Feasibility Study Dr. Ahmed Galal
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Modern University For Information and Technology
Civil Engineering Department
Lectures Notes of
Feasibility Study
CENG 328
Prepared By
Dr: Ahmed Galal
(First Edition 2021)
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Vision
The vision of the Faculty of Engineering at MTI university is to be a
center of excellence in engineering education and scientific research in
national and global regions. The Faculty of Engineering aims to
prepare graduates meet the needs of society and contribute to
sustainable development.
Mission
The Faculty of Engineering MTI university aims to develop
distinguished graduates that can enhance in the scientific and
professional status, through the various programs which fulfill the
needs of local and regional markets. The Faculty of Engineering hopes
to provide the graduates a highly academic level to keep up the global
developments.
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Contents Chapter One .................................................................................................................................................. 6
Feasibility study Definition: ...................................................................................................................... 7
Reasons for the feasibility study: .............................................................................................................. 7
The relationship between the feasibility study and strategic planning: ................................................... 8
Contents of the economic feasibility study for any project: ..................................................................... 9
Chapter Two Investment project: ................................................................................................... 12
Investment project: ................................................................................................................................. 13
First: new investment projects: .......................................................................................................... 14
Second: Completion projects: ............................................................................................................. 14
Third: Expansion projects: ................................................................................................................... 14
Fourth: Modernization projects (replacement and renewal): ............................................................ 15
Project management: ............................................................................................................................. 15
The program:........................................................................................................................................... 16
Program management: ........................................................................................................................... 16
Project Elements or Components: .......................................................................................................... 17
Project relationships with other projects: .............................................................................................. 17
(i) Autonomous Relationship of the Project: ...................................................................................... 18
(ii) Non-Autonomous Relationship of the Enterprise: ........................................................................ 18
A- Complementary relationship: ......................................................................................................... 18
(i) Independent relationship of the Project: ....................................................................................... 18
(ii) Non-Independent relationship of the Project: .............................................................................. 19
A- Complementary relationship: ............................................................................................................. 19
B- Interchangeability Relationship of the Project: .................................................................................. 19
Project classification: .............................................................................................................................. 19
Developing countries and investment projects: ..................................................................................... 20
First, political reasons: ........................................................................................................................ 20
Second: Environmental reasons: ........................................................................................................ 21
Third: Economic reasons: .................................................................................................................... 21
Fourth: Technical reasons: .................................................................................................................. 22
Investment decisions: ......................................................................................................................... 23
Thinking about investment projects: ...................................................................................................... 25
Project promotion: .................................................................................................................................. 26
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Investment decision ................................................................................................................................ 27
Ranking Decisions ................................................................................................................................... 28
Accept /Reject Decisions ......................................................................................................................... 29
Mutually Exclusive Decisions .................................................................................................................. 30
Factors affecting investment decisions................................................................................................... 30
Management philosophy ........................................................................................................................ 31
Market Study and Sales Forecasting ....................................................................................................... 31
Competitor behavior ............................................................................................................................... 31
Alternative opportunities ........................................................................................................................ 32
Taxes and Depreciation ........................................................................................................................... 32
Funding Structure and Sources ............................................................................................................... 33
Working capital ....................................................................................................................................... 33
Machine sources ..................................................................................................................................... 33
Balancing cash flows ............................................................................................................................... 34
Change in price level ............................................................................................................................... 34
Production mode .................................................................................................................................... 34
Non-economic factors ............................................................................................................................. 34
Timing...................................................................................................................................................... 35
Risk and uncertainty ............................................................................................................................... 35
Project and organization circumstances ................................................................................................. 35
Impact on the organization's circumstances .......................................................................................... 36
Organization environment ...................................................................................................................... 36
Organizational Structure of the Organization ......................................................................................... 38
Organizational strategy ........................................................................................................................... 38
Identifying new projects that will generate more profits ....................................................................... 39
Infrastructure of projects ........................................................................................................................ 40
Chapter Three Project idea, selection and preparation ....................................................................... 41
Target ...................................................................................................................................................... 42
Project Idea ............................................................................................................................................. 42
Choosing the right project ...................................................................................................................... 42
The correct setup process for the project .............................................................................................. 45
Project work document .......................................................................................................................... 45
Project client needs and expectations .................................................................................................... 46
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Define project constraints ...................................................................................................................... 48
Due Assumptions .................................................................................................................................... 48
Legal form of the project ........................................................................................................................ 49
Chapter Four General framework for project feasibility studies ......................................................... 52
Target ...................................................................................................................................................... 53
Introduction to feasibility studies ........................................................................................................... 53
First: Identification stage ........................................................................................................................ 55
Sources of ideas for projects ................................................................................................................... 56
Second: Pre-selection stage .................................................................................................................... 57
Third: Analysis stage ............................................................................................................................... 58
Evaluation stage before implementation ............................................................................................... 61
Implementation stage ............................................................................................................................. 61
Evaluation stage after implementation .................................................................................................. 61
Reasons for the failure of project feasibility studies .............................................................................. 61
Objectives of investment projects .......................................................................................................... 62
Project General Objectives ..................................................................................................................... 63
Classification of feasibility studies for investment projects ................................................................... 64
Applied areas of feasibility study ............................................................................................................ 69
Chapter Five Initial Feasibility Studies .............................................................................................. 70
Target ...................................................................................................................................................... 71
The objectives of the initial feasibility studies ........................................................................................ 72
Analysis of the investment climate ......................................................................................................... 75
Initial financial feasibility study (Top-Down feasibility study) ................................................................ 90
Deciding whether the project is feasible or not ..................................................................................... 93
Some real life feasibility studies examples and cases ........................................................................... 114
Case One: .......................................................................................................................................... 114
Case Two: .......................................................................................................................................... 116
Case Three:........................................................................................................................................ 118
Case Four:.......................................................................................................................................... 120
Case Five: .......................................................................................................................................... 123
References: ............................................................................................................................................... 125
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Chapter One
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Feasibility study Definition:
It is a study carried out by the owner of a new project (or his
representative, or by the fund supplier) to study the possibility of
implementing the project and its success, or in the case of developing an
existing project.
The feasibility study illustrate and identify the required investments, the
expected return, and external influences on the project, such as state laws,
competition and technical development.
The economic feasibility study is the methodology for making investment
decisions. This methodology relies on a set of methods, tools, tests and
scientific foundations that work on accurate knowledge of the possibilities
of success or failure of the investment project around which the study is
based, trying to reach the extent of the ability of this project to achieve
specific goals, including the highest return. Or the benefit of the project
motivator or to the national economy or both within the limits of the
project’s assumed life.
Feasibility studies are one of the branches of modern commercial sciences
that are related to both economics and management science in its various
disciplines and accounting, especially management accounting and cost
accounting.
Reasons for the feasibility study:
1- Uncertainty about achieving the project objective due to the presence
of various internal and external variables, and to reduce the uncertainty
conditions, it is necessary to deepen the feasibility studies. The greater
the uncertainty (risk) conditions, the more in-depth feasibility studies
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are required to try to reduce these circumstances. Knowing the success
of the project.
2- It is noted in this field that the economic feasibility study is a project
model that is conceived before starting implementation to ensure the
preservation of scarce resources from loss, and then the feasibility
studies become a tool for caution and caution and a safety valve against
engaging in investment activities that have no return from engaging in
them. Hence providing a certain degree of certainty and good use of
resources. Knowing the need of the project and its chances of success.
Knowing the expected return on investment and the period of capital
recovery. Knowing the fixed and variable costs of the proposed project.
3- Economic feasibility studies are necessary for all types of projects,
regardless of their objectives, as we find that they are required for
public projects, as they are required for private projects, and also
required for agricultural and industrial projects as they are for service
projects.
The relationship between the feasibility study and strategic planning:
The feasibility study is to study the feasibility of a new project or the
feasibility of developing an existing project. As the strategic planning is
to study the best areas in which the Firm or institution can work in the
coming years and how it can compete in these areas. Strategic planning is
more general than the feasibility study because strategic planning shows
the best areas in which the institution can work in the coming years, while
the feasibility study is concerned with studying a specific project or
projects. Despite that, there is a great similarity between them, as both of
them need to study the market, competitors, customers, external factors
influencing, available capabilities and end with the expected financial
return.
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Consulting offices prepare the feasibility study, and pre-prepared
feasibility studies can be used for specific projects. In the case of the use
of a consulting office, the project bears the cost of preparing the study. As
for the use of feasibility studies prepared by parties that encourage new
projects, it forces you to choose among the offered projects, which are
usually traditional projects.
Contents of the economic feasibility study for any project:
The feasibility study, in its broad or narrow sense, is making a decision to
reject or accept a particular investment. The broad concept of feasibility
studies refers to all studies of the investment project since the exploration
of the investment project until the moment of making the final decision to
accept or reject it. Thus, it includes four basic steps:
- Explore, study, and classify investment opportunities.
- Pre-feasibility studies.
- Detailed feasibility study.
- Estimating the viability of implementing the project.
While the narrow concept corresponds to the pre-assessment phases and
the post-exploration phase for investment opportunities, and then the
feasibility study goes to the preliminary study and the detailed study.
Thus, the decision to approve or reject the project preceded by a set of
preliminary and detailed studies that deal with the marketing, financial,
and technical aspects. Therefore, the decision maker can evaluate the
financial results and economic effects and present them to the owner to
make the investment decision to know the appropriateness of this
investment from the point of view of the general trend of international
economic policies.
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Within the framework, feasibility studies categorized as follows:
1- In terms of the responsible person on perform the analysis: the owner
or a group of partners studies the economic feasibility of some
investment ideas that they want to implement, and in return, the
Ministry of Planning and Investment, international bodies or
machinery suppliers and producers study the machines with feasibility
studies.
2- In terms of the level of analysis: economic feasibility studies can be
divided into preliminary feasibility studies and detailed feasibility
studies, but sometimes we find that the preliminary feasibility study is
sufficient, especially in small projects. Stop proceeding in the later
stages of the feasibility studies, and the preliminary studies show those
in charge of the feasibility studies - in the case of continuing and
moving to the detailed studies - about the parts that need some
supporting studies, such as conducting certain laboratory experiments
or conducting a survey on the shape of the product.
3- In terms of functional division: We saw that feasibility studies in their
broad concept include detailed feasibility studies. These studies need
the availability of competencies and technical qualifications that differ
from one part to another within the feasibility studies. There is a need
for marketing men to study the expected sales volume and draw up an
appropriate marketing strategy. There is also a need for engineers in
the field of education, construction, design and technology, in addition
to the need for experts in financial analysis, lawyers, and others.
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Accordingly, feasibility studies categorized in terms of the following
functional specialization:
1- Marketing feasibility study.
2- Technical feasibility study.
3- Financial feasibility studies.
4- Economic feasibility studies.
5- Social feasibility studies.
6- Environmental feasibility studies.
7- Legal feasibility studies.
The objective of the course is to introduce the student to how the
feasibility study works and how to think about managing the investment
business.
In addition to what was clarified as containing the feasibility studies
curriculum, a practical application of a feasibility study will be made for
some projects, including, for example, the work of a feasibility study for
a real estate investment company.
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Chapter Two Investment project:
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This chapter deals with clarification and explanation the investment
project. The difference between it and the investment program. Project
management and program management. Identifying elements or
components of the investment project, its relationship to other projects.
How to classify investment projects. How projects are thought and how
to promote them. Who makes the investment decision. How to determine
its priorities and then how it is done. Acceptance or rejection of projects,
what are the factors affecting investment decisions. How is the
organization’s climate identified and its impact on the project, and what
affects the organization’s situation.
Investment project:
A project is an investment proposal aims to establish, expand and/or
develop what is already in place with the aim of increasing the production
of goods and/or services in a place during a certain period.
Accordingly, the project is an investment process that takes place in a
limited place or places in which financial materials “costs” are spent in
order to create productive assets that lead to obtaining “returns” benefits
over a certain period, through the project. In practice, it may not be
possible to identify an investment unit as a result. There are several
alternatives or sub-projects within integrated projects. In this case, it is
necessary to study each alternative or sub-project separately as a project.
In some cases, it may be more appropriate to study each project and
consider it integrated with other projects. If the independent study of the
project does not reflect the actual reality, and accordingly, the future of
the sub-project is not profitable at a time when the integrated projects are
profitable as a whole. Therefore, a project at a certain level may be
considered a sub-project at a level to and for this reason, we find that the
project designer may resort to including Or neglecting what he sees as
sub-projects according to the nature of each project. Except for this
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problem, and if it is easy to solve at the level of the establishment or the
private investor, it is relatively difficult at the national level due to the
intertwining of National goals. However, in all cases, it is necessary to
apply the same rules used, whether in projects or sub-projects. In general,
the project is a temporary endeavor to achieve some specific goals at a
specific time and with certain capabilities.
The projects may differ significantly in size, continuity extent, and what
they included individuals. Whether in the form of a small group or a large
group distributed over the various departments or departments of the
organization. The project is always unique in its content and is not
repeated again in exactly the same way. On the other hand, investment
projects are divided to the following groups:
First: new investment projects:
These are projects that did not exist before, and therefore new production
capacity is generated from them.
Second: Completion projects:
It is the addition of assets to existing projects with the aim of achieving
additional production capacity that leads to a balance between the
different production stages.
Third: Expansion projects:
It is the addition of a new production capacity in an existing project, such
as adding a new production line to a previously produced product or a new
product.
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Fourth: Modernization projects (replacement and renewal):
It is represented in the purchase of new assets (machines, for example) to
replace them with old ones in order to maintain the production capacity
of the project, or with the aim of developing and improving the production
and operational efficiency of the project. Thus, the project establish a new
investment unit to obtain a specific product or complete existing projects
in order to achieve a balance between the production stages or expand the
production capacity of existing projects by adding new production lines
or modernizing existing assets with the aim of maintaining or developing
the maximum production capacity of the project. It is a group of
interrelated activities having start and end to ensure the use of certain
resources to obtain expected benefits during a certain period.
Projects considered the real framework for development in any country.
As any development plan is nothing but several projects distributed
among the different sectors of the national economy. It is implemented by
public, private, cooperative, investment, or combined by all of them.
