Financial Feasibtliry, s E Financial Feasibilit Stud “ ; for Investment Projects _ # Introduction to the Course: * Financial feasibility study is an essential and basi part from a comprehensive feasibility study that also include investment climes feasibility study, Marketing feasibility study, and technical feasibility ae oe 7 «ALI 5 goal 53 ye 5m Maal saat Alaa — Comprehensive feasibility Study as a topic considered a part of a larger field of \ knowledge called managerial economics which considered a bridge (link) between management and economics, PSN LAT 9 SIN SLAB dead eS hae Gee ja ge 5 JHE et ALi gal Lal = . Shei leg 3 1871 bs all ba Financial feasibility study together with the results of other feasibility studies will help in Project evaluation si i iain g Vl ll chal 3 als lal» Eyota. The results of Feasibility study and project evaluation will lead to making investment decision. Financial feasibility study is related to the future not the past which means planning {o the future to take investment decision which considered a long run not the current Operating decision. EH cole Tey GUY 18 a8) 538) Gute Las i shine 93 y idly Mila 9 ss 5 gael sl 2 saeall gad gle Cj) 8 9S Aaa g gale: Une coll cs gael Lalo # Main Concepts and Terminologies in Financial Feasibility Study: 1- Project: Is a plan or an idea cast ina plan to be studied. It is not implemented yet, it will be implemented in the future. It is expected not actual thing (will be accepted or rejected). tiscali Aad UnSsiis ing YY y Wbita 5 Ig Leas yam Gaal lll 5 Sal) J ALN ga G5 pall 2- Firms, organizations, companies, corporations, authorities: An established firm, it is an existing body. (Related to the past) rill: 2ya.50 obS 2 4S 5) ‘So, we are interested in a project, not the company Thus, a project is important than a company because the project must be studied before implementation. Note: If the project is accepted and established (implemented) it will be converted into a company in the future. 3- Feasibility study + Is a detailed plan investigated all aspects (point of views) of the project whether technical or environmental or marketing or financial or economic or political or social aspects in general. Therefore, it should be done by some experts in different fields. eld 118 spall Lal ya Low ll pS asS glte Gilyall US ya gy pall Ge oy Uae Aba a. Aili Nas QaFeasibility Study Financial * Its target is to provide indicators related to the project. Indicators which be neutral not subject) Balas gS QS yt yl yc jaye og A alls Ge al 4- Project evaluation s * Is the use of the indicators generated by the feasibility study in order to consider appropriate decisions regarding the project. It ends up by an investment decision (long term) if we accept or reject the project. Bibs ss ya GN lh SNL eth y Gs gall Lal ja Gps Labbe UN SI Spall bs a Ys ey ptal Remark: 1- Feasibility study comes first before the project evaluation. 2- Feasibility study ends by indicators regarding the project and project evaluation ends by investment decision based on the indicators of feasibility study. C83 aN 5 at eed pail ot ol Spall cle dels y NI at sell As ol Da Jas * Investment decisions There are 3 decisions related to investment: a) Accept/Reject investment decision (traditional) + Ifa project is rejected, no existing body will be considered. It is very traditional decision which is easy and simple when we have only one project it may be accepted or rejected. salsa rhe sale SONI ll del Go 8 Gai) she gel ISI ot LA b) Mutually exclusive investment decision + When we facing more than one accepted projects and each one satisfies our requirements but we need only one of them. The finance in this decision is not the problem because we assume enough finance to establish the larger project. + Ifa project is accepted, the other projects by necessity are rejected. + This decision is more difficult and complicated than the first type. aged sien Gea ie gg sally SUS GY Ge ley ptNNUS A fae & 9 ye Os JI gle So ls - + FSI see ym ysSa 02 5) lly «Laake ALN Usad ya gin aly Gy phe JOS il ine y Ss IM g sil c) Investment ranking decisions + All projects are accepted but the problem is to rank one Ist, one 2nd, one 3rd, and so on. + It is more difficult and complicated than the mutually exclusive investment decision. Seng S Sle Dap BAe A i Uy pga a Gael OSI y Maley Uyihe cle yal JS seth JA camel 09) ily oany lll S48 uses y JyMI Siity Que yh " There are 2 steps: First: Prepare the Feasibility Study To study & analyze the project from different angles. AM e Uy) Ge & stall Sal 5 xp! Second: Evaluating the Project Using indicators representing the outcomes of the feas'Donxa / Nowr Financial Feast « * Ifthe feasibility study is weak or poor project evaluation will also be weak o,® oF. _ Y coe O80 4 all ati 6 Ha ya og yl tl 2 Na > Usually, we should separate the job of preparing the feasibility study from the job of project Evaluation. This is to prevent any judgmental bias. > Project evaluation should be decided by one person not a committee However, the feasibility study should be done by various specialists, experts in different fields (financial, economics, .....) SM ah ame 9 ol il Se 86 Le esl Spall Ls GI say ao en 9g gal pat 5-Performance evaluation: In general, evaluation is to assess the efficiency and effectiveness. 