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What is a feasibility Study ?
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A. Investment project cycle and types of pre-investment
studies
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.
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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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11 Opportunity studies
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:
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1.2 Pre-feasibility studies
Why to do a pre-feasibility study ?
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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. 11
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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
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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
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1.1 Characteristics of strategic orientation
- 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.
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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
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