Therefore, the success of any development plan depends directly on the
success of its component projects. Since the establishment of these
projects depends on part of the economic resources of the state - which
often suffer from scarcity, especially in developing countries - so the good
use of these resources and their distribution among the proposed projects
is one of the most important things that the state must undertake in order
to achieve the best economic results. This is in addition to the priorities
that each country sees and that it wants to direct investments to.
Project management:
Project management is a dynamic process that uses the organization
available resources (material, human, technical) in a directed and planned
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manner to achieve some clear objectives known as strategic needs, which
are implemented within the framework of a set of specific controls.
In line with contemporary global changes, the advanced methods adopted
by many organizations are the use of "project management" to deal with
those variables, including that we may need in many situations for more
than one project until we reach the desired final output. In such cases, it
is often appropriate to divide the required implementing work into a group
of projects to be implemented by the organization in an integrated manner
through what is known as the program.
The program:
It is a group of interdependent projects that are managed in a coordinated
manner so that their implementation together leads to achieving the
desired results. Programs divided into phases with setting target deadlines
for the first phase that are known and binding on all. As the first phase
approaches completion, the following phases identified, allowing new
related projects to begin.
In the event that more than one project overlaps, or there are several
projects linked to each other in a phase, that has a time extension, then we
use “Program Management” to manage and control the change process.
Program management:
It is the use of a project management approach and its inherent procedures
to manage a closely related group of projects in a directed and planned
manner to achieve some clear and specific objectives known as strategic
needs. Therefore, it is natural that the processes used in both programs
and projects are similar.
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Project Elements or Components:
Any project must include the following elements or components:
(1) Cash outflows, also called costs, resources, investments, or
project inputs.
(2) Inflows, also called benefits, returns, products, or project outputs.
(3) A specific period representing the life or life of the project, and
these are divided into:
a- The economic life of the project - the period of time that the
project is supposed to end at its end, even if it remains productive
after that.
b- The useful life of the project - the period of time during which the
project remains productive, and it may be more or less than the
economic life of the project.
(4) Spatial space - it means a specific site or locations in specific
areas.
(5) Project management - includes personnel, technicians and those
responsible for project management
Project relationships with other projects:
The relationship of the project to other projects differs according to the
nature of the project, the conditions of the region and the type of activity
it engages in.
In general, this relationship can take one of the following forms:
1- An independent relationship.
2- A non-independent relationship
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(i) Autonomous Relationship of the Project:
It is said that project (A) is independent of project (B) if its cash outflows
or inflows will remain unchanged regardless of the acceptance or rejection
of project (B), but if the cash flows of project (A) are affected by the
acceptance or rejection of project (B), it is said Project A is a subsidiary
project. Therefore, the conditions for the independence of the project
require the availability of the technical capabilities necessary to establish
the project (regardless of the acceptance or rejection of the other project).
It also requires that the net benefits of the project are not affected by the
acceptance or rejection of the other project.
(ii) Non-Autonomous Relationship of the Enterprise:
If the cash inflows or outflows of project (A) are affected by the
acceptance or rejection of project (B), then project (A) is not independent
of project (B) and they have either a complementary or a mutual
relationship.
A- Complementary relationship:
The complementary relationship between two projects exists if the
acceptance of one of the two projects increases the overall net benefits
from the other project, whether by increasing the final return (inflows) or
by reducing costs (outflows), or both.
(i) Independent relationship of the Project:
It is said that project (A) is independent of project (B) if its cash outflows
or inflows will remain unchanged regardless of the acceptance or rejection
of project (B), but if the cash flows of project (A) are affected by the
acceptance or rejection of project (B), it is said Project A is a subsidiary
project. Therefore, the conditions for the independence of the project
require the availability of the technical capabilities necessary to establish
the project (regardless of the acceptance or rejection of the other project).
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It also requires that the net benefits of the project are not affected by the
acceptance or rejection of the other project.
(ii) Non-Independent relationship of the Project:
If the cash inflows or outflows of project (A) are affected by the
acceptance or rejection of project (B), then project (A) is not independent
of project (B) and they have either a complementary or mutual
relationship.
A- Complementary relationship:
The complementary relationship between two projects exists if the
acceptance of one of the two projects increases the overall net benefits
from the other project, whether by increasing the final return (inflows) or
by reducing costs (outflows), or both.
B- Interchangeability Relationship of the Project:
There is a reciprocal relationship between two projects if the acceptance
of one of the two projects leads to a decrease in the overall net benefits
from the other project, whether through a decrease in returns (Inflows) or
through an increase in costs (Outflows), or both.
Project classification:
Classification of projects according to the sector to which it belongs,
according to the size of the project, or according to place or geography.
(1) Classification by sectors - where there are agricultural projects,
industrial projects, service projects, etc.
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(2) Classification by size - in which projects are divided into large,
medium and small.
(3) Classification according to location or geography - in which projects
are divided into local, regional and national projects.
Developing countries and investment projects:
As we have already mentioned that projects are the real framework for
economic and social development in any country, as it is the plan with all
its sectors, so the success of any plan depends primarily on the success of
its projects - and vice versa - the failure that accompanies projects must
be reflected in the plan, and therefore the Focusing from the beginning on
good and proper planning of projects and preparing them accurately gives
the opportunity for the possibility of the success of the plan itself.
It is noted that many projects in developing countries have been
compromised, even though these countries suffer from a scarcity of
available economic resources and therefore are in direct need of making
the best use of them. They are classified as follows:
First, political reasons:
1- The desire of political leaders in most developing countries to show
their audience the rapid success in implementing many projects,
especially those that have a certain political luster, without carefully
studying the technical or economic aspects of these projects. This is
usually accompanied by kinds of pressures on those in charge of the
project to obtain quick results and an appearance that does not
reflect the truth, as well as the support of some parties, political
groups or certain social groups - technically, financially or
politically - for some projects and their encouragement regardless
of the real and necessary needs of the state.
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2- The impact of projects on the prevailing political currents and their
volatility with the volatility of these policies.
Second: Environmental reasons:
1- The developing countries transferred to them many projects that
succeeded in the developed countries, but the success of these
projects was not repeated in the developing countries due to the
shortage that these countries suffer from in the field of project
management, where the organizational methods and means
necessary for project management play a major role in their success.
2- Designing projects for developing countries according to general
standards prevailing in developed countries without taking into
account the availability of resources, raw materials, infrastructure,
and skilled labor needed locally….etc.
The conflict between the personal interest of the organizers, whether they
represent the public sector, the private sector or the investment sector,
and the higher national goals in developing countries.
Third: Economic reasons:
1- Lack of coordination between the various economic activities to
which the project is linked in developing countries, since most of
these countries work with a comprehensive view of the economic
planning as a whole. An example of this is the neglect of those in
charge of a project that needs large amounts of electrical energy to
take into account that the sector specialized in providing electricity
for the project His plan does not have any future expansions. Poor
planning here must lead to the project being suspended or (failed)
after its establishment.
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2- Also, encouraging some projects through incentive programs or
inappropriate incentives, such as the government providing types
of support or adopting policies, leads to rapid deviations.
Fourth: Technical reasons:
Those in charge of project planning in developing countries were not
always able to choose the appropriate technology to achieve the project’s
objectives in order to confuse the project’s economic objectives with the
political as well as technical objectives. Therefore, taking into account the
good link between these objectives in preparing and evaluating projects
has an important role in their success.
It should be noted that these effects cannot be mitigated to some extent
when preparing or evaluating the project.
Direct causes of project failure:
In addition to the general reasons associated with many developing
countries that lead to the failure of many projects in them, there are other
direct reasons related to organizations or sponsors of projects and lead to
the same result. Some of these reasons are more clear and common and
often come together and these reasons are the inaccurate identification Or
the wrong goals in the beginning.
Absence or weakness of senior management commitment.
Weak management
Inability to understand the capabilities and capabilities of project team
members to perform work
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Inability to anticipate surprises
Inability to diagnose and solve problems
Inability to take the right decision at the right time
Investment decisions:
Perhaps there is no decision in the field of business more dangerous than
the decision to invest, especially long-term investment, as such a decision
is considered a financial link with relatively large sums, especially in
circumstances that are largely unknown in the future, which makes the
investment process, as expressed by the economist Schumpeter, an
attempt to hit a target not only It is clear but also mobile and in an
unpredictable way.
Therefore, we must always remember that the nature of projects that are
held in developing countries is completely different from those that are
being carried out in developed countries, as a result of the different
general economic features in both of them and Egypt as one of the
developing countries whose general economy is characterized by features
that should be in the eyes of those who think about any investment project
The most important of these features:
- It is a decrease in the average annual income of an individual
- The increase in the number of agricultural workers
- Double employment rates
- Double the rate of individual savings for society
- Weak development and marketing facilities
- Decreased average foreign trade volume per capita
- The need for free foreign currency to cover the value of imports
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These phenomena or features force many developing countries, including
Egypt, to use the planning method to control and accelerate the process of
economic development. Taking into account all the above-mentioned
phenomena, on the basis of which the criteria for judging the value of
projects and the extent of their importance to the national economy are
determined, so when thinking about any of the investment projects, all
previous considerations must be taken into account so that the project does
not meet with rejection in the end, and this fact is not the new projects - It
is often taken by the highest level, whether it is at the level of the
company, the bank, the facility, the ministry, or even the Council of the
Ministry. In fact, many companies and banks establish special
departments for economic feasibility studies of investment projects that
include a group of experts and specialists in this field. Many governments
also establish departments or bodies specialized in evaluating national
projects and investments (such as the General Authority for
Industrialization in Egypt), or in evaluating joint and foreign investments
(such as the General Investment Authority).
Also, many international institutions have developed and developed
guides for evaluating investment projects, such as the United Nations
Industrial Development Organization (UNIDO), which developed a
guideline for evaluating industrial projects in 1972 under the title
"Guidelines for Project Evaluation", as well as the Organization for
Economic Cooperation and Development Economic Cooperation and
Development (OECD), which developed a project evaluation guide in
1968 under the title: Manual of Industrial Project Analysis, as well as the
Industrial Development Center for Arab Countries (EDCAS), which in
cooperation with (UNIDO) prepared a guide in English and Arabic under
the title ( Guide to Evaluation and Comparison between Industrial
Projects for Arab Countries in 1979).
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Thinking about investment projects:
The idea of investing in projects basically begins in the mind of a person
or group of people, whether in their personal capacity or as representatives
of one of the parties or investors that wish to invest in the investment
process. Or a specific service. There is a set of methods sometimes,
usually to investigate this, the most important of which is to refer to the
list of imports, or to note the intense craving for a good or service in the
local market of the state. And an inventory of the existing projects that
produce this commodity and the possibility of these existing projects that
produce this commodity and the possibility of this Projects to meet the
needs of the market. The idea can also arise from the possibility of
benefiting from the existing raw materials or the local workforce in the
production of a new commodity that is suitable for export to foreign
markets.
The idea may also appear in other images - the idea may revolve around
the exploitation of a new scientific invention in the production of a new
commodity or the development of a previously known commodity. Or it
may revolve around an invention that was previously discovered but not
yet used in the country concerned.
The idea may also be simply to create a project to compete with a number
of existing projects. In this case, it must be ensured that the project is able
to produce the commodity at a cost lower than the cost of similar projects,
so that the product produced can have the ability to compete. As the entry
of a new product into the market will be accompanied by an increase in
the supply of the commodity and thus a decrease in the selling price. The
thought may also revolve around integrating more than one of the existing
projects with each other in order to reduce the intensity of competition
between them and take advantage of the economies of scale.
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Project promotion:
After defining the investment idea, the promoter, whether it is a
governmental, private, individual or group of individuals, studies it to find
out the possibility of exploiting it. Usually, the promoter evaluates the
idea in an approximate way, and the promoter can use a number of
specialists according to the nature of the proposed project.
The promoter plays this role in the economic life, as he is the one who
takes the first steps to create projects necessary for economic
development, and the promoter may do this process only once, and he may
take it as a permanent craft, but the vast majority of projects are carried
out by individuals once in their life and project promoters get a return In
return for the services they provide, this return may be in the form of cash,
or it may be in the form of a share of shares in new projects.
Some countries resort to reorganizing the national economy according to
established plans aimed at developing production and raising the standard
of living, and the state may undertake the process of promoting projects
by itself.
It should be noted that the Egyptian economic life witnessed a number of
project promoters, and one of the most famous of these was the late Talaat
Harb, who adopted the idea of establishing Banque Misr and its partners,
which contributed greatly to building the Egyptian economy.
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Investment decision
Investment decision-making is linked to the degree of centralization and
decentralization in the economic structure, whether at the national level
or at the private level. On the one hand, we find that a number of
companies do not give the project manager the right to take the decision
to spend more money than a certain limit. On the other hand, we find that
other facilities specify the minimum amount Which are considered by the
Board of Directors (ie, not less than a certain limit) and may amount to
several million pounds.
It is natural that this degree of centralization and decentralization is related
to the economic situation of the facility with the degree of quality and
accuracy of the investment decision. If the quality of the decision is high,
it can be taken at a lower level, as there is no sense in this case of
consuming the time of senior managers or boards of directors in topics
that can be studied efficiently at the level of lower managers. It is worth
mentioning that there are two main reasons for weak (not good) decisions.
The first is the lack of correct and sufficient information available to the
decision maker.
In general, it can be said that if there is a good system for collecting and
authorizing information and there are specific criteria for making
investment decisions, then this must encourage decision-making at the
lowest administrative level. An exception to this is the case in which the
higher administration has information related to the general policy of the
state. , or other reasons. But in all cases, the investment decision-making
must be studied by the planning director, financial planning director or
financial manager. In practice, we find that the Planning Department
participates in preparing the required and sufficient data to make the
investment decision.
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Ranking Decisions
This means arranging the proposed investment projects according to the
relative benefit of each of them, especially if the inputs available for
investment are limits, whether related to cash flow or the human
competencies necessary for operation, or the degree of technology used.
In such cases, the investment decision is not based solely on the overall
profitability of the project or The proposed projects, but also depends on
the relative benefit of the limited income Input so that the selection of
projects that maximize the amount of return from the specified inputs and
often use some quantitative methods complex Quantitative Techniques in
its installation and implementation in practice to reach the resulting
investment decisions.
