Financial Feasibility Study

2020/2021

Theoretical Part (2)

 Investment Cycle Steps
1.Identifying the investment opportunity or investment idea.
2.Preparing a pre-feasibility study.
3.Preparing comprehensive functional feasibility study.
4.Project evaluation (Ended by an investment decision).
5.Project implementation and establishment.
6.Operating the company (After establishment the term project is no
longer applicable and should be stopped, instead an existing body i.e.,
company, firm partnership,…)
7.Performance evaluation (Evaluating operating results).
1. Define an Investment Opportunity or Investment Idea
Investment ideas may be different from investment opportunity.
✓Opportunity is something already available for
implementation requiring an investor only, a typical investor.
✓Investment idea require investment promoter. The idea could
be relatively new in time and place. Investment promoter is
not just an investor commanding economic resources but
should be commanding new ideas.
✓The investment progress is not just measured by the number
of investors but by the number of promoters.
2. Prepare a Pre-feasibility Study
A pre-feasibility study is an intensive in depth investigation of all
probable prohibitive constraints that will prevent the project
from being established or implemented or could cause the
failure of the project. Prohibitive constraints could be legal,
political, social, environmental, technical, financial, ... etc.
➢If we didn’t find any constraints, the pre-feasibility study gives
the green light to perform the comprehensive feasibility study.
➢The costs of preparing a pre-feasibility study should generally
be less than the costs of conducting a comprehensive
feasibility study.
 N.B.
The cost of comprehensive feasibility
study could be avoided once we found
one strong prohibitive constraint.
3. Prepare Comprehensive/Functional Feasibility Study
It is more expensive in its preparation than the cost of
preparing the pre-feasibility study.
The functional feasibility studies are divided into 4
sections:
1.Investment climate and the legal feasibility study.
2.Marketing feasibility study.
3.Engineering/Technical feasibility study.
4.Financial (economic) feasibility study.
✓There is no specific order to complete these feasibility
studies or no right sequence for these feasibility
studies.
✓This sequence depends upon the nature of the project.
✓No need for all these feasibility studies in each project.
✓However, one should not generalize the
comprehensive feasibility studies for all projects
because there are no rules or regulations or procedures
to be followed generally ---> it is difficult for this field.
4. Project evaluation:
In general to evaluate any project we need methods of
evaluation. These methods are used to take an appropriate
investment decision with regard to the project itself.
Methods of Evaluation can be divided into 2 main groups:
1.Traditional methods of evaluation (classical or conventional)
a.Accounting measures (Such as Accounting Rate of
Return ARR)
b.Non-accounting measures: consists of:
i. Methods of evaluation ignoring the time value of money
(Payback period, Highest net cashflow in any year, Average
net cashflow related to the capital invested)
ii.Methods of evaluation considering time value of money
{Net present value method (NPV), Internal rate of return
(IRR)}.

2.Modern/More advanced methods of evaluation

Regardless of the method's of evaluation used, the project
evaluation should end up by taking an appropriate/suitable
investment decision regarding the project. Investment
decisions are 3:
a.Accept/reject investment decision.
b.Mutually exclusive investment decision.
b.Ranking decisions.
If a decision is to reject the project, investment cycle is
terminated.
If the result of 4th step is to accept the project, investment
cycle continues to the 5th step.
5. Project implementation and establishment: It is done in
accordance with the project's plan
6. Operating the company: After establishment, the term
project is no longer applicable. The establishment can be in the
form of a company, firm, partnership, (i.e. an existing body).
7. Performance evaluation: After one year of operation, we
prepare accounting financial statements (e.g. the Income
Statement of the actual year and the Balance Sheet as of the
end of the actual year ended). These accounting reports and
statements are used for performance evaluation.
The investment cycle may take one year, but usually it
takes a longer time. When this time ends, the firm is
liquidated and cash is collected from sale of assets.
The difference between the 1st cash and the last cash
represent the total return of the project or the
investment cycle which should be planned in advance.
 Sections of the feasibility study
1. Investment climate and the legal feasibility study:
Two wings exist for this feasibility study:
1st: Investment climate: we have to study the social
community surrounding the project; governmental attitudes
where the project is to be established, the traditions of the
community, the general believes, political stability, taxation
and inflation rates and like.
Without knowledge about investment climate and
community, the project under study may fail or produce net
losses.
2nd: Legal feasibility study: Refers to laws governing
investment; especially investment disputes and settlement
of disputes.
In Egypt, we have 2 laws: the inland trade law “commercial
law”, and the investment law.
The main purpose of preparing investment climate study
and legal feasibility study is to determine the law under
which the project will be established and the other
regulations related to the investment.
2. Marketing feasibility study:
The outcome of this feasibility study is to estimate the units
which can be annually sold in the local market and abroad
for at least a time horizon of 10 years and also to settle
down policies for pricing (sales).
It includes:
1.Defining the market gap
2.Defining the market share
3.Specifying market structure
4.Determining the pricing policies
3. Technical feasibility study:
The purposes of technical feasibility study is to:
1.Select the best location of the project.
2.Determine optimal size of production.
3.Select the best technology of production.
 The outcomes of each of the first three functional
feasibility studies (i.e., investment, marketing, and 3rd
technical feasibility studies) are inputs to the financial
feasibility study.