4ltill, 3-UiS)) 0 Performance evaluation: is to assess the efficiency and effectiveness of an existing company (related to the past to assess the actual performance based on the financial statements at the end of the year). Performance evaluation is related to the company, 45 yl lets 139) O Project Evaluation € stall auii : Is related to the future (idea for the future). Thus, any decision is related to the future. It is to assess the efficiency and effectiveness expected of a project under study (expected performance- expected profitability). It should end with an investment decision. Project evaluation is related to the Project. oll 5 pall (cused gull Sa 9 elo) Adel 9 BEL Aas alls JMG Glade Chey pall pass hill a8 hte da yay 6- Consumption: (based on need) ~ Isto get the immediate benefits now from commodities (goods) and services. If the immediate benefit is more than future benefit we will consume. Immediate benefits is more important than future benefit es gia sin Jil GF Sl Qo SI i gh B39) Da by Zale diay DL agli ya - In another word, the higher the consumption rate the lower the investment rate in the future because we are are consuming the larger part of income leaving almost nothing for savings so nothing will be invested because savings is the way for investment. 7- Savings: ~Refers to cash or liquid money or cash equivalent (resources can be easily converted into cash in a short run without heavy loss). PES dl Le 5B Ge US Lela A ggees p38 lho gall 3) ULM Gu lll go cal yall > Savings are the way for investment, eiiu20 4 jlll (2 C139) > If the national income is limited, nothing will remain for savings, and most of the national income will be directed to consumption This is the basic indicator of economic welfare » No savings, No investment, No economic welfare. (Higher savings, higher investments) Page| 3Doaa/ Nour ' oe Financial Feasibility Study 8- Investment: Transfer cash or liquid money into material items (ex: fixed assets). fixed assets Sie tess vs 2) bt a> 2! ae - benefits to get it in the future; where future benefits must be maximized and of 7 aust De maximiz ganized, PS) OS AM SI NA SY Us yyy Lada ote SLAY ya gh Lasla i saga) Jal Is to postpone immediate Notes: 1 pas Consumption, lower savings, lower investments. * ower consumption, higher savings, higher investments. O There are two features realized: a) To maximize future benefits (should be maximized). + Ifthe future benefit is expected to be less than the immediate benefits, so there is no need for investment and tendency will be towards consumption. Mik hy Na Sal go I dl saa ae GS + Therefore, investment is for the coming generations not for the existing. + In short investment should maximize future benefits otherwise, the economy of any country will collapse. Sie Ui gall ol oS GS Lely ABA OILY OY SAM b) The future benefits should be obtained in a way to organize these benefits over a long period of time AS a result, part of the national income should be saved. Savings increase investment because the way to invest is savings. Usually, there is a time gap between savings investments Investment is to transfer saving into material items and mainly after saving for 3 years (the time gap is 3 years) 439 Ow sll jal Syiney y Mike IS Gh ga hes LAN g SYN gn Ake 5 2a Nags 9-Inflation: + The decrease in the purchasing power of money. gl 4a jas al aa) + If prices are increased and the quality of things purchased increased also, this is not inflation. + The higher the prices, the higher the quality, the lower the inflation. Va rss Mabel oy) ge pda pics fhe 09 Lb ay Fy GLa Thall Aotty Ba gall GUS Ger aaj aul) Agi a Sagal Gas ths Inflation takes one of the following three forms or the three together: a) prices increased, and the quality & quantity of the products decreased. This is the maximum degree of inflation. b) prices increased, and the quality decreased at the same time c) prices increased, and the quantity purchased decreased at the same time -Inflation is hitting life and related to and affecting on a project, company, feasibility studies, project evaluation, performance evaluation, consumption savings and investments. } Inflation — Consumption — | Savings — | Investment Page| 4Doua/ Nour 10- Financial analysis: jc entities (Firms, eng = Isa tool used for evaluating S oo) There are two basic types of financial analysis y analysis for performance 1- Financial analysis based on actual figure nist companics | ied projects). According to this evaluation is based on actual results achiev h 2+ Financial analysis related to the future (in decisions Financial analysis for type, the financial analysis leads to investment roject evaluation, the performance of economi psy) CHS oll Le el Me Least ayy #The Investment Cycle : - 7 © Investment cycle relates to investments not 1 ee eaneterred b liquidity easily Savings refer to liquidity or things which can ° (or in the short run) without heavy losses. ; k © Certificates earn soft ite are deposits which can be collected bac immediately without any heavy losses. 4 © On the other hand, favecnaae refer to non-liquid assets or is to Lead — liquidity to material assets like land, machinery, equipment, and any o¥ liquid assets. . © Investment can be liquidated immediately or on the short run with heavy losses, tast8 stu — © Retum of investment should be higher than return on savings. Otherwise, tendency in general will be toward savings without investments. Investment Cycle (7 steps) 1) Identifying (defining) 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 & establishment 6) Operating the company (After establishment the term project is no longer applicable & should be stopped, instead an existing body i.e., company, firm Partnership) 7) Performance evaluation (evaluating operating results)Doaa / Nour Financial Feasibility Study 1) Identifying (defining) the investm nt opportunity or investment idea Investment opportunity r Investment Idea As something available, ready for It is relatively new in time & place. implementation, Sutil! jaty (Existed) -It needs an investor (typical investor) | -Itneeds an investor promoter (pioneers to fol low up the steps followed by in their fields of investment) to search others in the past. Typical investor for investment ideas. acting like the other investors. Sas ca has aS all > Glas Ll La ost SN shSN gis 2 yas gale yes cline bayae IG) ge Sey olte JULY! ~The investor needs resources -Investor promoter is not just an to establish the project. investor commanding economic Cs rtall My hte spall cline jis! | resources but should be commanding new ideas. Basta MSH 5 21 ye Gyatinn Ea #The investment progress can be measured by numbers of promoters not by the numbers of typical investors. Whether we start from investment opp. Or idea the following steps should be prepared. 