Accordingly, the proposed investment projects are arranged in the form
of an investment program that accurately determines the priorities for the
implementation of projects according to certain criteria (these criteria
differ from other countries, and from a certain stage to another stage of
development), and we mention, for example, the following :
(1) The criterion of the total return or profitability of the proposed
project or projects, and this criterion is used in the event that there
is no shortfall or shortcoming in the financial and operational
investment inputs.
(2) The criterion of relative return on the specified input or inputs, in
which the project that achieves the largest relative return on these
inputs is preferred, then the project with the lowest return on it.....
and so on.
In this case, the investment program may allow the
implementation of all the projects proposed in the same program,
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but with the different start of each project according to the
previous considerations or priorities, until all the projects in the
program are completed.
The importance of investment programs is increasing in countries that
pursue a policy of central planning for the process of economic and social
development, as in the Arab public of Egypt - in this case, the problem
faced by the master plan is how to find appropriate solutions to reach an
optimal arrangement of the priorities of investment projects, taking into
account the intertwined elements of development The comprehensive
economic and social, and at the same time, it allows the optimal
investment of the untapped resources in the state, and the optimal
exploitation of what is exploited.
Accept /Reject Decisions
Such decisions are considered normal and inevitable at the same time in
the investment field, where some investment projects are accepted, and
this is also done through a set of criteria on the basis of which selection is
made, and that these criteria differ according to each case and the
conditions of each stage of development. And the acceptance process This
rejection is called the process of differentiation between investment
alternatives, in other words, the decision here is a decision to choose an
investment alternative.
However, it must be understood that the optimal investment alternative
here does not necessarily mean that it is a project linked together, because
it is possible to classify projects not on an individual basis, but on the basis
of multiple groups, each of which includes more than one project, and not
necessarily that each of these groups must To include projects of one
nature such as industrial projects, agricultural projects, agricultural
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projects, or service projects. Rather, it would be better to classify these
investment groups so as to lead to a kind of investment integration within
each group, for example that investment groups include agricultural and
plant projects And animal and animal factories, factories for the
manufacture or treatment of products, in addition to projects to improve
the soil and test breeds and varieties, in addition to financing projects such
as the establishment of a financial institution specialized in financing
these operations, and others that carry out the process of discharging and
marketing raw and manufactured products at home and abroad...etc.
In such cases, the different investment groups are discussed and evaluated
in proportion between the groups and some of them and not among their
components of projects, then the best alternative is chosen, which in this
case is an integrated investment group.
Mutually Exclusive Decisions
Usually we are faced with such decisions, especially when we do not have
factors restricting the sources of investment financing, and it is required
to choose an alternative one project or group of investment projects,
knowing that the choice of this project or this group of projects will
necessarily prevent us from choosing the proposed alternatives for
investment that perform the same service or produce the same commodity.
In this case, the selection is made according to the preference of the form
or amount of return or benefits achieved by each project or group, and the
rest is necessarily rejected.
Factors affecting investment decisions
After we have clarified from the above the steps for making the
investment decision, we must make it clear that in practical life the
investment decision in most establishments is often taken on the basis of
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only a few tangible economic factors. However, such a decision is
appropriate only if the management of the establishment is aware of all
the internal factors. In general, the factors that affect investment decisions
can be summarized as follows:
Management philosophy
This factor reflects the policy of the facility determined by its
management. It is important that this philosophy be commensurate with
the conditions of the industry in which it operates, the environment
conditions and the time factor, and to avoid the concept of the marketing
view that is based on unthoughtful adventures.
Market Study and Sales Forecasting
Management must predict the market potential (domestic and foreign) and
the volume of long-term and short-term sales. Long-term plans should
include critical decisions in investment spending, and focus its efforts on
growth and innovation to keep pace with future markets.
Competitor behavior
The management of the facility must consider the main competitors for
several reasons, the most important of which is that the competitors who
continue to acquire more efficient and higher production machines pose a
threat to other facilities operating in the same field. The management must
also be aware of the competitors’ strategies with regard to investment
spending and targeted growth rates and determining reactions on a long-
term basis.
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Alternative opportunities
The main and permanent question before the management becomes where
the resources can be exploited so that profits will be maximized in the
long term? This also means that spending on capital equipment must be
balanced with spending on human resources under the available
conditions, as well as achieving an appropriate balance between
development programs and marketing research. And other areas of
activities that require specific expertise or a skilled worker.
Taxes and Depreciation
Taxes depend on profits, as well as on the assumed depreciation expense,
and a high-value investment leads to a high annual depreciation expense
that is subtracted from the revenue for purposes related to calculating the
tax. There is no doubt that the lower the tax, the greater the cash flow for
a particular investment.
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Funding Structure and Sources
There are two ways to finance investments in long-term assets:
- Withholding money from profits made, or selling stock. This
increases the rights of the owners of the facility.
- Borrowing from others, which, although it allows greater flexibility,
increases the claims of creditors from outside the facility. Since
investing money in capital assets is an economic choice, there is
usually an obvious or implied alternative opportunity represented in
the cost (or return) of a second best use of the invested money. If
internal sources of financing are used, the cost of capital is the return
from the best available alternative for investment, but if funds are
borrowed from outside the facility, the cost of capital is necessarily
paid on the funds.
Working capital
The factor is represented in the increase in current assets over current
liabilities, and the maintenance of an increase in long-term loans or capital
increase. In all cases, attention must be paid to maintaining cash flow.
Machine sources
The sourcing of machinery significantly influences some investment
decisions related to machinery. These sources are:
Machines available in the facility - New machines from suppliers - Used
machines sold by commercial sources - Machines rented - Foreign
suppliers.
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Balancing cash flows
Flows must be developed for each investment alternative, and the analysis
of the cash flow budget affects making investment decisions. On the one
hand, it may indicate the importance of the change in timing, and on the
other hand, the timing of cash flows for investment alternatives may
appear. It is obvious that investments that give net cash inflows in years
are preferred as the initial life of the investment.
Change in price level
This is mainly due to the inflation factor, which leads to a decrease in the
purchasing power of the currency. If the costs and revenues are the same
with each other, the change in price levels has little effect on the pre-tax
benefits.
Production mode
The appropriate mode of production of the project's products must be
taken into account when evaluating investments, and management is
required to evaluate projected labor costs against the costs of new
machinery. In general, automated (or automatic) production lines are
preferred in large projects, while intensification of human work is
preferred in small projects. However, all this also depends on the degree
of availability of capital or labor force, interest rates and the level of
wages.
Non-economic factors
These factors have economic impacts, but they are difficult to measure.
The most important of these factors are:
Adequate safety in operating the machines to avoid their damage and to
avoid the expenses of treating workers and the injured, as well as the time
lost in arranging subsequent operations.
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Appropriate working conditions that often lead to reduced absences and
increased productivity.
Timing
This factor enters into the investment decision in three ways:
Timing as part of the project's long-term plan.
The timing of the alternative hypothesis.
The timing that links the selection of capital expenditure for the machine
to the preparation of the product design.
Risk and uncertainty
The risk and uncertainty associated with the future accompanies
investment and related decisions, as all the factors involved in evaluating
investment projects and related to the future are subject to change, such
as operating costs, revenues, interest rates and prices. When comparing
the alternatives, the decision maker makes a distinction between two
different risk situations, and operations research provides different
methods that help management in estimating the results related to
alternative decisions.
Project and organization circumstances
The general climate that prevails in the organization affects the selection
and establishment of projects, and implementation is carried out in light
of this climate, which may be:
Internal conflicts prevail.
Exposed to unexpected external influences.
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Focuses on the present without regard to the future.
Therefore, managers at the higher levels of the organization have to
innovate and strive constantly to maintain an environment conducive to
the success of projects. These managers must always remember that it is
their failure that is often mentioned more than their success.
Impact on the organization's circumstances
Organization circumstances.
Organizational structure of the organization.
Business strategy.
Infrastructure of projects.
We note that each of the previous elements has a significant impact on
whether the project climate is appropriate or not.
Organization environment
The prevailing environment within the organization is often cited as the
reason for not achieving what was planned. It is difficult to define the
principle of environment or explain it in a conclusive way, and there is no
consensus on its meaning or on the nature of its relationship to climate in
the organization. One of the simple and common ways of defining the
environment is “how to perform tasks in this place”, and it generally
distinguishes between “acceptable and unacceptable” and between the
behavior that is encouraged and that which is rejected. Most of the
attempts that wanted to analyze this definition focus on the set of customs,
values, policies and beliefs. and the trends that make up a general
environment for everything you do within the organization.
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You can therefore expect that the environment is influenced by rituals,
ceremonies, patterns of communication, and the types of behavior that are
expected and accepted. The management also has a noticeable impact on
the environment through the leadership style and the acceptance of the
work staff for the existing climate, and this affects the environment in
which the organization operates by responding quickly and keeping pace
with change when that is required.
Thus, we see that accepting the environment or not has a clear impact on
the climate, as the behavior of individuals is strongly affected by the
feelings that they have about the internal climate of the organization. The
main elements in the climate that affect the ability of individuals to
achieve success in the project also include other effects of the
environment that may be less obvious, including:
- Impact on the morale of individuals.
- Influencing their mutual trust.
- Influencing their support and respect for decisions.
- Influencing openness, sincerity and avoiding confrontations.
- Influence the recognition and acceptance of risks.
- Influencing their participation in decision-making.
- Influencing freedom of action through conscious responsibility.
- Impact on commitment and sense of belonging.
- Influencing joint cooperation and teamwork.
- - Impact on training where opportunities to learn new.
Attention must be paid to the importance, location, and extent of these
effects, especially by managers, who must work with the team to ensure
that each of the aforementioned influences receives the appropriate
attention, and that each manager provides the appropriate climate so that
he and his team can achieve success in the project.
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Organizational Structure of the Organization
Organizations were and still many of them follow the hierarchical
organizational structure, which despite its many advantages, the most
important of which is defining responsibilities and delegating authority
and in which each function plays a well-known part, but this structure may
result in some problems that stand in the way of success in the project.
However, projects can succeed despite their hierarchical organizational
structure when the project leader is strongly committed to breaking down
the barriers that frequently arise between work groups. But that required
an extra effort that could have been spent on the project's work.
But problems can arise that show that the structure is more than just a set
of layouts.
A formality within the organization, where the structure includes all the
major and sub-systems, which are:
- Formal and informal communication channels.
- Relationships by means of reports, which is the real strength of the
structure.
- Decision making processes.
- The system of incentives, rewards and distribution of profits.
- Easy to accept rules and norms.
Organizational strategy
Recognizing the work strategy pursued by the organization enables people
not only to be able to know the objectives of the projects that are being
implemented, but also to identify the reasons that called the organization
to think about these projects. Although the vision of management is not
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always clear, otherwise every organization It always has a primary
direction in which to dedicate its efforts. The strategy that the organization
develops is always compatible with that direction, and any of the
strategies that are used consist of:
Supporting existing activities to increase growth and create profits.
Focusing on projects that are currently being implemented to achieve
additional gains.
Identifying new projects that will generate more profits
If the projects that are being implemented are not in line with the business
strategy, the risk of using the available resources and funds to create
something that the organization does not need will exist. This is on the
one hand, and on the other hand, there will be a possibility of losing an
alternative opportunity that may or may not be apparent.
The business strategy is the basic starting point, and any new program or
project should not be started without knowing whether it agrees with the
existing strategy, or justifies making some changes to the strategy - under
special circumstances. If the program does not fit and supports the
strategy, we must ask why we did it?
The bottom line is that the criteria of the strategy alone are not enough to
ensure success, but they only serve to ensure that we are doing the right
thing, and that we are not doing anything that has nothing to do with
business needs.
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Infrastructure of projects
Despite the important contributions to the work structure formed by the
structure of the organization, the organizational structure and the work
strategy, all of these elements need to be linked with each other, and this
is what the infrastructure does. And that the presence of the appropriate
infrastructure leads to the possibility of making the right decision, and
ensures that the focus of all systems and projects is directed towards
meeting the needs and objectives of the business strategy. Also, the
creation of this infrastructure ensures that each of the basic individuals in
the organization’s project environment has a clear and specific role and
responsibility.
On the other hand, the vision of the work must be balanced and
comprehensive to ensure that all available resources are best utilized for
the growth and development of the business, and this exceeds the limited
view usually supported by the hierarchical organizational structure.
It is worth noting that decisions can be effective only if they are based on
accurate and real information. Hence the need for information collection
and analysis support systems and to enable management to make
decisions based on information and not based on dependence, inspiration
and predictions.
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Chapter Three Project idea, selection and preparation
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Target
In this section, the idea of the investment project will be addressed, and
how to choose the right project. It will also discuss how to prepare and
amend the project business document. It also dealt with identifying the
needs and expectations of the project client. He can also determine the
restrictions on the project, and the necessary assumptions in this regard.
And he can identify the legal form of the investment project.
Project Idea
Most investment projects stem from initial ideas, whether from a potential
client, or generated within the organization itself, or from one of its
employees, and such ideas abound until they often exceed the amount of
available resources or the value of funding that allows these ideas to be
transformed into a tangible reality in the form of projects. active.
Therefore, a preliminary filtering of these ideas must occur so that the
organization can achieve the desired results within the framework of its
available resources.
Therefore, this may include some forms of written suggestions, or the
issuance of an administrative decision to prepare the initial business
document. As a general rule, it is better to prepare the initial business
document as a basis for making decisions based on information.
Choosing the right project
How many times have organizations spent huge amounts of money and
put in strenuous efforts on a project only to find out that no one needs the
output from that project
For this reason, the importance of the project selection process came on
clear, specific and accurate bases to a large extent in order to ensure that
our choice was correct and therefore the allocation of different resources
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to the chosen project was in order. In this regard, there are two main
directions of the selection process:
- Selection according to a model that provides quantitative information.
- Selection according to a form that provides qualitative information.
