Project Identification and Feasibility Study PDF

PROJECT/ PROJECT IDENTIFICATION FEASPRO What is a PROJECT?  Project Definition Project is defined as a scheme or part of scheme a) for investing resources b) which can be evaluated as an independent unit  Reasons for Defining a Project 1. T...

PROJECT/ PROJECT IDENTIFICATION FEASPRO What is a PROJECT?  Project Definition Project is defined as a scheme or part of scheme a) for investing resources b) which can be evaluated as an independent unit  Reasons for Defining a Project 1. To determine the scope of the project. 2. To determine the required investments/sources of funding and implementation period. 3. To be able to analyze and evaluate its investment merits. Project Concept of Evaluating Long Term Investments PROJECT PROJECT COST IDENTIFICATION ·Estimates AND PROMOTION ·Timetable ·Drawdown schedule ·Financial package COMPARE PROJECT COST AND BENEFITS PROJECT ·Financial PROJECT BENEFITS ·Economic ·Market/Commercial ·Technical ·Managerial ·Financial ------------------------------- ECONOMIC ANALYSIS  Project Cycle Project cycle is a series of activities or steps that a project take from conceptualization to operation. Phases of the Project Cycle 1) Project Identification 2) Project Preparation 3) Project Appraisal 4) Documentation 5) Project Supervision  Phases of the Project Cycle Project Identification It is the process of seeking out possible investment projects. Project Preparation It involves the preliminary assessment of the project through a study if initial designs, alternative technical processes and initial calculations of financial and market aspects.  Phases of the Project Cycle Project Appraisal It is the comprehensive and systematic review of the technical, market, financial, managerial and economic aspects of the project to ensure its viability. Documentation It is the translation of all the findings made during the project appraisal stage into formal records. Project Supervision It is the follow-up and management of the project through its implementation, construction and operation stages to ensure that the project is executed as planned.  Functions in the Project Cycle 1. Market/Commercial 2. Technical 3. Financial 4. Economic 5. Managerial  Why Identify Project? There is a scarcity of resources (i.e., capital, labor, raw materials, land, etc.). The usage of these scarce inputs must be maximized, based on the objectives of the investing entity.  Eleven (11) Guides to Identify Project Opportunities 1. Study Imports/Exports 2. Investigate Local Materials and Resources 3. Study Available Skills 4. Monitor Economic Indicators 5. Make Industry Studies 6. Originate or Apply Technology 7. Examine Inter Industry Relationship 8. Evaluate Development Plans 9. Review Old Projects 10. Observe Experience Elsewhere 11. Use Standard Industry Classification Lists  Importance of Feasibility Studies Provide investors with the viability and all the vital information they need in deciding the extent of their exposure to certain business proposal. Financial institutions normally require feasibility studies from loan applicants borrowing beyond a certain loan ceiling.  Scope and Nature Scope Pre-operating, Management, Marketing, Production/Technical, Financial, and Socio- Economic feasibilities. Nature The best way of gauging the correctness is the practicality of being implemented in a specified future time. Data inputs must be carefully studied and selected and should contain allowances for future inflationary considerations. Project Cost Estimate  Project Cost Project Cost is the approximate investment requirements of a particular project from the time it was conceived to the start of commercial operations.  Factors Affecting Project Feasibility Cost Size Nature Depth Availability of data Length of the project  Items Included in Project Cost Estimate 1. Pre-operating and Organization Expenses 2. Land 3. Site Preparation and Improvements 4. Buildings and Other Structures 5. Machinery and Equipment 6. Marine Insurance and Freight 7. Bank Charges and Other Local Expenses 8. Custom Duties and Taxes 9. Installation Costs 10. Spare Parts 11. Start-up and Trial Run 12. Process Acquisition/Patents/Licenses 13. Technical Assistance 14. Other Fixed Assets 15. Financial Charges during Construction or Pre-operating Period 16. Working Capital 17. Provision for Contingencies  Pre-Operating and Organizational Expenses  It is based on the actual and projected expenditures from the project inception state until the start of commercial operations. Examples:  Initial investigations  Research and technical analysis  Economic, marketing, and profitability studies  Design studies  Legal advice  Incorporation papers, issuance of shares  Initial advertisement  Establishment of sales network  others  Land The cost of land should be the amount invested by the proponent in land for the project. The cost should likewise include notarial and registration fees. Usual sources for the cost estimates of land: the prevailing market rate in the area, land purchase agreement contract, and offers.  