which may
cause additional costs for air conditioning
- Different laws and regulations, for instance, on safety
- Possible errors resulting from lack of reliable data, preliminary
project design, methodological deficiencies…

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4. Selection and verification of alternatives
The preparation of a feasibility study is often made difficult
by the number of available alternatives (regarding the choice
of technology, equipment, capacity, location, financing etc.) and
the assumptions on which the decision making process has to be
based.
As a rule, the available alternatives should already have been
reviewed and preselected at the stage of the pre-feasibility
study. Sometimes, however, it may be necessary at the
feasibility study stage to determine the detailed costs and
revenues for a limited number of alternatives, as in the case of
two or three possible locations, or two production programmes
with different appropriate technologies. A detailed justification
of the selection of any particular alternative should be given,
together with a description of the methods and formulas used in
the selection process.