2) Preparing a pre-feasibility study (Quick but intensive) * It is a quick study that explain in general the framework of the project. It gives the green light to do the comprehensive F.S. Casall dee Ub} ple JS cp hey pe Al oo + Is not few pages explaining in general terms the investment opportunity or idea (it can be spread over volumes of papers not just few pages). + Pre-feasibility study is essential study before preparing the comprehensive or the integrated or completed feasibility study. - Pre-feasibility study is an intensive investigation of the prohibitive constraints that may be the elements which prevent the project from being implemented or caused the failure of the project, some are social, legal, financial, technical, or political. - In short, _Pre-feasibility study is the search for the prohibitive constraints of the project under study. Gapall Lalys deel ght Larson y cys Epo sall Yad 9 cuiyy ayaa be Lagaill 5 japll ls LAM QSL sg g plea ISS gh gy pal) Si iets IM a gill US 5 at Apr g yon Ll jay ALL - Example, the activity to distribute drugs is very profitable almost 900% profit. However, there is a legal prohibitive constraint of the project under study. Constraints — Cycle will stop No constraints — Cycle will continueDoaa/ Nour 3 ir ive functional feasibility study / Erg come eo eg feasibility study. It comes after the pre- feasibility study. > It is generally recommended to do the pre-feasibility study before incurring huge amount of cost for preparation of comprehensive feasibility study. | ; S935 kale Shey IS Ga 2S Sita spel Ls ae oy > Itincludes four sections: A. The investment climate & legal feasibility study B. Marketing feasibility study C. Technical / engineering feasibility study . Financial /economic feasibility study # Types of the Feasibility Study The investment climate & the legal feasibility study: _ at ae of preparing investment climate study & legal feasibility study is to Seethin: erent with the community & the government regarding the . will Eee 0! Senn the project and to nominate the appropriate law which Ra catjore mt '¢ establishment and operating the Project. 9 Call BH I Jao a 45 5 gan joy JURE ea alo stool a Gil tn Esl GREE y ALE) Sos Li gy Sl a 5 gy pall A) 5 yam Ld vestment laws to establish the Project. Laws, Regulations and policies related to investment in the country. Ex: Taxation laws, Monetary policy, Inflation rate and tradition and customs. I will pay some legal fees (cost). First: Second: Marketing Feasibility study: The purpose of this feasibility studies is to determine the quantities of sales forecasted for the entire operating life of the project in the local market & abroad, and to settle down polices for pricing for at least a time horizon of ten years. oP HEM gla Syl gS Ey hall LAL yall ge ad all Chagall CS gan a Lg Gl Marketing feasibility studies includes: a. Defining the market gap (market demand > market supply) : It is the total difference between total demand and total supply. This gap should be filled using two ways: 1- Import the needed qualities 2- To establish projects to close the gap b. Defining the market share: Is the share of the project under study to fill the market gab. There could be other projects sharing the project in filling the market gab. Then the market gap is usually larger than the market share. But if there is only one project to fill the market gap, then there is no difference between the market gap and market share. c. Specifying marketing structure d. Determining the pricing policies Page|7Feasibility Study Dow / Nour Financial Third: Technical Feas' ly Study: + The purpose of the feasibility study is: a. Selecting the best location of the project. sis J! ~ Near from sources of raw materials and near from customers. + Minimize pollution, ~ Get benefits like tax exempted, grants and loans with low interest rate. b. Determining the optimal size of production. 5 UV! eas ©. Selecting the best technology. (Techniques of production) ee ~ Capital intensive —» Capital invested and technology used more than labor man power (capital > workers) capital intensive projects lead to higher return but increase unemployment rate. A ~ Labor intensive — mainly based on man power (man power > capital invested and technology used) © Iwill pay cost land (location) - cost of technology Fourth: Financial/Economic Feasibility Study > The objective of this feasibi ity study is to assess the attractiveness of the project in terms of profitability & economic benefits. ALABY ait pally Apa Cass ye gy pall Anthe pulll 58 G2 spall Lule Ge Gull > The target is to prepare indicators or criteria to be used for project evaluation. It is usually based on the outcomes of the other feasibility studies. Note: the results of the previous feasibility studies are considered inputs to be processed in the financial feasibility study. Remark: + There is no specific order to complete these feasibility studies or no right sequence for these feasibility studies. The sequence depends on the nature of the project. Espa desks le aie af 5 gael al al gue 8 i Ute + There is no need for all