Each method has its advantages and disadvantages, as well as its
disadvantages and disadvantages. Therefore, we find that it is common to
use more than one method or model to ensure that the results are as
accurate as possible. The more information generated, the greater the
effort required to re-evaluate and measure actual performance.
But the final choice remains the decision of the senior management
through the program management team, which needs to provide it with
sufficient data and information to enable it to take such a decision. And if
the climate is available - which was referred to in the previous chapter -
the role of obtaining strategic approval comes as a prerequisite for the
project management team to begin studying this proposal or that business
document. Each organization must develop its own way of conducting this
process to the extent that it ensures that its entire portfolio of active
projects does not require credits or resources in excess of what can be
provided to achieve success.
We note that what is agreed to be studied in detail is then subjected to a
complete analysis of the needs and expectations by the core team, and it
is usual for these data to lead to the establishment of a complete business
document for the proposed project. As for the second filter carried out by
the program management team, it reviews the entire business document
before issuing the order to move to the project definition stage.
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At each stage of the liquidation process, if the decision is rejected, the
projects are returned completely, or some of them are transferred to the
waiting list to be studied at another time.
Naturally, the project selection process will prompt the program
management team to ask some basic questions, and determine the exact
answers to them, which are:
- Will the proposed project increase profits?
- Will the proposed project work to raise the profile of the
organization?
- Will the proposed project increase the utilization of existing "human
and material" resources?
- Will the proposed project increase the utilization of existing
production capacities?
- Will the project activity match the organization's current skills and
experience?
- Will the project increase the degree of risk faced by the
organization?
- Will the proposed project lead to one of the following:
- Maintaining the organization's share of the market?
- Strengthening the organization's position in the market?
- Opening new markets?
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The correct setup process for the project
Some managers are enthusiastic and eager to start setting up the project
and show some activity. However, such haste leads to a lot of risks, and
the credit is always due to a careful review of the information collected in
order to make sure that the project is going in the right direction.
Therefore, at this stage, it must be absolutely clear that:
- Who is the project supervisor?
- Who are the core team members, or the closest candidates for that?
- Who will use the results?
- Who is the primary customer?
- Who is the secondary client?
- Who else has influence on the work .. the shareholders?
Project work document
Every project should have its own business document, which is already a
basic control document for the project as the blueprint for its business.
This document should be regularly reviewed, reviewed and updated. It is
established in multiple stages during which it is developed from an initial
business document to an initial business document to a final or completed
business document.
The initial workers document is drafted with the initial liquidation with
the initial liquidation of the available investment ideas and opportunities,
and what is approved for detailed study is then subjected to an analysis of
the needs and expectations by the main project team. Naturally, this data
will enrich the business document.
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We note here that whenever new information is reached during the
project, it must be used to strengthen and update the business document.
At each stage of the liquidation stage carried out by the management team,
the entire business document is reviewed before issuing the order to move
to the next stage.
Attention should also be paid to the administrative formation of the
project, and to record all revisions and additions that have been made. It
is important for the management team to refer to the most recent reviews
of the business document when making decisions.
Project client needs and expectations
There is an important fact that any business document will contain some
defects if it does not take into account accurately the requirements of the
client and understand his needs accurately. Also, challenging the needs of
the client and understand his needs accurately and identifying the needs
of the client will help in the end to prepare a list of goods or services
tailored to meet his expectations. Once you become clear about these
needs, you can develop requirements that drive the planning process, and
this can be considered as preparing the foundations for the proposed
project for investment.
We stress here that failure to allocate sufficient time and effort to complete
the process of identifying the client's needs will negatively affect the
project throughout its life. Therefore, a special effort must be made to do
the following:
- Understanding the customer through a customized questionnaire.
- Understand the environment in which the client operates.
- Demonstrate ability and technical knowledge of client technical
needs.
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- Transforming unexpected customer needs into practical solutions.
- Maintaining an open mind and innovative attitudes.
- Helping the client display his hidden expectations.
- Helping the client identify needs that are difficult to name.
The goal at this stage is to transform the information we receive into a
clear statement of needs. These needs can be passed on to the client for
approval and acceptance without ambiguity. At this point, the project
organizer and client are ready to cooperate fully to guide the project
towards a successful conclusion.
The following is an example of the list of questions that are asked to the
client or clients when we begin to prepare a project business document to
get specific answers to them.
- What does the customer think is required?
- Do all customers agree?
- Are the basic security needs separated?
- Have the estimated solutions already been proposed?
- Has the end user's vision of needs been defined?
- Have primary and secondary needs and hopes been arranged?
- Was this list arranged according to priorities in agreement with the
client?
- Can you convert information into data as required?
- Can you use a needs analysis to formulate statements about
requirements?
- Will the customer agree with statements about the requirements?
- What are the specific variables?
- What are the style changes?
- What are the behavior changes?
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Define project constraints
Restrictions on the project are all the factors that limit the activities of the
project. In today's business environment, there are scarce resources,
financing and unlimited time to complete the work. And if we take into
account the fact that the requirements and needs of the market change
continuously and effectively, the project’s products must always be
presented to the market on time, because any rental that may occur may
lead some to believe that the effort that was made in the project was a
waste of time and the rest of the resources allocated to the project .
The project constraints are usually in the following categories:
- Financial constraints - represented in project costs.
- Qualitative constraints - those related to setting standards and
standards.
- Time constraints - those related to the time factor, represented in the
specific times for the delivery of products.
Due Assumptions
It is a well-known fact that at the beginning of work on the establishment
of any project, there is no escape from formulating many assumptions
about all aspects and activities of the project. These assumptions are
always related to the more complex or obscure things. Assumptions are
potential sources of obstacles in the future, so we must make sure to record
them now, and to record all new developments in the future. We also
constantly correct and correct every assumption that we dealt with if
necessary, otherwise it could become a future issue waiting to be resolved.
Assumptions are made to deal with them, not to be used as an excuse to
fail. Therefore, the management team needs to identify all the
assumptions made in order to help them in the decision-making process.
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Remember that incorrect assumptions become problems that have a
negative impact on the progress of the project and must be resolved.
Legal form of the project
After the investment decision is taken, and the specialists study the
financial plan for the establishment of the project and decide the
possibility of its implementation, they must determine the legal form that
the project will take. From a legal point of view, we find that the project
may take one of the following forms:
(1) Individual project
(2) Personnel companies - divided into:
A- Partnership companies
In which all partners are jointly liable for all the obligations of
the company before the offer, and that this responsibility is not
limited, and this company is called a solidarity company because
it is based on the persons of the partners in it, and therefore it is
considered among the companies of persons, and any action of
any partner towards others is obligatory for all partners.
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B- Partnership
It is one of the partnerships of persons as well, and the solidarity
in it is between some of the partners only, without the rest, and
they are the ones who participate in the management of the
company and their responsibility for its obligations is unlimited.
The company’s obligations are limited to the extent of their share
in the company’s capital.
(3) Joint Stock Company:
It is a money company because its legal personality is
independent of the personality of its shareholders, and because
these shareholders or shareholders are not responsible for the
company’s obligations towards third parties, the limits of what
each of them owns from the capital shares. As for the ownership
of the real capital of the company represented in its fixed, current
and liquid assets, it is a common ownership. The legal entity of
the joint-stock company is not affected by the death or
withdrawal of one of the partners - unlike the case in partnership
companies - if the shares of the joint-stock company can be traded
by buying and selling in the stock market.
(4) Holding Company:
A company that owns a company or other companies in part or
in full.
(5) A cooperative society.
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(6) Projects established under the Investment Law No. 230 of 1989
for the Arab Republic of Egypt, and they take any form of the
previous companies, but they enjoy the advantages and
exemptions granted by this law to companies operating under it.
The previous legal forms for investment projects, thus shows a close
relationship with the financial aspects. For example, the risks to which
the funds of partners and creditors are exposed are determined according
to the legal form that the project takes. On the other hand, you find that
the legal form determines to a large extent the amount of money that It
can be collected and invested. In addition, the legal form determines the
tradability of the partner's share.
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Chapter Four General framework for project feasibility studies
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Target
By completing this chapter, the reader becomes familiar with the general
framework of project feasibility studies and its dimensions and stages,
starting with the project definition stage, passing through the initial
selection stage, then the analysis stage, the final evaluation stage, and then
the project implementation and completion stage.
This enables the student to learn about the various reasons for the failure
of feasibility studies. He learns about the objectives of private and public
investment projects and how to classify feasibility studies, whether in
terms of the functions they perform or in terms of their utility, and finally
the applied fields of feasibility studies.
Introduction to feasibility studies
In light of the continuous and accelerating development in which we live,
in which work is characterized by specialization and division, and in light
of the great accumulation of knowledge so that it is impossible for every
single individual, regardless of his abilities, to be fully acquainted with
one of its branches, and in light of the complexity of practical problems
in general to the degree that they are generally addressed to the degree
that they are addressed. You need an integrated work team. We find that
all of this is reflected in particular in the field of research, feasibility
studies and evaluation of investment projects, where the success of these
projects depends on accurate, comprehensive and objective studies of
these projects so that the available resources can be used in the best
possible way. This is achieved through a set of studies that are conducted
on the investment project from the marketing, technical, engineering,
financial, economic and social aspects and ends with a report on the extent
of the project's success in achieving the objectives required of it, whether
they are economic or social returns.
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In this context, the feasibility studies of the investment project aim to
determine its validity from several legal, social, marketing, technical and
financial aspects, whether from the point of view of the private or public
investor, or from the point of view of the investment host community.
These studies depend on an integrated set of scientific foundations and
rules derived from the sciences of economics, management, accounting
and operations research, all of which are used to collect, study and analyze
data related to the project in order to evaluate the investment in it from
the point of view of both commercial profitability and national
profitability.
It should be noted that the emergence and development of the investment
project is an integrated process that is implemented in successive stages
that can be focused in three basic stages: the project preparation stage, the
evaluation stage and the implementation stage. These three stages are
closely related to each other, and achieving maximum success ultimately
depends on all these stages to the same extent.
We have agreed that the project is in fact a financial investment for a
relative financing in which the benefits are deferred in exchange for
expenditures or costs or the allocation of part or all of the available
resources in order to realize these benefits in the future and in a
satisfactory manner characterized by maximizing the return. Accordingly,
the project feasibility study is a process of measuring the viability of
investing in that project and the percentage of the benefits it achieves.
It can be said that any attempt to formulate a specific method that can be
followed to study the feasibility of investment is considered out of the
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question due to the multiplicity of the nature of investment projects and
the difference between each of them from the other, due to the different
sources of information and research centers. In practice, however, it
follows mainly the preparation, classification and classification of
investment data. Then the use of this data in evaluating the investment
and making a decision on it.
Also, the larger the size of the investment project and the greater the
amount of invested capital, the more this requires conducting a feasibility
study in a formal manner, while if the project is small, the feasibility study
may be limited to a set of facts and reports on similar activities to the same
project activity. Therefore, the preparation of the investment project can
be seen as a series of activities that lead to a set of studies and reports that
ultimately enable the investment decision-maker to make his decision to
invest in the project.
The main steps and analytical studies required "in particular" for the
evaluation of the investment project will be explained.
First: Identification stage
The correct starting point in any investment project is to determine the
goal to be reached. As this goal can in itself be evidence of the need to
add or produce a specific product or group of products, or use certain
resources that have not been addressed before, or the necessity of using
certain types of investment. Machines, devices, etc., as well as
determining the goal of the project represents the initial nucleus of a series
of descriptive and quantitative analyzes to explore the dimensions and
effects of investment in the project. In fact, the project begins with
defining its idea, which is at the beginning of a general idea of the
possibility or Desire for specific production or use of certain resources.
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Project ideas may arise from studies of consumption and production
patterns in the country, market studies, and lists of imports and local
resources.
Sources of ideas for projects
In practice, project ideas often arise from:
1- Demand for some goods and/or services and unsaturated needs that
are required to be produced to meet these needs.
2- The existence of unused financial / or human resources and there are
opportunities or possibilities to use them for productive purposes.
3- Some problems encountering the development process generate
ideas for new projects.
4- Lack of marketing facilities for goods such as transportation,
storage, manufacturing or packaging facilities. These points suggest
to the investor project ideas.
After identifying the project ideas, one or more ideas are selected from
among them, and this naturally requires a quick preliminary sorting of the
available ideas or the preparation of new, better ideas to be chosen among
them.
Here, a question is asked about the difference between “the beginning and
the definition of the project.” The answer to this question is that “the
beginning” is the collection of multiple information, while the
“definition” is the process of transforming this information into something
more than hope and security. Therefore, allocating sufficient time for this
process is very important, and failure to allocate this time leads to a bad
or at least inaccurate definition of the project, which leads to reducing the
chances of its success.
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Second: Pre-selection stage
At this stage, the decision is taken to either complete the studies related to
the investment project or to stop doing that and regardless of the
investment idea in that project. If the result is positive, we move on to
determining the costs of the following studies, as both the investor and the
planner want to make sure that the project is suitable. Technically, and
that an appropriate decision can be taken, in addition to that the project is
in line with the objectives of the national plan set by the state and does
not contradict it. And engineering or market study stage and forecasting
the volume of demand for the project’s products...etc.
The results obtained at this stage usually lead to what is known as the pre-
feasibility study for investment. These studies are conducted by the
investor or the party inviting the investment based on the data available in
a published form or that can be collected and prepared in different ways.
These preliminary studies end with the initial selection. For the proposed
projects for investment, and to refine the ideas of projects that promise
success among them.
In other words, the preparation of initial feasibility studies is sufficient to
justify the justifications for choosing the project and arranging the
proposed projects for investment. There are general criteria for selecting
a project from among a number of projects, or quickly excluding projects
in certain cases, such as:
- Being technologically inappropriate.
- Lack of availability of raw materials and technical skills enough.
- The idea of the project involves a high degree of risk.
- The project has significant social and environmental costs.
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If the advantage of the project idea becomes clear, it sometimes requires
obtaining other additional information about the project, such as:
- A more detailed study of the market.
- The availability of the technical skills necessary for the project.
- Studies evaluating the results of similar projects to benefit from.
- The economic and social characteristics of the residents of the area
in which the project will be established.