Site Preparation and Improvements  This includes the preparation and improvements of the following: a) Land surveys and fees b) Dewatering and drainage c) Site clearing d) Excavation e) Grading f) Underground sewers g) Piling h) Roads, walkways, and paving i) Parking lots j) Landscaping k) Fencing l) Fire protection facilities  Site Preparation and Improvements Basis for cost estimation: contractor’s estimate based on plans, site consideration, topography and job to be undertaken. Estimates may also be on a per square meter basis, which is usually available from land developers and contractors.  Buildings and Other Structures Types of Typical Buildings within an industrial plant: Process (main) building Administration offices Laboratory Medical services Warehouse Maintenance shops Garages Cafeterias  Buildings and Other Structures  Auxiliary areas or offsite facilities:  Steam generation and distribution buildings  Power generation and distribution buildings  Cooling towers and cooling water distribution system  Fuel oil/fuel gas systems  Pollution control facilities  Fireloops and hydrants  Separators and ponds  Yard lighting and communications  Receiving storage and shipping  Bases are usually contractor’s estimates according to building plans. In the absence of contractor’s estimates, costing may be computed on a per square meter basis.  Machinery and Equipment Should cover main process equipment and auxiliary equipment. Basis for costing: Quotations, past experience with similar equipment used in other projects, machinery dealers and suppliers, and rapid cost estimate.  Marine Insurance and Freight The charges for marine insurance and freight are based on the arrangement with the equipment supplier, but should basically include inland freight, ocean freight, and handling expenses up to the port of destination. This item is usually sated in the supplier’s quotation. Basis for costing: past experience in identical or similar equipment, from insurance firms/shipping companies/freight forwarders with whom the necessary details of the equipment to be insured/delivered should be  Customs Duties and Taxes For most countries, all articles, when imported from another foreign country, are subject to customs duties and taxes, except those exempted by virtue of government decree, special arrangement or government incentives.  Bank Charges and Other Local Expenses Bank charges are incurred when imported equipment is acquired. These consist of fees incurred during opening of letter of credit for the equipment. Delivery and other local expenses are incurred when in the local delivery of the equipment from warehouse or pier to the plant site.. Arrastre charges are costs incurred in bringing down the goods from the vessel to the pier and warehousing these goods. Installation Costs and Spare Parts Installation costs are normally included in civil works expenditures in the form of foundation, plumbing, electrical and support costs. Sometimes this is not included specially for expansion projects. Spare Parts vary depending on the type of equipment and the country of origin. Normally, one lot of spare parts is included together with the machineries and equipment acquisition.  Start-up and Trial Run These are the costs incurred during the test runs or debugging stage of the machineries and equipment. Costs for these may be derived through the experience of the process owner or supplier or the proponent himself.  Process Acquisition/Patents/Licenses This is based on the actual contract with the process supplier or process owner. Some patents and licenses are charged based on a percentage or sales or of profits of the company. Only the portion which is payable prior to commercial operations, if any, shall form part of the project cost.  Technical Assistance This is based on the contract or quotation. Sometimes, the basis is actual expenditures which includes board and lodging, stipends and transportation expenses for technicians which are sent to the proponent company. For the majority of cases, installation and start-up assistance are given free and form part of the machinery and equipment cost.  Other Fixed Assets These are costs which may be incurred depending on the industry. Bases are usually per requirements and current costs. These include service and delivery vehicles and furniture and fixtures.  