these feasibility studies in each project. Some projects may not require marketing or financial feasibility studies. + Example, to manufacture rocket, you may not need financial feasibility study because most banks will be willing to finance you. 4) Project Evaluatiot When the feasibility studies are completed, the indicators are used to evaluate the project and take the appropriate investment decision. Methods of evaluation are divided into two groups: a. Traditional / classical / conventional methods of evaluation. b. Modern / more advanced methods of evaluation. ~ we are concentrating on the first group. + Regardless of the method/s of evaluation used, the project evaluation should end by an appropriate investment decision regarding the project: A. Accept / reject investment decisions B. Mutually exclusive investment decisions C. Ranking investment decisions.Doaa/ Nour Financial Feasibility terminated, Investment cycle is However, Note: If the result of the 4th step is to reject the Project, the if the result is to accept the project, the i , eo Investment cycle is continued to the Sth 6) Operating the company: After establishment, the term project is no longer applicable & the establishment can be in the form of an existing body i.e., company, firm partnership EFA an Sg Lael O85 I Sony Gala ae seal ee be oct a al. 1b AS 7) Performance Evaluation After one year of operating the factory ot company, Statements are prepared (Income statement, balance accounting financial These accounting reports & statements are used for sheet, cash flow statement). performance evaluation. AS 520 cal all ylte AMI) pil gill Jan Si oe Note: 22 lal ail glte AIL ail J . ne investment cycle may take one year, but usually it takes a longer time. When this ime ends, the firm is liquidated, and cash is collected from sale of assets. * The difference between the Ist cash & the last cash represent the total return of the Project (or the investment cycle) which should be planned in advance. Financial/Economic Feasibility Study includes: [1] Identification of the project life [2] Identification of the project Type [3] Preparing estimates of the project [4] Project Evaluation [1] Identification of the project life: Any project has three lives: A. Legal life: is determined by the investment law or company act. (25 years renewable). Or agreed between owners within the law. B. Production life: is measured by the life of the main production line; during which this line is capable of delivering products. (Regardless of profitability) (HM oe Stl ats) catia one gi le Is SIN NS GS) yo tp I CWUYLS pany us C. Economic life: is the life during which the project produces products profitable to owners. Economic life is relatively shorter than the production life. We are interested in economic life. It includes 2 periods: C Establishment period (-3, -2, -1, 1, 2, 3) (investment cost & investment finance). OC Operating periods (operating cost, operating revenue). ¢ Project maybe: 1- New project (previous investment = zero) ' 2- Investment expansion (there is a previous investment) s > x 5) Project implementation & establishment ¢ 5,4 4as; «4, Fi 7 the project’s plan. Project turned into a company/figm, * * i® done in accordance with Page| 9we Dose tNaxe: Financial Feasibility Study Notes: * Inestablishment period the investment costs are incurred while in operating period the current operating costs and revenue are both noted. * At the end of the economic live of the project it could be a residual value from Selling the assets of the projects or selling the project to another lead [2] Identification of the Project type: There are two types of projects: (a) Ready for operations (no establishment period) * YO (initial investment) + Y1, Y2, Y3 (operating period) (b)Projects requiring an establishment period * Assume economic life 8 years. + Establishment period (3 years: Y-3, Y-2, Y-1) (ex. 2016,2017,2018). Ba perating period (5 years: Y1, Y2, Y3, ¥4, YS) (ex. 2019, 2020, 2021, 2022, 123). [3] Preparing estimates of the project : Includes determining the investment costs & investment finance, current operating costs, revenue & receipts. O In this feasibility study four groups of estimates should be made: a) Investment costs f b) Investment Finance or Sources of Finance [Owned capital (equity) & Borrowed capital (loans)] c) Current Operating Costs d) Current Operating Revenues (a) Investment costs: As a term is wider than the capital cost. | . * Capital costs is an accounting term related only to capital expenditures required to acquire/ purchase a fixed asset (e.g., plant, machinery, equipment, fixture, transportation means of like assets of useful life exceedingly usually one fiscal year). a eal el yo / le J pucoall 4p gllaall Aleash pM cially Lb Gh pales allaues 8 ull Gal Gass + Investment costs include long term assets (fixed assets) as well as short-term assets (current assets). Note: The costs of acquiring current assets are not capital expenditures to acquire fixed assets, Thus, accounting capital costs are only part of investment costs as long as the investment cost includes short term investment costs. + It must also be mentioned that the cost of capital is not a capital cost. The cost of capital refers to the costs of using finance from different sources through lending banks (loans) or by issuing shares whether common or any other type of shares. 