Third: Analysis stage
At this stage, the various alternatives are studied, with priorities and
controls set for these alternatives for all the elements necessary for
feasibility studies, such as the technology used, raw materials, market
studies and the rest of the other elements, bearing in mind that there may
be more than one element that can be analyzed and evaluated in some
projects, such as the optimal size. For the project, the capital used, the raw
materials, the skilled labour, the production systems used or the
technology used...etc.
This stage of analysis includes all or some of the following studies:
A- Technical study
The technical study (technical analysis) is useful in clarifying whether the
project is feasible from the technical point of view or not. This analysis is
also an opportunity to study the impact of different technical alternatives
on the project activity, production, quantity and quality, workers and their
quality, and capital. As well as their impact on other similar activities and
the environment.
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B- Market Study:
Market analysis is useful in identifying the main features of the market in
which the proposed investment project will operate. There is no doubt that
one of the main features of the market stems from the clear identification
of the extent of the vitality of the market. The market may be restricted to
some goods and services, or it may enjoy complete freedom without any
restrictions. The market may be regulated by official rules or procedures
by the state to the extent that it is restricted to the proposed project.
Accordingly, the conditions of competition differ from another market,
but what is generally observed at the present time is the existence of some
kind of imperfect competition, and what can be called a market of perfect
competition or complete monopoly is rare.
Market analysis includes defining the limits of this market, and whether
it is a consumer market or a market for capital goods or Intermediate
Goods products, as well as the consumer's knowledge of the project's
products and services, determining the quality of the main consumer ...
and determining the size of the total demand for the products and services
of the proposed project.
C- Monetary and financial study
In this study, the preparation of financial reports is emphasized so that the
project can be evaluated using the various measurement elements. Thus,
it is possible to determine the amount of the necessary financing that
meets the requirements of the schedule for the various activities of the
loans used, their size, the type of these loans, their expenditure and the
method of repayment. The monetary study also includes the cost of
production, management, selling, sales volume, storage levels, and sales
method, and it may be necessary to conduct a sensitivity test to show the
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most important elements that have a significant impact on financial
profitability, and it may even have to conduct a risk study as well.
Fourth: Evaluation stage and final decision making
At this stage, detailed studies of the project are conducted, whether
financial profitability studies (financial evaluation), taking into account
the national social profitability (economic evaluation), taking into account
the priorities set by the state and giving it importance in its development
plan, and the extent of the project’s compatibility with these priorities. It
also studies, at this stage, all possible alternative ways to implement the
purpose of the project idea from all technical, financial, economic and
administrative aspects, with presentation of the results and supporting
data in a systematic and logical form. When the final positive result is
reached, the final decision is taken to start implementing the project after
preparing the official documents for that, in order to submit to the
competent authorities a request for approval to start implementation.
Fifth: The stage of implementation and completion of the project
This stage includes contracting, project design and construction.
Contracts, of course, include negotiations with financial institutions such
as lending banks, or sometimes governments, in addition to contacting
suppliers of raw materials and technology needed for the project. Then the
tendering phase begins, and the bids submitted are evaluated in terms of
price and technical levels, and finally, contracts are signed.
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Evaluation stage before implementation
The project is evaluated before its implementation by the project
financing bodies, whether they are national bodies or local or foreign
banks that provide loans.
Implementation stage
It includes defining the stages of implementation, their timing, the bodies
to supervise them, and recording what has been implemented.
Experiences have proven that if the implementation is bad, it leads to the
failure of the project despite its proven feasibility before implementation.
Evaluation stage after implementation
It included the financial, commercial, economic, social and environmental
evaluation of the project after implementation. Evaluation after
implementation differs from evaluation before implementation although
the metrics used are the same - in the evaluation process after
implementation we use actual values while before implementation we use
estimated values.
Thus, we have identified the weaknesses or the causes of the problems
that could face the project and we are working to solve them, and take
advantage of them to improve the chances of success of the project.
Reasons for the failure of project feasibility studies
1- The feasibility study should be weak/accurate.
2- The project costs should be estimated at less than the actual value.
3- To set a very optimistic timetable for the implementation of the
project that does not take into account the possibility of delay in the
implementation of the project.
4- Forecasting project outputs or price estimates.
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5- Overestimating the return on investment.
Objectives of investment projects
The economic theory of the project assumes that achieving the maximum
profit is one of the main objectives of the project. The profit sought by the
enterprise is the difference between sales proceeds and production costs.
Production costs in this sense include all expenses incurred by the project.
But despite the fact that making a profit is necessary for the continuation
and growth of the project, it is the only goal that the owner of the
investment project seeks, as we find besides achieving profits many other
goals that are the subject of the interest of the original projects, the most
important of which are:
Achieving the maximum possible amount of sales as a way for the project
to gain wide fame and great confidence in the markets.
The objective of the investment expenditure of an existing project may be
to protect its main activity from the risk of production interruption.
Achieving a high degree of self-gratification as a result of doing a work
that is favorable to the same owner of the project, which makes the profit
factor come second.
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Project General Objectives
The matter is very different in public projects than in private projects,
where we find that realizing a direct financial profit from the
establishment of this project or not. The public benefit here has multiple
forms, it may be represented in the establishment of projects that improve
the level of production of goods or provide services at their cost price or
even at the lowest cost But it should not be understood from this that
public projects are also not concerned with profit. This is not true only,
provided that this is done at the expense of achieving the goals for which
the public project was established.
The following are the most important objectives for which public projects
are established:
The establishment of some national projects related to the national
security of the state, such as the manufacture of weapons and ammunition,
or economic considerations, such as the establishment by the oil-
producing state of refineries or a naval fleet to transport it, or the
establishment of a base of heavy industries as a basis for development....
The state may establish projects to sell its products at less than the cost of
production, for social considerations estimated by governments, as in the
case of bread, textiles and medicines...
The purpose of the state's establishment of productive projects may be to
obtain financial resources to finance its expenditures instead of resorting
to imposing new taxes - the cigarette industry, for example, is one of the
public projects of this kind in many countries of the world.
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Public utility projects that produce basic services and infrastructure (such
as transportation, transportation, roads, bridges, electricity...).
Classification of feasibility studies for investment projects
It is possible to classify the feasibility studies of investment projects from
several aspects, but all of these aspects can be traced back to two basic
classifications. The point of view of the national economy or the society
in which this same feasibility will exist, in the sense of distinguishing the
feasibility studies from each other according to the function of each study,
such as the technical feasibility study, financial feasibility, or economic
feasibility ... etc.
In addition to the previous two categories
First: the utilitarian classification of feasibility studies
(1) Feasibility studies at the level of the project - the concept of private
profitability, which expresses the private profitability of the project or the
subjective profitability, which is the amount of benefit that the project
achieves for its owners or investors without considering the effects of this
subjective profitability on the profitability of other projects owned by
others. Or its effects on the national economy of the country in which the
project is located. In order to measure this profitability, it is necessary to
prepare a feasibility study of the project in a special way that enables
feeding the investment evaluation stage with indicators on the basis of
which it is possible to measure the extent of the project's benefit to its
owners. The subjective profitability of the investment project is expressed
as the net return on investment from the point of view of the project
owners. This is calculated either by traditional measures such as the
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concept of accounting profit, which is the difference between current costs
and revenues, or it is expressed by a financial scale represented by the
difference between the cash inputs and outputs of the total project for the
investment that generates this surplus.
(2) Feasibility studies at the level of the national economy - the concept
of social profitability The general goal differs from the private goal, it
may be the welfare of the community as a whole regardless of the
weakness of private profitability or even its absence. Feasibility studies at
the level of the national economy become necessary in the case of
Investment projects that the society as a whole bears the burden of
financing, such as utility projects and public utilities. They are also
necessary in the case of private projects, where the establishment of
private projects may have positive or negative effects on the national
economy as a whole, and therefore it becomes necessary to measure and
evaluate these effects. This measurement and evaluation It is what leads
to the calculation of social profitability, that is, a measure of the extent to
which the community as a whole derives from the establishment of the
proposed investment project.
Measuring national profitability is not an easy matter in all cases due to
the presence of some national effects that are difficult to express
quantitatively, such as the effects of environmental pollution and others,
but it can be said - in general - that social profitability consists in
identifying the benefits achieved by the project at the level of the national
economy and comparing them with the burdens that It is imposed by the
same project on the same level. In other words, it is a direct balancing
process between these benefits and those burdens.
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The importance of feasibility studies for private investment projects at the
national level increases in countries whose public policy requires a
specific amount of intervention to direct investments, even private ones,
and of course also in those countries that adopt the method of central
planning. As well as in cases where investment projects are granted some
advantages and tax exemptions and others As is the case in the Arab
Republic of Egypt at the present time, because approval of the
establishment of such projects means the loss of financial proceeds or
resources at the national level.
Second: Functional classification of feasibility studies
Feasibility studies are also classified according to the basic function that
each study achieves. If the investment decision-making process in the
project requires an extensive research on the market in which the products
and services of the proposed project are spent, and this results in the
unloading of this research in the form of a report on the market, the
marketing process and the main customers. The term marketing feasibility
study could be used for this report. Likewise, if it required an extensive
research of the legal aspects of the proposed investment project and it
resulted in arriving at a comprehensive report on the legal aspects related
to the project, the term legal feasibility study could be called this report.
And so when preparing a technical and engineering feasibility study for
the project, or when studying the social feasibility. This culminates the
previous feasibility studies with the study of the financial feasibility and
economic feasibility of the project, whether these studies were carried out
by the owners of the project or were carried out with the aim of measuring
the social profitability of the project at the national level
In comparison with the above, feasibility studies can be classified
functionally into the following sections:
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(1) Legal feasibility study.
(2) Technical and engineering feasibility study.
(3) Social feasibility study.
(4) Environmental feasibility study.
(5) Marketing feasibility study.
(6) Financial feasibility study.
(7) Economic feasibility study.
Some observations may be made on this classification, including the
following:
(1) Each investment project has its own characteristics that distinguish it
from other projects, and each project has its own circumstances, meaning
that it may not require conducting all previous studies on all projects, for
example, it may not require a legal feasibility study in the case of similar
projects working in the same field And the same circumstances or when
the legal aspects of investment are clear, specific and stable for a long
time horizon.
(2) Likewise, it is not required to conduct a marketing feasibility study for
the proposed project when the marketing aspects are completely clear, as
in the case of studying an investment project for the production of popular
bread in a densely populated country, and the average annual income per
capita is low. Therefore, we can say that all previous feasibility studies
may not be required To reach the decision to invest in a project.
(3) It should also be noted that the previous arrangement of feasibility
studies does not follow the previous picture, meaning that the technical
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feasibility study must precede the marketing feasibility, but each project
has its own circumstances and characteristics as previously said, in
addition to that it is often required to conduct feasibility studies in parallel
at the same time Marketing feasibility studies and technical and
engineering feasibility studies may be conducted with each other, where
determining the market segment of the proposed investment project,
which is reached within the framework of the marketing feasibility study,
can be one of the important factors by which the determinants of the
production capacity of the project are set, and it is at the same time It
represents an important aspect of the technical and engineering feasibility
study. We also note that the study of alternatives to the proposed
investment project site is analyzed within the framework of the marketing
feasibility study to find out the suitability of each site in terms of its
proximity or distance from the markets for the disposal of the products
and services of the project, and at the same time the site is studied within
the framework of the technical and engineering feasibility study to find
out the technical viability of the site to establish Construction of the
project through soil tests and other technical and engineering factors for
the site.
(4) Functional feasibility studies may take different names, although all
of these names lead to the same functional content and aim for the same
purpose. Sometimes we meet the term commercial feasibility study,
which means the study of financial feasibility, and sometimes it is called
the study of financial and economic feasibility together. The term
evaluation of projects may also be used. Project Evaluation or Investment
Appraisal on all functional feasibility studies. In many cases, all these
studies are referred to by one term, which is the feasibility study.
Therefore, what is important is the content of the study, not its name.
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(5) The functional classification of feasibility studies necessarily refers to
a set of practical and practical specializations that are required to complete
the investment feasibility studies. The legal feasibility study needs legal
experts who are able to examine the aspects of the project from a legal
point of view, as well as for the marketing feasibility study that needs
Experts in marketing and so on with regard to the technical and
engineering feasibility study, financial feasibility, economic feasibility ...
etc. To the extent that it is correct to say that the feasibility study is the
product of the effort of a specialized and integrated team. Therefore, it is
rare for a single expert to undertake all aspects of the investment
feasibility study without accompanying omission or weakness of the study
or analysis of one or more aspects of the feasibility study.
Applied areas of feasibility study
Feasibility studies occupy a prominent place among the interests of public
project planners, and the subject of feasibility studies has become one of
the basic topics in the curricula of university studies, research institutes
and international financial institutions in the United Nations and others.
International projects on basic and heavy industry and infrastructure
projects such as roads, transportation, communications, utilities..etc, new
investment projects, investment expansion projects, capital replacement
projects, technological development projects and improving operating
economics...etc.
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Chapter Five Initial Feasibility Studies
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Target
In this chapter, the preliminary feasibility studies of the projects will be
dealt with, identification of their objectives and stages, testing information
on the initial feasibility studies and analysis of the investment climate of
the project, including the social environment, economic environment,
political environment, legal environment, technical environment and
technology for the project under study.
Introduction
In order for the investor, whether he is an individual or a specific entity,
to take the good and appropriate investment decision in a project, he must
carry out extensive studies of the feasibility of that project in order to be
sure that it will achieve the objectives required of him, which are the
economic and social benefits and returns, as well as taking into account
the development goals in the country in which it will be established. The
project This is because the establishment of any project requires the
allocation of part of the human, material and financial resources that can
be used to create another better project.
However, these extensive feasibility studies require high costs and a
longer time and may result in refusal to implement the proposed project.
Therefore, preliminary feasibility studies are conducted to judge the
possibility of implementing the project or not, and the extent to which it
can achieve the desired goals. In addition, the preliminary studies aim at
differentiating between the proposed projects for investment in order to
choose one or more of them to conduct detailed feasibility studies on it at
a later stage.