Financial Charges During Construction or Pre-Operating Period This consists of all fees and charges which are incurred during the pre-operating stage relative to the securing of financing. Actual fees would depend on the type of financing incurred and the actual prevailing interest rates. This item is usually left out by most proponents in their estimate of the project cost. This is a real cost and must be taken into account and paid specifically for projects with large loan requirements and long gestation periods.  Working Capital It is the fund required for day-to-day operations which is tied up in raw materials, work-in process, finished goods, accounts receivables and operating cash to ensure an uninterrupted flow of operations. Components of Working Capital  Raw Material Inventory  Work-in Process  Finished Goods  Account Receivables  Operating Cash  Other working capital requirements  Provision for Contingencies Common source of inexactness: accidental events, changes in general conditions, imperfections in estimates, oversights, and arithmetic errors  Rapid Cost Estimate Methods Unit Price Six-tenths Factor Capacity Adjustment by Exponential Method Project Timetable  Project Timetable  The project timetable lists down the individual events or activities of a project from project conceptualization to commercial operation, according to a time scale and in order of precedence.  This is significant in order to determine the minimum amount of time necessary to put the project timetable into operation.  Errors in estimating the project timetable may cause delays in certain activities which could lead to project cost overruns. Knowing the timetable also allows the proponent to maximize on the use of time and minimize on interest and financial charge prior to operations.  Funds Drawdown Schedule A funds drawdown schedule tells the time when funds for a particular activity should be withdrawn/disbursed or made available. This is significant since both the creditor and specially the proponent may have to prepare funds for the purpose. This drawdown schedule is also significant for computation of the financial charges during the pre- operating period. Feasibility Study Outline Feasibility Study Outline 1. Introduction 1.1 Product/Project Description  Detailed physical and functional description of the project or product. 1.2 Industry Assessment  Assessment of prospects, opportunities and problems in the industry being addressed by the study  Information on related industry, i.e., revenue/income, substitute/similar products  Feasibility Study Outline 2. Market Feasibility 2.1 Competitors’ Profile  Evaluation of competitors using the 4P’s of marketing, namely; product, price, place, and physical distribution. 2.2 Target Market  Selection of target market and positioning of the product/project 2.3 Detailed Demand and Supply Analysis  Analysis of existing data, i.e., consumption, imports, exports and production  Forecast future demand or performance using appropriate forecasting tools Feasibility Study Outline 2. Market Feasibility 2.4 Price Determination  Determination of the cost of the product/project with the use of appropriate cost accounting and engineering economy tools  Computation of production cost  Determination or mark-up and market price 2.5 Distribution System  Determination of appropriate channel of distribution Feasibility Study Outline 2. Market Feasibility 2.6 Promotions Aspects  Formulation of advertising strategy and projection of marketing cost  Design of packaging material  Term of sale and discounts 2.7 Evaluation of marketing feasibility  Feasibility Study Outline 3. Technical Feasibility 3.1 Plant Location  Determination of exact site and alternatives 3.2 Manufacturing/Operations Processes  Description of the conversion process from raw materials to finished goods 3.3 Capacity Requirements  Target share in the market pot  Machine requirements with line balance  Utilities requirements  Manpower requirements 3.4 Plant Layout and Design 3.5 Evaluation of Technical Feasibility Feasibility Study Outline 4. Management Feasibility 4.1 Ownership 4.2 Organization Structure 4.3 Personnel Requirements 4.4 Evaluation  Feasibility Study Outline 5. Financial Feasibility 5.1 Capital Requirements  Marketing and technical expenses  Pre-operating and developmental expenses 5.2 Sources of capital with funds drawdown schedule 5.3 Financial Projections  Balance sheet  Income statement  Cash flow statement  Cost of good sold statement 5.4 Financial Analysis and Evaluation Feasibility Study Outline 6. Socio-Economic Feasibility 6.1 Social Costs and Benefits 6.2 Economic Analysis 6.3 Evaluation 7. Conclusion and Recommendation