3h (oy ill) Lez jal A gall JMS. (ye Malina saline ho Ch pall plains GSS sl} all Gal AUIS ws peel Ge sal gsi gl side CAMS ol ps pga Jlanal ah oeFinancial re, Doaa/Nowr ial Feas Remarks: U Depreciation: Systematic allocation of the capital expenditures of acquiring a depreciable fixed asset 4i2U sts J+! over the useful life of the asset using different methods. Such as: straight line method, double declining method, some of the years digits, units of production. In project economics, ignore the historical / actual cost and consider only fair market Value of the asset/ item being acquired. oo Agle eeaa coll JuodU Ustad Laill gp uiel gb asl y Lyall Gils) Galas, '" All capital expenditures should be charged on the fixed asset to be acquired. Such as charging machinery with customs & duties, transportation costs, costs of running trials or Some experiments before setting machine in a condition ready for operation. CAmortization: ‘There are two main items subject to amortization: 5 Amortization related to Intan ible long-term investment costs: refers to the allocation of the e; poe ‘apital expenditures of acquiring or purchasing these assets. An intangible long- term item of investment cost over the economic or productive or useful life of the asset is subject to amortization, a Amortization related to loans is to repay back the loan to the lending bank or lender as a | ‘ump sum or over installments. ODepletion «a Related with nature Tesources such as petroleum oil. It is a distribution of the capital cost of these Tesources over the estimated period of Production. ° Depreciation, Amortization and Depletion are not cash costs calculated but not ‘paid in casi (b) Investment Finance or Sources of Finance: Is the finance needed to cover all investment costs. + It must be noted that: Total Investment costs = Total Investment Finance Long term investment cost + Short term investment cost = Owned capital + Borrowed capital (Loans) * In general, the sources of finance are: First: main sources of finance such as owned capital & loans. Second: Other sources of finance including internal finance, provision, teserves, retained earnings to be re-invested, net income to be re-invested & Provisions in general are internal sources of finance. + The main emphasis in this course is on owned capital & borrowed capital (loans). Page| 11Financial Feasibility Study - Capital (Equity): Owner Sources of finance: - Borrowed Capital (Loan comes in the form of shares (common oF preferred) #Two terms should be dealt mith rae oe = Ss U The debt service= the ; Tear Hee the interest of loan in addition to installments to repay the 1 Amortizati or in incallmenns loan: the way the loan is to be repaid as lump sum (bulk) + Interest she Saat ini ing i eo ‘ould be calculated on the principal of the loan remaining & outstanding in nes is to be calculated from the start of contracting the loan whether to be paid irectly from the start of the loan period or to be deferred for a period or years after contracting the Joan, * Grace Period: the interest for this period is computed but not paid. However, interest during grace period should be paid after the end of grace period. The debt service= Interest + Installments Interest 1st year = loan principal x interest rate Interest each year after 1° year = Outstanding balance of the loan x interest rate Installment = Principal of the loan / number of loan years (C) Current Operating Costs: Costs which are consumed within only one year. Can be divided into two groups: First Group: Accounting current operating costs including Raw materials, Wages & salaries, Rent, Power and Interest on loans. In addition to these, depreciation, amortization, and depletion. Second Group: Cash current operating cost exclusive of interest on loans and do not include of course depreciation, amortization, & depletion charges which are non-cash current operating costs. Note: Interest on loans are cash paid but if the cash flow calculations for the purpose of. evaluating from the Project View, it is not to be considered as cash current operating costs which usually referred to as follows; Current operating cash costs exclusive of interest and not including of course depreciation, amortization & depletion charges. (D) Current Operating Revenues and Other Receipts: 0 This group of estimates includes sales revenue & other receipts from the sale of fixed assets (land, machinery) or the net residual value. O The net residual value includes the last working capital, net cash collected from the sale of land, and scrap or salvage of other assets. 1 Accounting net profit (pretax) = Current operating revenue — Current operating costs (cash & non-cash) C After tax accounting net profit = Pretax accounting net profit — income tax Page | 12Financial Feasibitiyy Doaa/ Nour [4] Project Evaluation : : " Methods of Investment Appraisal/ Evaluation: Traditional methods (N): ; . The accounting methods are based on accrual basis. Each year is to be charged with its costs, expenses, losses without regards to cash payments for these Cost, expenses, and losses. Example: Accounting Rate of Return "The non-accounting methods are based on cash flow concept for project evaluation. Cash flows in Project Economics: are a way of representing data related to the project in order to apply various methods of project evaluation, * This sub-group is divided into a) methods of evaluation ignore the time value of money (e.g., The Payback Period Method). of money (e.g., The Net Present b) methods of evaluation consider the time value Value, The Internal Rate of Return). Non-traditional methods () PREPARED BY: DOAA/ NOUR DON’T WORRY, I REALLY CAREFe ‘or each of the followin statements, if the statement Is true ai at a art of the statement is false select (B): cermin the current operating costs should pot.at all be SSaccine | i investment costs of industrial projects. the starti ip the appropriate investment law should not always be 3: Wh ng step of the investment cycle of every project. : en selecting an appropriate economic activity one may sometimes find it important to consider the differences, if any, between the “investment Ideas” and the “Investment Opportunities”, 4. “Savings” represent usually the clear path to “Investments”. 