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The nature and importance of economic feasibility studies for investment projects 1.

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Presentation on theme: "The nature and importance of economic feasibility studies for investment projects 1."— Presentation transcript:

1 The nature and importance of economic feasibility studies for investment projects 1

2 Students will be able to: Discuss the concept of economic feasibility studies. Know how to analyze the projects. Explain how to evaluate the projects. Explain how to follow up the projects. Examine the importance of economic feasibility studies. Identify the types of economic feasibility studies. Analysis & Evaluation Project Theortical & Practical.2

3  The subject of feasibility studies got great interest in achieving use and optimal distribution of available economic resources. There is a close relationship between the economic feasibility studies and the nature of investment decisions, the more decisions depends on comprehensive, accurate, objective and scientific studies, where decisions were more successful and safety in achieving the objectives. Analysis & Evaluation Project Theortical & Practical.3

4  It is a comprehensive scientific studies of all aspects of the project or proposed projects, which may be either a detailed preliminary studies, which can be achieved through it to the selection of an alternative or investment opportunity among several alternatives or proposed investment opportunities. these studies must be characterized by accuracy, objectivity and comprehensiveness. It is a group of specialized studies carried out to make sure that the project outputs (benefits, income) is greater than inputs (costs) or at least equal to them. Analysis & Evaluation Project Theortical & Practical.4

5  United Nations for Industrial Development Organization (UNIDO). Identifies the feasibility study as: The study that determine the productive capacity of the project in the selected location by using the specific technical way of production appropriate to raw materials, and with investment and determine operational costs, and expected revenues yield a specific return on investment. Analysis & Evaluation Project Theortical & Practical.5

6  The Gulf Organization for Industrial Consulting and it's status of "Doha", it is an Arab regional organization considering the investment opportunities in the Gulf Cooperation Council (GCC) countries. Identifies the feasibility study "as a study by which a decision for the project, whether to approve or disapprove the project by the competent governmental authorities, or by financial institutions which are required to provide the necessary funding for the project or even by the investor himself on the decision to implement the project". Analysis & Evaluation Project Theortical & Practical.6

7 According to this definition feasibility studies can be classified as to the following:  Detailed feasibility studies.  Pre-feasibility studies.  The models used by government agencies for approval the project.  Only basic data about the project can be considered a preliminary study for the project. Analysis & Evaluation Project Theortical & Practical.7

8 Most of the feasibility studies for small and medium projects to the private sector in most countries under the last three items of the previous classification. Feasibility studies of large projects require an integrated team work of the specialized technical experience, including the specialized engineer in the project activity field, and experts in financial and economic analysis, and consultants in management, sociology and law. Analysis & Evaluation Project Theortical & Practical.8

9 The concept of projects analysis, "is carried out a detailed study on all the different aspects of the project." These studies include the following: 1. Study the marketing aspects of the project. 2. Study the technical and engineering aspects. 3. Financial aspects and determine the total required investment and financing plan. 4. Financial analysis and calculating the indicators of business profitability of the project. 5. Economic analysis and calculating the indicators of social benefits for the project 6. Study the project effects on the environment.  And these studies are combined to make the economic and technical feasibility of the project, which will be presented in detail later. Analysis & Evaluation Project Theortical & Practical.9

10  Is limited to financial analysis of projects, whether it's new or existing, and it take from the financial statements for the projects analysis, namely: 1. Balance sheet of the project: a statement of assets and liabilities at the end of a specified time period (usually the end of the year). 2. Financial checklist or a list of financial sources of income and use of funds and assets that explain how to finance the liabilities. 3. Income or profit and loss account of the project: which shows total revenues, total costs and net profit during the period of time.  These lists are used by investors and those interested in such projects to extract the financial ratios as liquidity, profitability, debt and activity ratios, as financial indicators help in making decisions to implement the project or not, especially small and medium projects. Analysis & Evaluation Project Theortical & Practical.10

11  The project evaluation is to assess the project before implementation as aim to make the decision of implement the project. The evaluation process aims to review the feasibility study and it's financial technical, economic and organization indicators. Who is evaluating the project either investors or the funding of the project, such as banks, or others, such as the government, which will execute the project. Analysis & Evaluation Project Theortical & Practical.11