With the intent of preliminary feasibility studies to examine the aspects
and effects of the proposed investment project in general in the light of all
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the information that can be available at that early stage in the life of the
project. Therefore, these studies do not require in-depth analyzes of the
proposed project, but are merely outlines or approximate numbers only to
guide them in rejecting or deciding to continue with the detailed studies
of the project.
In order to achieve this, the decision maker must have the data and
information that will enable him to make the right decision, whether to
accept the project to conduct detailed studies on it or to reject it
completely. Therefore, these studies must be as accurate as possible, as
the fate of the proposed project depends on them.
The objectives of the initial feasibility studies
The initial feasibility study or the previous feasibility study does not
require careful and detailed examination, as is the case in detailed
feasibility studies, which leads to the inability of those undertaking it to
bear large expenses. The initial feasibility study tends to clarify the
following information or some of them:
The preliminary feasibility studies aim in particular at the following:
(1) Justify conducting preliminary feasibility studies, if this is
approved.
(2) Determining the matters that need greater attention or special
focus in the detailed feasibility study, such as the marketing
feasibility study, either the technical feasibility study, or the
financial feasibility study (commercial profitability) or any other
studies whose importance shows the initial feasibility studies of
the project.
(3) Estimating the costs and time capacity needed to carry out
detailed feasibility studies.
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(4) Studying the legal aspects of the project to determine the
possibility of avoiding any legal obstacles, or taking into account
certain legal considerations to benefit from certain advantages
provided by law in the host country for investment.
(5) Determining the main characteristics of the project's products,
and whether they are products for export, alternative products for
imports, or products for local consumption, with an indication of
the available alternatives for the same products in the local
market.
(6) Study and characterize the local and expected market for the
project's products and determine the possible marketing segment
in light of the current and expected competition for the project's
products, and the nature of this competition.
(7) A study to estimate the size and trends of local consumption,
prevailing prices, and consumer tastes.
(8) Statement of the availability of the basic production factors and
methods of obtaining them, especially raw materials, driving
forces and skilled labor, and this requires a study of the raw
materials that the project will need in terms of their continuous
availability and quality, as well as the employment on which the
project will depend in terms of their efficiency and wage levels.
(9) Studying possible technological alternatives for project
production.
(10) Preparing initial estimates of the fixed investment cost as well as
the annual operating costs of the proposed project.
(11) An initial estimate of the expected profits from the project
compared to estimates of the profits of existing competing
projects.
(12) A summary of the problems that may face the project, and the
types of risks that may result from its establishment. This requires
studying the economic, social and political environment in which
the project will be established.
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In addition to this information shown by the initial feasibility study, all
information that helps to establish the acceptance or exclusion of the
proposed investment must be clarified. Such information can be obtained
from several sources, the most important of which are:
1- Field sources
Such as personal receptions with salesmen, potential customers and
officials in the government, chambers of commerce, trade unions...etc.
2- Library resources
It is represented in the data and statistics published in the bulletins
issued by government bodies and agencies such as the Ministry of
Planning, the Central Agency for Mobilization and Statistics, the
Information and Decision Support Center, the Central Bank and
commercial banks, in addition to scientific research and studies.
As is the case in detailed feasibility studies, preliminary feasibility studies
must take into account the element of time in cash inflows and outflows
alike due to changing environmental conditions and marketing
opportunity and others with the passage of time. Therefore, investment
feasibility studies are affected by environmental factors and conditions in
which all elements and environmental variables interact. Also, this
environment interacts with other environments, whether neighboring or
far from it, in addition to the fact that the environment itself is subject to
change from one period to another, as it is also affected by the factor of
time. This means that the passage of long periods of time between the
completion of feasibility studies and the start of project implementation
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may It leads to a change in environmental conditions, and thus affects the
extent to which the project can achieve its planned objectives.
To clarify the above, we mention the following three possibilities that may
occur in the market for the exchange of goods and products after a certain
period of time from conducting feasibility studies:
A- That the market opportunity remains to the same degree.
B - That the market opportunity remains, but to a lesser degree.
B- Completely lost market opportunity.
Analysis of the investment climate
It is preferable for the aforementioned reasons to conduct an investment
climate analysis before entering into any feasibility studies to accurately
identify the investment environment in which the project will be born and
grow. The importance of the investment climate for the project or the
proposed projects for investment stems from the fact that the project will
inevitably be affected by the environment in which it will be established,
and also that it may affect it, and also it affects it - so such a study usually
includes an analysis of a set of variables and factors that can be divided
into the following :
a) Environmental factors related to society and what it contains of
individuals, organizations, sectors, and political, economic and
social trends.
b) The announced government policies, including their political,
economic and social trends and indicators.
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It is difficult to separate from a scientific point of view all the elements
and components of each group of these variables, although it is possible
to distinguish the basic elements from them only, because each investment
environment has its own specifications, although these specifications are
also subject to change from one period to another.
The following is an explanation of the most important elements contained
in the investment climate study, whose study helps to understand and
analyze the important environment for the project:
Studying the general and environmental factors external to the project.
Study the special factors and environment of the project.
In order to study the previous factors, it is necessary to analyze the various
environments affecting the project, the most important of which are:
First: social environment
It includes the social values, customs and traditions prevailing in society
and the possibilities of their change, as well as language, education and
the behavior of individuals. The importance of this environment stems
from the fact that it affects the intellectual and moral formation of
individuals and determines their behavior. It will also provide the project
with experts, technicians, workers...etc. It is known that there is a direct
relationship between the level of education and between the work force of
the school and the high technical expertise. On the other hand, this
environment shows the extent of society's acceptance of the goods and
services produced by the project. As consumption is mostly related to
social customs and values. Therefore, the study of the social environment
accurately determines the level of manpower that is required for the
project, and the extent of its availability, whether from ordinary or skilled
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workers or from specialized expertise, as well as affecting the type of
proposed production and its specifications.
Second: Economic environment
It includes the study of the basic features of the existing economic system,
as this element strongly affects the degree of investment risk to which the
project is exposed. The economic environment includes natural resources,
capital, financial, monetary and economic policies...etc. The study of the
economic environment aims to identify:
General economic level
This is based on estimating the size of the national product, the size of the
national income, the average per capita income and the size of total and
sectoral investments..etc.
Distribution of prices and well fare Policies
Since setting minimum wages in a country makes it necessary to take this
into account when calculating the profitability of the project. But in the
absence of such limits, it would be socially inappropriate to create types
of distinction in the level of wages compared to other projects within the
same investment environment.
Pricing policies and operating subsidies:
This element directly affects the degree of the investment project. Forced
pricing policies may relate to project inputs and outputs, as well as the
cost of lending from local banks, and these policies may impose subsidies
on project products in the form of direct cash, export subsidies,
exemptions from customs duties or Various taxes...etc.
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Monitoring systems and granting working permits Policies
Since the strictness of the monetary and control bodies in completing the
procedures of dealing in foreign exchange through complex
administrative regulations and procedures may hinder the movement of
investment, the same can be said about the bodies for granting project
approvals and giving production licenses, quality and specifications
inspection, and industrial and health inspection. And control over the
movement of import and export .... etc.
Political environment
It includes a study of the basic features of the existing political system and
the degree of its stability, as this element strongly affects the degree of
investment risk to which the project may be exposed. Shifting towards
public ownership It may be inappropriate for a private investor to flood
all of his resources in that cycle, thus placing them vulnerable to
nationalization or expropriation.
Legal environment
It includes an extensive study of the legal validity of the proposed
investment project in an environment in all its aspects, in the light of
public and private laws, republican and ministerial decisions and
regulations regulating investments. The term "special laws" refers to any
laws regulating investment in forms, templates, or special legal situations,
in contrast to what is stated in general laws. Private laws may have priority
in implementation over general laws. The matter is not limited to
examining the legal environment for investment in the scope of the laws
related to industrial and commercial transactions and others, but also goes
beyond that scope to studying and analyzing any laws, regulations and
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other decisions related to investment such as tax laws and the employment
of workers.......etc.
The following is a brief reference to the most important elements of the
study of the legal environment:
A - Incentives and restrictions on investment
Investment Incentives &Restrictions
When conducting a legal feasibility study, the legal researcher must
recognize in his study the legal logic behind granting incentives,
exemptions and exceptions for investment, while comparing the
incentives stipulated in special laws with the incentives affiliated with the
investor himself (such as his desire to approach sources of raw materials,
or his desire to contain the market, etc.)
And make a balance between them to find out whether the final outcome
of this comparison is in the interest of the host country for investment or
in the interest of the private investor. It is also preferable that the legal
feasibility study include balancing the final outcome of investment
incentives with the restrictions offered on investment (and this may be
imposed to control the investor’s behavior so that his investments do not
lead to events An imbalance in the local market, the usual prices, or the
effect on the economic exploitation of the host country, etc.).
One of the most important things that the study of this item should focus
on is the careful analysis of all requirements and restrictions imposed on
investment, especially those directly related to the following aspects.
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1) Restrictions imposed on the practice of certain activities, or which
exclude any foreign (or private local) investment from the practice
of certain activities. Outright Exclusion From Certain Sectors.
2) Restrictions that determine the acceptance of private investment
projects when these projects represent an economic benefit at the
national level as a result of using criteria for matching social cost
with social return.
3) Restrictions imposed on prices, monopolistic conditions from an
economic and political point of view, restrictions on preventing
pollution and preventing social disruption in the classes of
society...etc.
4) Restrictions imposed on technology and the form of local
participation with foreign investment, and on the components of
local production and employment and their percentage in the final
society of the investment project, as well as restrictions on the use
of foreign labor and the employment of local labor.
5) Restrictions imposed on dealing in foreign exchange, as well as
restrictions and local and foreign investments, and the specific
restrictions on accepting or rejecting foreign investments in light of
a country's general policy towards its dealings with certain foreign
political regimes.
6) Restrictions imposed on investment operation and exploitation by
general government agencies or limited professional bodies under
the investment law (such as the intervention of regulatory and
accounting bodies...).
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B - Allowances and tax exemptions
The tax allowances receive the attention of many experts, whether in the
legal feasibility study or the financial or economic feasibility of
investment projects, and the interest has extended to the global level so
that the United Nations organizations sought to come up with specific
rules for the conditions of use of tax allowances, as well as the capabilities
of tax holidays as an incentive for investment incentives. major in
developing countries.
Tax exemptions are also used as an encouraging factor to attract foreign
investment and encourage domestic investment as well. However, this
factor is considered a double-edged sword. On the one hand, it results in
a loss of public financial proceeds at the state level, and consequently a
decrease in the financial resources of the state, which necessarily affects
public spending in traditional service projects such as education, health,
public utilities and infrastructure projects, and on the one hand, Other tax
exemptions may result in the flow of investments and thus create an
investment boom that would reform or develop the existing economic
conditions. Therefore, a careful balance must be made between the
negative and positive effects of tax exemptions granted to investment
projects according to their relative importance to the national economy.
The tax incentives go beyond mere exemption or reduction of tax rates
and rates on income and net profits to giving other tax advantages such as
full exemption or partial exemption from customs duties and taxes, or
postponement or installments. These advantages may be withdrawn only
on investment imports, or they may also be applied to projects' imports of
raw materials, operating requirements, and others. In all cases, it is
necessary to determine the validity of the proposed project to enjoy such
benefits and exemptions.
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C- Direct and indirect investment incentives
Direct incentives are represented in direct financial support for investment
projects by the host country for investment, as well as in exemptions and
tax benefits of various kinds. As for the indirect incentives, they are often
in the form of indirect reductions in the costs of establishing and operating
investment projects, such as the host country bearing the burden of public
utilities and infrastructure in the area of the proposed investment project.
Or the host country increasing the customs tariff on imports of similar
products produced by the project to form a kind of market and economic
protection for the project’s products. In practice, thanks to the owners of
investment projects, direct incentives over indirect incentives due to the
difficulty of measuring the effects of indirect incentives on the proposed
investment projects. Likewise, the owners of investment projects prefer
direct financial support over tax exemptions and allowances.
D- Laws and rules regulating the conditions of foreign investment in
the countries hosting the investment
These laws are, in fact, nothing but general policies intended to direct
foreign investments so that the investment-hosting country (whether it is
a developing country or a developed country) achieves its national
economic goals.
In general, the components of these laws can be presented into four main
groups as follows
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The first group: Making decisions regarding foreign investment
Foreign Investment Decision Making
We often see the texts of investment laws in most developing countries
on investment projects, whether they are financed with foreign, local or
joint capital. These countries often examine investment applications
before their approval to enjoy the investment incentives established
locally - and some investment laws specify fixed criteria for accepting or
rejecting investment projects, as well as specifying the official authorities
that specialize in examining investment applications and making a
decision on them.
The investment laws also regulate the restrictions that limit the foreign
investment’s control over the existing establishments locally through its
incorporation into them, and therefore through prevention measures on
the merger, Control of Takeovers. and strategy such as steel, energy,
mining, transportation, communications, media and public utilities .... etc.
It is also noticed in many developing countries now that there is a growing
fear of foreign investment dominating the banking and insurance sectors,
otherwise foreign investment is encouraged.
The second group: Form of ownership, management and employment
Ownership, Management and Employment
Most of the investment laws in developing countries in particular and also
in some developed countries such as Japan allow the establishment of
joint projects, while other laws prevent even mere foreign participation in
certain projects. In some former socialist countries, the investment laws
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stipulated the necessity of the participation of the local administration
from the host countries of the foreign administration at the level of the
senior administrations of the board of directors, as well as the lack of the
necessity of using local labor at all administrative levels, as is the practice
of most developing countries. On the other hand, investment laws in
developing countries are concerned with the foreign investor training
local workers, but these requirements are not strictly limited in most cases,
with the exception of some individual cases that take place as a result of
direct negotiations with the foreign investor.
The third group: Taxes and remittances
Taxes and Financial Conversion
Although the investment laws recognize and define the principle of tax
accounting for foreign investment activities, these laws often overlook
how to conduct this accounting for the mutual transactions between the
foreign parent company and the subsidiary company provided by the host
country for investment. Therefore, we find that some developing countries
overcome this defect by following other undeclared policies, such as
pricing the reciprocal transactions between the parent company and its
subsidiaries using current market prices, or using the cost basis plus an
estimated profit margin, or pricing in a way that achieves a reasonable
amount of return on the invested capital.