5. It is generally unacceptable to say that the proper meaning of the term “Project Evaluation” is somehow different from the conventional meaning of the term “Performance Evaluation”. FE 6. When classifying the investment costs of any new project, the goodwill should not be included in the long-term non-salable intangible investment costs. av 7. A “Pre-feasibility Study” should contain the probable “prohibitive Constraints” which may be related to the project under study. 8. It is acceptable to say that all the functional feasibility studies of any “Comprehensive Feasibility Study” should not be given the same degree on investigation in relation to every project \~ 9. The favorable trends of the investment movement can accurately be measured by the number of the successful “Active “Investment Promoters” and not by the number of the “Typical Investors” who command some economic resources. 10. The increase in prices does not mean inflation if it is economically justified. a @11. A maximum degree of inflation prevails when prices of Boos are Increasing while both; the quantities and the qualities of these 800ds are decreasing over time. TT 12. The comprehensive feasibility study ends by an investment decision regarding the investment proposal. 13. One of the considerations of selecting appropriate locations forthe investment Projects is to enjoy longer tax-exemptions, 14. You should Seneralize when dealing with the comprehensi feasibility Studies and project emiaion F. sho } yn 15. The term “Cost of Capital” in “Project Economics” is different from the term “Capital Costs or Expenditures” in “Financial Accounting”,For each of the following statements, if the statement is true gore pe of the statement is false select (B): riod” as a tool to evaluate investment Proposals ignores the time value of money but does not ignore ie Bina Cash Flow” after the pay-back period. |” 2 . No_items of the current operating costs should be considered in the investment costs of industrial projects. same, 3. “Business Projects” are exposed to approval and refusal, but if they are approved they lead to business firms and/or segment(s) of operating firms, 4. “Investments” represent usually the clear path to “Savings” and not vice-versa. Sa)\ 5. The costs of the functional feasibility studies can be avoided or saved just we discover at least one important prohibitive constraint. “| ~ 6. Some projects are subjected to project evaluation processes while some other projects are subjected to performance evaluation processes. F 3 7. There is always a standard sequence to complete the functional studies of every “Comprehensive Feasibility Study”. FE 8. The proper meaning of the term “Project Evaluation” is different from the conventional meaning of the term “Performance Ealuaton | 9. “Project Evaluation” ends-up by issuing appropriate investment decision with regard to a project which is subjected to a comprehensive feasibility study. \ 10. “Investments” are always the channels to “Savings” and not vice-versa. Caw) I 11. The higher the amount of saved income, the higher the expected volume of investments. TT (3) 1tity of 7 3 ile quality and/or quant 12. If prices are increasing whi a na maximum degree of Purchased goods are also increasing, 2 CTCAgn inflation is achieved. : iate between the term 13. It is normally acceptable not to differentiate bers “Investment Opportunity” and the term “Investment fe tional 14. Any “Pre-fea lity Study” should contain all br - fealty studies of the “Comprehensive Feasibility a it 25. Not all the functional feasibility studies of" any “Comprehensive Feasibility, Study” should be given the same degree of investigation, 16, There is alw ays a standard or typical sequence or specific Order to complete the first three functional feasibili dies of every “Comprehensive Feasibility Study”, a= 17. For every investment cycle, the first step is always the Preparation of a “Pre-feasibility Study’"to identify any prohibitive Constraints. : BP 2 Gy aD Gro 18. The first working capital should cover the requirements of the first cycle of Operating. So, it must be included as a part of the investment Costs of any industrial ProjetTrue/Fa] i Se Assignment on Lecture 1 & 2 Determine wi, ether ¢; and correct th ach of the f ¢ false on following st es only: ig statements is true or false le It is not a ge: neral rul roced & or cor 2, Pypeetes should be followed for the study of ony haere) a h cting an a of any investment project.(T, unimportant to cose roPriate economic activi if ‘invest consider the di ivity, one may find it A ee wert Opportunities” and the “Investment Ideas? wo + [tls always acceptable n ae ; pobis Companies” ( e to confuse the term “Projects” with the term . je term “Proj a ject Evaluation” i - ; ‘Performance Evaluation” Cr) is somehow different from the term . Some proj : Ter Fes ae subjected to project evaluation processes while some 6 The prefeasibil e subjected to performance evaluation processes. EF of few feasibility study of an investment project is not a general study pages explaining in broad terms an investment idea or Opportunity. —~ “Savings” represent the way to “Investments”. .- meaning when 8. The term “Consumption” should be given a different compared with the term “Investment”. 9. Selecting the appropriate investment law should be treated as to be le. F Je should be the proper the starting point o' The starting point of any investm identification of relevant “Investment Ideas or Opportunities" The third step in any investment cycle is the preparation of a comprehensive feasibility study for any investment proposal. 