12 Example: Suppose that an investor has prepared a feasibility study for a project, and wanted to give it to a commercial bank to seek financing for the project or loan from the bank, where the study found that the rate of return on investment was 15%, the Bank through it's expertise of the project, assessment and re-cost assumptions and income found that the rate of return on investment does not exceed 7% in the best conditions. Analysis & Evaluation Project Theortical & Practical.12

13 The result is that the Bank refuses to provide the loan to the investor. In the same way the financier authority carried out the analysis and evaluation the projects on a specific financial and economic basis. The accuracy of the evaluation depends on: Accuracy of data and technical information. The expertise of the evaluation process makers. Analysis & Evaluation Project Theortical & Practical.13

14  It is study the project indicators after completion the implementation stages, and beginning the production. This study is occur by the owner, or organization funded the project. The aim of this study is compared the performance of the actual project with the status in the feasibility study and the evaluation process. All of these studies together make on: Discovery the positive or negative effects of the project implementation. Provide a great opportunity to correct the project selection criteria. Analysis & Evaluation Project Theortical & Practical.14

15 The importance of the feasibility study as the means by which they can answer the following questions: What is the best project can be done? Why doing this project not the other? Where is the place of the project? What is the best time for the project and put its products? Who are the target group in the project? How will project establishment? What is the need of the project to workers and machines...? How much will the project costs? Will the project achieve profit or not? What are the sources of funding the project? How choose a project from a set of draft alternative? How install that the project economically feasible? Analysis & Evaluation Project Theortical & Practical.15

16 Why preparing economic feasibility studies? Reduces probability of the project failure reduce the waste of capital. Assist in the differentiation between available projects. Achieve optimum utilization of available economic resources. Support the economic and social development, process. Analysis & Evaluation Project Theortical & Practical.16

17 Can distinguish between 3 types of feasibility studies, despite the overlap among them, namely: 1. Preliminary feasibility studies. 2. Detailed feasibility studies. 3. Technical feasibility studies. Analysis & Evaluation Project Theortical & Practical.17

18 A Business Feasibility Study can be defined as a controlled process for identifying problems and opportunities, determining objectives, describing situations, defining successful outcomes and assessing the range of costs and benefits associated with several alternatives for solving a problem. The Business Feasibility Study is used to support the decision-making process based on a cost benefit analysis of the actual business or project viability. Analysis & Evaluation Project Theortical & Practical.18

19 The feasibility study is conducted during the deliberation phase of the business development cycle prior to commencement of a formal Business Plan. Feasibility Study an analytical tool that includes recommendations and limitations, which are utilized to assist the decision-makers when determining if the Business Concept is viable (Drucker 1985; Hoagland & Williamson 2000; Thompson 2003c; Thompson 2003a). Analysis & Evaluation Project Theortical & Practical.19

20 1. It is estimated that only one in fifty business ideas are actually commercially viable. Therefore a Business Feasibility Study is an effective way to safeguard against wastage of further investment or resources (Gofton 1997; Bickerdyke et al. 2000). 2. If a project is seen to be feasible from the results of the study, the next logical step is to proceed with the full Business Plan. The research and information uncovered in the feasibility study will support the business planning stage and reduce the research time. Analysis & Evaluation Project Theortical & Practical.20

21 3. Hence, the cost of the Business Plan will also be reduced. A thorough viability analysis provides an abundance of information that is also necessary for the Business Plan. 4. For example, a good market analysis is necessary in order to determine the business concept's feasibility. This information provides the basis for the market section of the Business Plan (Bangs 2000; Hoagland & Williamson 2000; Truitt 2002; Thompson 2003b). Analysis & Evaluation Project Theortical & Practical.21

22 4. Finally, a feasibility study should contain clear supporting evidence for its recommendations. 5. The strength of the recommendations can be weighed against the study ability to demonstrate the continuity that exists between the research analysis and the proposed business model. Analysis & Evaluation Project Theortical & Practical.22

23 7. Recommendations will be reliant on a mix of numerical data with qualitative, experience-based documentation. 8. A Business Feasibility Study is heavily dependent on the market research and analysis. 9. A feasibility study provides the stake holders with varying degrees of evidence that a Business Concept will in fact be viable (Hoagland & Williamson 2000; Thompson 2003c; Thompson 2003a; Wickham 2004). Analysis & Evaluation Project Theortical & Practical.23


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