The process of developing countries, through the monetary control bodies,
organizes the transfer of foreign capital invested in a country abroad. Or
even transferring the profits of foreign financial investments abroad,
through the general laws for the control of money, or through the special
rules for the control of money towards foreign investments. These
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regulations also specify how investment projects can obtain foreign loans,
as well as the amount of permitted financial transfers, the time period
during which these transfers are made, and the maximum interest rates for
foreign loans.....etc.
It should be noted that such matters are not limited to developing countries
only, but extend to all countries that host investments, only the
requirements set by each country vary in line with its interests. Therefore,
these requirements are subject to change from one period to another
according to the general economic situation and from one stage to another
stage of development.
Fourth group: Management and supervision
Administration and Supervision
In most developing countries, it undertakes the implementation of laws
and the management of the processes of accepting or rejecting investment
projects, either by ministerial committees or high investment councils, or
government bodies and agencies specialized in the technical, financial,
marketing and economic aspects of investment projects, and central banks
also contribute to this task, especially in the field of monetary control. the
alien.
The position of developing countries in general towards determining the
conditions of foreign investment’s contribution to national economy
projects stems from seeking to find acceptable methods to meet the
objectives of international companies that often have comprehensive
investment strategies around the world in a way that maximizes their
overall gains. These companies may not stop at maximizing gains only It
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may even extend to the desire to control the sources of raw materials, and
sometimes to ensure the establishment of good political relations with
developing countries, whereby international companies can benefit in the
long term.
For the previous reasons, we find that the criteria for accepting foreign
investment differ from their counterpart for local investment, whether
public or private, because it is dangerous to leave foreign investments in
developing countries at work without controls that are at least parallel to
the investment incentives they enjoy. And not only that, but we find that
developing countries' view and evaluation of foreign investments differ
according to the political ideology and the existing economic and social
system in each of them.
It should be noted here that it is not correct to generalize in saying that
bringing modern technology from industrially and economically
advanced countries is always in the interest of developing countries
economically and politically. Although modern technology is considered
a hallmark of foreign investments. These are also reasons that lead to the
different rules of foreign investment in developing countries from one
country to another.
E- Arbitration of investment disputes
In view of the possibilities of one or more changes in future conditions
during the life of the project, whether in terms of laws, rules, procedures,
flows, etc., in the light of which the choices of legal validity were made,
it becomes necessary to study the decision to withdraw the investment,
whether this withdrawal is due to me The investor himself or was his
reference to the host country for the investment.
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In order for the investor to withdraw the investment decision, this
withdrawal must be based on strong practical justifications, such as the
deterioration of the market situation and a severe decline in the investor’s
profitability, or a difference in the financing structure of the investor,
which makes it difficult for him to obtain banking facilities on acceptable
terms, or the occurrence of changes The investor is forced to reconsider
his investments.
The host country may be the reason for withdrawing the investment
decision when it faces certain difficulties, such as the difficulties related
to the balance of payments, especially in cases where the currency of the
host country for investment declines. Or in cases of increasing the costs
of what the investor imports from abroad. Or any other laws such as local
labor protection laws, to other legal, social, political and economic
reasons.
On the third hand, a dispute may arise between the partners in the
investment projects, and the focus of the dispute may be on the
interpretation of one of the articles of the agreement concluded between
them or in the contracts due to the impossibility of defining and defining
some of the articles contained in the contracts precisely because it is
practically impossible to do so. This is what is often referred to as major
force. Therefore, joint investment project contracts usually stipulate some
aspects of force majeure that can stop or prevent the practice of project
activities, such as revolutions and wars, or the occurrence of natural
disasters such as earthquakes and floods. Or even in the event that
governments issue decisions that prevent implementation or its
continuation, etc., and all that can be called Act of Got.
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In the event of a dispute over the definition and determination of force
majeure between the contracting parties, the disputants resort to the local
judiciary to settle their disputes, or the contracting parties may agree to
settle these disputes in other ways such as the agreed-upon arbitration, or
through informal internal settlement.
F- Legal documents for investment projects
The documents required to document projects differ according to the
nature of the project's activity, the size of its business, and the identity of
the parties involved, directly or indirectly. The beginning of legal
correspondence may be in the form of letters of intent, and these letters
are usually formulated so that they do not explicitly constitute any legal
obligations towards the parties to the letter. At other times, he means a
certain amount of legal or contractual obligations, as in the case of the
sender of the letter undertaking to complete a certain matter in the event
that other matters proceed as required.
It is common practice to use letters of intent in the case of the participation
of foreign investment with local investment, as an official entry before
preparing more specific legal documents such as contracts of various
types. On the international level, it is customary when a local economic
authority or unit participates with the other global one in an investment
project that a set of official discussions is first conducted. If the
discussions resulted in encouraging prospects for further study of the
proposed project, a so-called protocol shall be prepared, which is a
specific preliminary agreement for the framework of joint cooperation,
with defining the initial form of ownership of the proposed project, its
general administrative structure, the foundations of investment financing,
and the time period during which feasibility studies are carried out.
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Q- Technical and technological environment
The study of the technical and technological environment includes
identifying the applied technical methods and processes and reviewing the
scientific heritage of the environment in which the project is proposed, as
the technical and technological progress of this environment is measured
by the development of applied, engineering and industrial sciences in it.
The main objective of studying this environment is to identify the
following:
- The technical methods used in the production of goods and services
in the environment.
- The operational sequence of industrial processes with identification
of the various technical alternatives that can be used.
- The availability of technical and practical knowledge of these
methods, the cost of obtaining them, the possibility of developing
them, and their relationship to the nature of the goods and services
produced by the proposed project.
- The availability of raw materials and the technical possibility of
obtaining them, and the identification of their natural, chemical and
mechanical properties.
- The type and quantity of waste and the operating products that must
be disposed of, and the technical methods used in that.
- The location of the project and its suitability to the sources of raw
materials and markets for the disposal of products, and the possible
alternatives for this site.
This topic is dealt with in detail when studying the technical feasibility of
the investment project.
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Initial financial feasibility study (Top-Down feasibility study)
First: Defining the project objectives
• Features of government projects
1) Not aiming for profit
2) The need for it is measured on social / demographic / geographical
grounds / ....
3) Investment decisions are made on an economic basis (the added
value of the national economy).
• Features of Private Projects
1) Mainly aimed at profit
2) Market needs determine the need for them
3) Investment decisions are made on a financial basis (rate of return on
investment)
• Features of service projects
1) Not mainly for profit
2) The need for it is measured on the basis of social / local / needs of
the population in the area.
3) The decision to invest in it is taken on a service / religious / social
basis ......
Engineering data for the financial feasibility study of the project
1) The optimal project size according to the required service or
services.
2) The expected initial cost.
3) The time required for the expected construction.
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Determining the optimal project size according to the required service or
services, by referring to:
1) Building percentage of the total land surface Foot Print area
2) The maximum height allowed according to the requirements of the
administrative authority granting the license
3) Architectural design code and administrative authority requirements
4) The needs of the architectural design of the facility in terms of area
and height
Make an initial estimate of the cost of the project and the time required
for its implementation:
A preliminary estimate of the cost of the project and the time required to
implement it is made in one of the following ways:
1) Referring to similar projects that have been implemented while
adjusting the numbers in proportion and proportion.
2) Use a repeating unit of measure (residential, commercial or
industrial square metre, hotel room, school classroom, hospital
bed,.....) to estimate cost and time.
3) Analyzing the project elements for approximate quantities,
calculating their cost, and estimating the time required for their
implementation.
4) The use of previous experience in similar projects.
5) Using more than one of the previous methods of calculation to verify
the accuracy of the numbers.
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Always take into account when estimating cost and time:
1) The project-specific factors affecting the cost and time that
distinguish it from similar projects (location, nature of the land and
the surrounding area, ........)
2) The effect of inflation on the prices used at the time of the study.
Make an initial estimate of the return from the project and the extent to
which it has achieved the required objectives
The return from the project is estimated in several ways depending on the
nature of the project:
• Governmental projects
- The return is estimated as an added value to the national economy
from the implementation of the project.
• Private and service projects
- The financial return is estimated according to the inputs that were
used when calculating the cost of the project
- The estimation of the return is carried out according to studies of
market needs
- Financial considerations are taken into account when measuring
market needs (present value of money)
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Deciding whether the project is feasible or not
• First: government projects
In it, the ratio of the economic return of the project to the cost of its
establishment is calculated only to determine the priorities of the
projects. As for making investment decisions in the projects, it is
subject to social, geographical or demographic determinants ... etc.
• Second: Private projects
There are three indicators that are used to measure the feasibility of
investing in a particular project or not, and they are:
1. Pay Back Period
It is the period required to recover the original investment value of the
project. This method is used in the case of projects that generate a fixed
annual income
𝑃𝑎𝑦 𝐵𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑑 (𝑖𝑛 𝑦𝑒𝑎𝑟𝑠) = 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐶𝑜𝑠𝑡 (𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒)
𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Net Present value
Net Present value of an amount (x) after (n) years based on an interest rate
(discount rate)
𝑌% = 𝑥 ∗ 1
(1 + 𝑝%)𝑛
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The amount 1 / (1 + p%)n is called the discount coefficient, and there are
tables prepared in advance for each discount rate at (n) years.
The criterion for acceptance or rejection is the value of the difference
between the benefit to the cost. The project in which the value is greater
than zero is accepted and the project in which the value is less than zero
(the value is negative) is rejected.
Example:
The present value of EGP 1,000 after three years based on an interest rate
of 10% can be calculated as follows:
Interest Rate = p = 10% = 0.1
Number of years = n = 3
The discount factor = 1/(1+p)n = 1/ (1+0.1)3 = 0.7513
Present value of EGP 1,000 after three years = 1,000 x 0.7513
= EGP 751.3
2. Benefit / Cost Ratio
This method is one of the methods that depends on calculating the present
value of cash flows over the life of the investment.
Benefit-Cost Ratio
= 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑠𝑢𝑚 (𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒)
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑡ℎ𝑒 𝑝𝑟𝑗𝑒𝑐𝑡 𝑐𝑜𝑠𝑡
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The criterion for acceptance or rejection is the value of the benefit-cost
ratio. The project in which the ratio is more than one is accepted and the
project in which the ratio is less than one is rejected.
3. Internal Rate of Return (IRR)
It is the interest rate (discount) at which the sum of the present values of
the project's revenues over the life of the investment equals the present
value of the project cost
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Example:
One of the projects costs 100,000 pounds and generates an annual net
income for four years as follows:
40,000 EGP in the first year
30,000 EGP in the second year
50,000 pounds in the third year
20,000 pounds in the fourth year
Assuming that the interest rate (discount rate) = 10%, it is required to
study the feasibility of the project
Solution:
Present value of project revenue
Year Net Value Discount Rate Present Value
First 40,000 0.909 36,360 L.E.
Second 30,000 0.826 24.780 L.E.
Third 50,000 0.751 37.550 L.E.
Fourth 20,000 0.683 13,600 L.E.
Total 112,350 L.E.
First; the net present value method
Net Present Value = 112,350 – 100,000
= 12,350 (Possible accept the project)
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Second, the cost-benefit ratio method
Ratio = 112,350/100,000 = 1.1235 (greater than “1”project is accepted)
Third, the internal rate of return (IRR) method
In this method, an attempt is made by trial and error to reach the interest
rate at which the current values of revenue are equal to the value of the
cost (investment). For example, by experimenting with the interest value
12%, the present value of the revenue is 107,950, which means that the
internal rate of return (IRR) is greater than 12%.
The attempt is repeated until the internal interest rate (IRR) can be
reached, and its value is the criterion for acceptance or rejection
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Estimate preparation • request made by management to estimate the cost of a project • The first task for the estimator is to study and interpret the project
scope and produce an estimating plan • The next task is to collect historical data related to similar past
projects • It is very important to describe in detail all the information,
assumptions and adjustments considered in the estimate • The outputs from this stage are the project conceptual cost estimate
Estimate Basics
Unit cost should be determined as an average of previous projects data not depending on one project • UC = (A + 4B + C) / 6 • UC = forecast unit cost • A = minimum unit cost of previous projects • B = average unit cost of previous project • C = maximum unit cost of previous projects
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Example • Use the weighted unit cost to determine the conceptual cost
estimate for a proposed parking that is to contain 135 parked cars Project No. Cost (LE) No. of Cars
1 466,580 150 2 290,304 80 3 525,096 120 4 349,920 90 5 259,290 60 6 657,206 220 7 291,718 70 8 711,414 180
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Project No. Unit Cost (LE/car) 1 3,110.4 2 3,628.8 3 4,375.8 4 3,888.0 5 4,321.5 6 2,978.3 7 4,167.4 8 3,952.3
• Unit cost per car • the average unit cost = 30,431.5 / 8 = LE3,803.94 / car • The forecast unit cost =
(2,987.3 + 4 × 3,803.94 + 4,375.8) / 6 = 3,763.14. • The cost estimate for 135-cars parking = 135 × 3,763.14 = LE
508,023 Time adjustment
• The adjustment should represent the relative inflation or deflation of costs with respect to time due to factors such as labor rates, material costs, interest rates
• Time of value of money
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• Index numbers are used to reflect changes in money values • Various organizations publish indices that show the economic
trends of the construction industry with respect to time
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Example • The indices for building projects these economic trends. It is
required to use the cost of a LE843,500 project completed last year to prepare a conceptual estimate for a project proposed for construction 3 years from now.