12. A “Market Gap” is sometimes not different in its meaning from the meaning of the “Market Share”. is not a monkey!, but he/she is somehow 43. The investment promoter i distinctive when compared with the typical investor. T ould be located to be 14, It is a general rule that all industrial projects shi very close to the consumers markets. 15. Feasibility study is the use of that indicators generated from project evaluation in making proper investment decisions. - Q , f any investment cycl ent cyc 10. 11,16. Project evaluation should be done bya team of experts. fe : For some technical reasons, industrial projects should be establisheg near the sources of their raw materials. F ‘8. The Proper meaning of the term “Project Evaluation” is different from fe the conventional meaning of the term “Performance Evaluation”. . ous favorable trends in the investment movement can be accurately 20, Busine’ bY the number of the successful investment active promoters. T . eae Projects” are exposed to approval and refusal, but if they are flrine “se they lead to business firme and / or segment(s) of operating 21. "4 ” S Tene are always the channels to “Savin oP investments mount of saved income, the higher the expected volume 23. If prices are j if are also igen re while quality and/ or quantity of purchased goods Sing, then a maximum degree of inflation is achieved. F gs” and not vice-versa. F 24. “Proj ier hie clea with tore oe by issuing appropriate investment it rd to a project which is subj te _ comprehensive feasibility study, — oe 4 25. one of the Considerations of selecting appropriate locations for the investment projects is to enjoy longer period of tax exemptions. —- :. 26. A “Pre-feasibility Study” should contain the Probable “Prohibitive Constraints” which may be related to the Project under study, TT 27. It is acceptable to Say that all the functional feasibility studies of any “Comprehensive Feasibility Study” should not be given the same degree of investigation in relation to every project. 7— 28. The size of the “Market Share” can be equal to the size of the “Market Gap”. ar 29. The pre-feasibility study of any investment project should contain the four functional studies of any comprehensive feasibility study. 30. The location of any industrial project should be determined in such a way as to minimize only the costs of transporting the products to the consumers markets. e @ ,10. B 1 12. N 13. 14. 15. . The third step feasibility study for v grue/False Assignment on lectures 1 & 2 petermine whether each of the following statements is true or false and correct the false ones only: set of sequential It is not a general rule or convention that a specific investment ocedures should ‘bil protect. be followed for the feasibility study of any ee a an appropriate economic activity, one Tay find it important to consider the differences, if any, between the ‘Investment Opportunities” and the “Investment Ideas”. It is always acceptable not to confuse the term “projects” with the term ‘Existing Companies”. The term “Project Evaluation t from the term ‘Performance Evaluation”. Some projects are subjected to project evaluation processes while some other projects are subjected to performance evaluation processes. The pre-feasibility study of an investment project is not @ general study of few pages explaining in broad terms an investment idea or opportunity. ” is somehow different “Savings” represent the way to “investments”... The term “Consumption” should be given a different meaning when compared with the term “investment”. te investment law s| Selecting the appropria int of any investment cycie. should be the proper the starting pol The starting point of any investment cycle identification of relevant “Investment Ideas or Opportunities”. in any investment cycle is the preparation of a r any investment proposal. eaning from the hould be treated as to be comprehensive A “Market Gap’ meaning of the The investment promote: distinctive when compare: It is a general rule that all industrial proje very close to the consumers markets. Feasibility study is the use of that indicators generated from project evaluation in making proper investment decisions. ”” is sometimes not different in its m' “Market Share”. ris not a monkey!, but he/she is somehow d with the typical investor. cts should be located to berts. 16. Project evaluation should be done by a team See 17. For some technical reasons, industrial projects s| near the sources of their raw materials. nce 18. The proper meaning of the term “Project Evaluation i a m the conventional meaning of the term “Performance Eva o 7 19. The favorable trends in the investment movement can be nce 7 ly measured by the number of the successful investment active promoters. 20. “Business Projects” are exposed to approval and refusal, but if they os approved they lead to business firms and / oF segment(s) of operating irms. Png “Investments” are always the channels to “Savings” and not vice-versa. + The higher the amount of saved income, the higher the expected volume . of investments. _ meas are increasing while quality and/ or quantity of purchased goods also increasing, then a maximum degree of inflation is achieved. id be establisheg 24, poles Evaluation” ends-up by issuing appropriate investment ecision with regard to a project which is subjected to a comprehensive feasibility study. 25. One of the considerations of selecting appropriate locations for the J/nvestment projects is to enjoy longer period of tax exeniptions. a 26.A “Pre-feasibility Study” should contain the probable “Prohibitive Constraints” which may be related to the project under study. 27. It is acceptable to say that all the functional feasibility studies of any “Comprehensive Feasibility Study” should not be given the same degree of investigation in relation to every project. 28. The size of the “Market Share” can be equal to the size of the “Market Gap”. 29. The pre-feasibility study of any investment project should contain the four functional studies of any comprehensive feasibility study. 30. The location of any industrial project should be determined in such a way as to minimize only the costs of transporting the products to the consumers markets.TF Fe fee yiate | ere feat ey) ee <= Rerts, wlolr}|ola ‘statement No. 4 2 3 4 40More detailed notes in theoretical ch * T Inflation — + Consumption > | Savings > | Investment »So we shouldn’t neglect the inflation in financial feasibility study. * In prefeasibility study (quick but intensive) : Constraints — Cycle will stop No constraints ++ Cycle will continue # Types of the Feasibility Study . (In more details) First: The investment climate & the legal feasibility study: ~The purpose of preparing investment climate study & legal feasibility study is to reach an agreement with the community & the government regarding the feasibility of establishing the project and to nominate the appropriate law which will govern the establishment and operating the project. Aa sSally ect ce LEN ue tl go 25 ya es giell Gal yay LYN Elbe al Es.pall JR y LLU Sas gi ual i a hy Gy pall LA) syne Obs Investment laws to establish the project. Laws, Regulations and policies related to investment in the country. Ex: Taxation laws, Monetary policy, Inflation rate and tradition and customs. I will pay some legal fees (cost). Second: Marketing Feasibility study: The purpose of this feasibility studies is to determine the quantities of sales forecasted for the entire operating life of the project in the local market & abroad, and to settle down polices for pricing for at least a time horizon of ten years. ebay cla Spud! gb py ill Littl peal lye MAb gall Ciaguall CS sans gh Lye Gill Marketing feasibility studies includes: a. Defining the market gap (market demand > market supply) : It is the total difference between total demand and total supply. This gap should be filled using two ways: 1- Import the needed qualities 2- To establish projects to close the gap b. Defining the market share: Is the share of the project under study to fill the market gab. There could be other projects sharing the project in filling the market gab. Then the market gap is usually larger than the market share. But if there is only one project to fill the market gap, then there is no difference between the market gap and market share. c. Specifying marketing structure d. Determining the pricing policies( qhird: Technical Feasibility Study: + The purpose of the feasibility study is: a, Selecting the best location of the project. gé5+ Ji! i Na ae Se raw materials and near from customers. ‘. - me benefits like tax exempted, grants and loans with low interest rate. ermining the optimal size of production. ¢32 +1! al c. Selecting the best technology. (Techniques of production) “25! Jil 3! = Capital intensive —> Capital invested and technology used more than labor man power (capital > workers) capital intensive projects lead to higher return but increase unemployment rate. - Labor intensive — mainly based on mi technology used) © Iwill pay cost land (location) - cost of technology an power (man power > capital invested and Fourth: Financial/Economic Feasibility Study > The objective of this feasibility study is to assess terms of profitability & economic benefits. : “sheaf gil asd Sas O° E225 > The target is to prepare indicators or criteria to be used for project usually based on the outcomes of the other feasibility studies. the attractiveness of the project in ab ss ig psall kal 2 oe el t evaluation. It is Note: the results of the previous feasibility studies are considered inputs to be processed in the financial feasibility study. ——— Notes: «In project implementation & establishment > project turns into a company / firm. + Typically investor is like a monkey because he is acting like the other investors. Financial/Economic Feasibility Study includes: [1] Identification of the project life: Any project has three lives: A.Legal life: is determined by the investment law or company act Or agreed between owners within the law. t. (25 years renewable). Production life: is measured by the life of the main production line; during which this Production lite: line is capable of delivering products. (Regardless of profitability)(Fan ce shal ia ) Stal Jpeg le ld LS 1 Ss Cie tell CUI LS sony ©. Economic life: is the life during which the project produces products profitable to Economic life: oduct owners. Economic life is relatively shorter than the production life. We are interested in economic life. It includes 2 periods: a Establishment period (-3, -2, -1, 1, 2, 3) (investment cost & investment finance). -] Operating periods (operating cost, operating revenue). * Project maybe: |- New project (previous investment = zero) 2- Investment expansion (there is a previous investment) Notes: * In establishment period the investment costs are incurred while in operating period the current operating costs and revenue are both noted. . * At the end of the economic live of the project it could be a residual value from selling the assets of the projects or selling the project to another investor. Depletion +44 : Related with nature resources such as petroleum oil. It is a distribution of the capital cost of these resources over the estimated period of production. Note : Depreciation, Amortization and Depletion are not cash costs calculated but not paid in cash Doaa/Nour Don’t worry, | really care