Year Index 3 years ago 358 2 years ago 359 1 year ago 367 Current year 378
• The equivalent interest rate can be calculated based on the change
in the cost index during the 3-year period as follow: • (378/358) = (1 + i)3 • Then i = 1.83% • Accordingly, the cost of the project should be adjusted for time as
follows: • Cost = LE843,500 × (1 + 0.0183)4 = LE906,960
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Location adjustment • Tender price levels vary according to the region of the country
where the work is carried out • the use of cost information from a previous project should be
adjusted to represent the difference in cost between the locations of the two projects
• The adjustment should represent the relative difference in costs material, equipment and labor of the two locations
• Indices that show the relative difference in construction costs with respect to location is published by many organizations
Example
• The indices for different location of construction costs are shown below. The construction cost of a project comple ted at city A is LE387,200, it is required to prepare a conceptual estimate for a similar project proposed in city D
• The cost of the proposed project • Cost = LE387,200 × (1.105 / 1.025)
= LE417,420
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Size adjustment • In general, the cost of a project is directly proportional to its size • The use of cost information from a previous project to forecast the
cost of a future project will not be reliable unless an adjustment is made that represents the difference in size of the two projects
• The adjustment is generally a simple ratio of the size of the proposed project to the size of the previous project from which the cost data are obtained
Combined adjustment: Example
• Prepare the conceptual cost estimate for a building with 62,700 m2 of floor area. The building is to be constructed 3 years from now in city B. A similar type of building that cost LE2,197,540 and contained 38,500 m2 completed 2 years ago in city E. Estimate the probable cost of the proposed building
• The Original building: Area: 38500 Year: 2 years ago City: E (1.24)
• Proposed building: Area: 62700 Year: 3 years from now
City: B (index 1.17) Inflation: 1.83%
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Location Index City A 1.025 City B 1.170 City C 1.260 City D 1.105 City E 1.240
Proposed cost = Previous cost × Time adjustment × Location adjustment × Size adjustment = LE2,179,540 × (1 + 0.0183)5 × (1.17/1.24) × (62,700/38,500) = LE3,700,360 Without time and location adjustment
= Previous cost × Size adjustment = LE2,179,540 × (62,700 / 38,500) = LE3,549,537
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Unit cost adjustment
• Although the total cost of a project will increase with size, the cost per unit may decrease
• For example, the cost of an 1800-m2 house may be LE535/ m2 where the cost of a 2200 m2 house of comparable construction maybe only LE487/ m2
• certain items such as furniture, garage, etc., are independent of the size of the project
• The estimator must obtain cost records from previous projects to develop appropriate adjustments for new projects.
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Example Cost records from previous projects show below. Find the adjusted unit cost
Project No. Cost (LE) Size, No. of Units 1 2,250 100 2 1,485 60 3 2,467 120 4 2,730 150 5 3,401 190
Max. UC = 3401/190 = 17.9 & Min. UC1485/60 = 24.75 Unit cost = [(17.9 – 24.75) / (190 – 60)] x + 24.75
= - 0.0526 x + 24.75
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Where 60 < x < 190, then y = 24.75 – 0.0526 (S – 60)
• • • • •
• Using Excel curve fitting • Add trend line
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• Write the equation • Unit cost = - 0.056 x + 27.81
Interpolation
• It requires a good deal of skill and experience and is the process of adding in or deducting from the cost analysis to arrive at a budget for a new project
• Using data from previous projects • Add or deduct to adjust cost • Using unit cots, etc.
Unit method
• Depends on the cost per functional unit of the building, a functional unit being, for example, a hotel bedroom
• It is suitable for clients who specialize in one type of project; for example, hotel or supermarket chains
• Schools – cost per pupil • Hospitals – cost per bed • Note that, all other adjustments must be also made (time, location
and unit) Superficial method
• The superficial method is a single price rate method based on the cost per square meter of the building
• the most frequently used method of approximate estimating
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• quick and simple to use • Similar to the unit rate method
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Example
Gross floor area for office block = 10.0 x 25.0 - 2 x 3.0 x 7.50 = 205.0 m2 Area of 5 floors 205.0 x 5 = 1025.0 m2 x LE1100 /m2
= LE 1,127,500.0 Basement 7.00 x 25.0
= 175.0 m2 x LE1300 /m2 = LE 227,500.0
Estimate for block = LE1,355,000.0
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Approximate quantities
• Most accurate method of estimating, provided that there is sufficient information to work on
• group items corresponding to a given operations and relating them to a common unit of measurement
• Rates are built up for these items • All measurements are taken as gross
Parametric cost estimate The parametric model uses historical data as the basis of the model's predictive features
• Parametric models calculate the dependent variables of cost and duration based on one or more independent variables
• These independent variables are quantitative indices of performance and/or physical attributes
• The output of parametric models includes the cost of major phases, duration of project major phases, total project cost, and resource requirements
• A parametric model, for a construction project, would use the data provided by the user on any or all of the following characteristics: project type, frame material, exterior material, ground conditions, desired floor space, and roof type
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• Then, using the general relationships developed between these input and output variables, the model provides an estimate of some or all of the output variables
• Depending on the organizational environment and on the nature of targeted projects, these models use different statistically derived algorithms
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Some real life feasibility studies examples and cases
Case One: Feasibility study on approaches to aggregate OTC derivatives
data (19 September 2014);
This study was as G20 Leaders agreed in 2009 that all over-the-
counter (OTC) derivatives contracts should be reported to trade
repositories (TRs), as part of their commitments to reform OTC
derivatives markets in order to improve transparency, mitigate
systemic risk and protect against market abuse. To date, a total of
25 TRs in 11 jurisdictions are either operational or have announced
that they will be, and these numbers may increase. Aggregation of
the data being reported across these TRs is necessary to ensure
that authorities are able to obtain a comprehensive global view of
the OTC derivatives market and activity. The FSB therefore
requested a study of the feasibility of various options for a
mechanism to produce and share global aggregated data. The
feasibility study should take into account legal and technical issues
and the aggregated TR data that authorities need to fulfill their
mandates, this study responds to that request.
The contents of that study was as follows:
Executive Summery
Introduction
Chapter 1: Objectives, scope, and Approach
Chapter 2: Stocktake of Existing Trade Reporting
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Chapter 3: Authorities’ Requirements for Aggregated OTC Derivatives
Data
Chapter 4: Legal Considerations.
Chapter 5: Data & Technology Considerations
Chapter 6: Assessment of Data Aggregation Options
Appendices
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Case Two: Feasibility Analysis of Water Supply For Small Public Water
Systems (August 2010),
In this study, the University of Texas Bureau of Economic Geology
(BEG) and its subcontractor, Parson Transportation Group Inc.
(Parsons), was contracted by the Texas Commission on
Environmental Quality (TCEQ) to conduct a project to assist with
identifying and analyzing alternatives for use by Public Water
Systems (PWS) to meet and maintain Texas drinking water
standards.
The overall goal of this project was to promote compliance using
sound engineering and financial methods and data for PWSs with
recently recorded sample results exceeding maximum contaminant
levels (MCL). The primary objectives of this project were to provide
feasibility studies for PWSs and the TCEQ Water Supply Division
that evaluate water supply compliance options, and to suggest a
list of compliance alternatives that may be further investigated by
the subject PWS for future implementation.
This feasibility report provides an evaluation of water supply
alternatives for the Mirando City Water Supply Corporation (PWS
ID# 2400025, Certificate of Convenience and Necessity #12629), is
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located at 315 North Linder (also known as Farm-to-Market Road
649), Mirando City, Texas in eastern Webb County. The PWS is
approximately 34 miles east of Laredo and 12 miles west northwest
of Bruni. The Mirando City PWS is a community water system
serving a population of 500 with 250 active connections. The water
source for the Mirando City PWS comes from two groundwater
wells, Well #1 (G2400025A) completed to a depth of 540 feet, and
Well #2 (G2400025B), completed to a depth of 462 feet. Well #1 is
rated at 60 gallons per minute (gpm) and Well #2 is rated at 58 gpm.
The contents of this study was as follows:
Executive Summary
Section 1: Introduction
Section 2: Evaluation Method
Section 3: Understanding sources of Contaminants
Section 4: Analysis of the Mirando City PWS
Section 5: References
Appendices
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Case Three: BIOGAS PRODUCTION FROM AGRICULTURAL WASTES AND
FEASIBILITY STUDY TO ENRICH BIOGAS MANURES (2014)
This study was a Master of Science thesis, made by “Yerasi Kavya”
The experiment was conducted during 2013-14 at Department of
Agricultural Microbiology and Bioenergy, and Department of Soil
Science & Agricultural Chemistry, College of Agriculture,
Rajendranagar, ANGRAU, Hyderabad. Cow dung along with other
agricultural wastes (press mud, poultry litter, kitchen wastes, maize
stalks and fruit wastes) were used for the biogas production in lab
scale. Along with the estimation of biogas production different
parameters like Total Solids (TS) per cent, Total Volatile Solids (TVS)
per cent, Volatile Fatty Acids (VFA), pH, Nitrogen (N), Phosphorous (P),
Potassium (K), Organic carbon per cent, Biological Oxygen Demand
(BOD), Chemical Oxygen Demand (COD), Electrical Conductivity (EC)
and methane percentage was estimated.
This dissertation contents were:
Chapter 1 Introduction
Chapter 2 Review of Literature
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Chapter 3 Material and Methods
Chapter 4 Results and Discussion
Chapter 5 Summary and Conclusions
Then; Literature Cited, and Appendices
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Case Four: Feasibility Report on Delhi Ghaziabad – Meerut
This study backgrounf and target are; National Capital Region (NCR) is
a unique example for inter-state regional development planning for a
region with Nation Capital at its core. It is one of the largest National
Capital Region of the World and constitutes about 1.60% of the
country‟s land area. NCR is the home of 371 lakhs people living in 108
towns of which 17 are class I cities and more than 7500 rural
settlements.
The population of NCR is projected to be 641.38 lakhs by 2021. Based
on the projections & policies given in the Regional Plan-2021 for NCR,
it is expected that the population of NCT-Delhi Sub-region would be
225 lakhs by 2021 and 163.50 lakhs, 49.38 lakhs & 203.50 lakhs for
Haryana, Rajasthan Sub-region & Uttar Pradesh Subregions
respectively.
NCR Planning Board prepared a Regional Plan with the perspective for
year 2021 for the National Capital Region which was notified on
17.9.2005 for implementation. The Plan aims at promoting growth
and balanced development of the National Capital Region. In this
endeavor the effort is to harness the spread of the developmental
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impulse and agglomeration economies generated by Delhi. The above
objective is sought to be achieved.
The proposed RRTS corridor between Delhi, Ghaziabad and Meerut is
envisaged as part of the National Capital Region Planning Board‟s
Regional Transport Plan 2021 for a Mass Rapid Transit System that
could provide an effective, high-speed and world class solution to
benefit ridership between the cities of Ghaziabad, Meerut and towns
of Modi Nagar, Murad Nagar, Modi Puram, Guldhar and Duhai with
Delhi. The RRTS corridor has been proposed to create a cost-effective
yet world class transportation solution to provide a much needed
relief to the NCR commuters and to discourage congestion within
Delhi, a city bursting at its seams with inflow of population and
strained resources and infrastructure.
The contents of this study was:
Chapter 1: Introduction.
Chapter 2: Approach and Methodology.
Chapter 3: Recommendations from Travel Demand Forecast Study.
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Chapter 4: Review of Present Railway & NH Alignment
Chapter 5 Proposed Alignment
Chapter 6: Key Inputs From Engineering and Operations Report.
Chapter 7: Assumptions and Boundary Conditions
Chapter 8: Revenue Estimation
Chapter 9: Capital Cost Estimation
Chapter 10: Operation & Maintenance Cost Estimation
Chapter 11: Project Structuring & Viability
Chapter 12: Economic Evaluation of RRTS
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Case Five: PROPOSED EXPANSION PROJECT HAVING Ferro Alloys Plant,
Integrated Steel Plant, Captive Power Plant & Cement Grinding
Plant.(Feb. 2017)
This study is : The proposed expansion of Ferro Alloys Plant, Iron Ore
Beneficiation/Pellet Plant Integrated Steel Plant through secondary
route of steel manufacture and Cement Grinding Plant will be located
at village Nabagram, PO: Digha, Development Block: Neturia, Dist:
Puruliya, West Bengal. Total land acquired for this project by M/s Ispat
Damodar Pvt. Ltd. is 78 Acres in which a Sponge Iron Plant with 2 X
100 TPD kilns, SMS Plant with induction furnace of 2 X 4 T & 1 X 8 T
capacity, a Ferroalloy plant of 4 X 7.5 MVA capacity and a Waste Heat
Recovery based power plant of 8 MW capacity are already in
operation. The existing plant has been operating since 2006. The
company proposes to further acquire 25 acres of land for the
expansion purpose. The acquisition will involve mostly private land.
The site is accessible by Sarbari – Panchet Road which connects SH-5
(Purulia to Asansol via Dishergarh). Thus the site is having dvantages
of proximity to 2 Coalfields – i. e. Ranigunj Coal field of ECL on one side
and Dhanbad coalfields of BCCL on the other. Nearest Railway station
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is Madhukunda on S.E. Railway which is about 10 Km. from the site.
Nearest sea port is at Haldia at aerial distance of170 KM from the
project site. Nearest Air Port is at Andal at a distance of 75 KM and
Netaji Subhas Chandra Bose airport at Kolkota, at an aerial distance of
270KM from project site.
This study contains the following:
Chapter one: Excutive summary.
Chapter two: Introduction to the project and background information.
Chapter three: Project Description.
Chapter four: Site Analysis.
Chapter Five: Planning Brief.
Chapter six: Proposed Infrastructure.
Chapter seven: Rehabilitation and Resettlement (R & R) Plan
Chapter Eight: Project Schedule & Cost Estimate
Chapter Nine: Analysis of Proposal Final Recommendations.
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References:
- Ahmed Farid Mostafa, “Economic Feasibility Study for Investment
Projects”, University youth Foundation, Alexandria 2009.
- The League of Arab States, Industrial Development Center for Arab
Countries, “Evaluation and comparison guide between industrial
projects for Arab countries”, Issued by the Industrial Development
Center for Arab Countries and the United Nations Industrial
Development Center. June 1979.
- Abdel Muttalib Abdel Hamid, “Economic Feasibility Studies for
Making Investment Decisions”, University House, Alexandria,
2006.
- Abdel Qader Mohamed Abdel Qader Attia, “Commercial,
Economic and Social Feasibility Studies with Bot Projects, Second
Edition”, University House, Alexandria, 2008.
- Dr. Murad Ali Khalil, “Feasibility Studies and Evaluation of
Investment Projects”, 2007.
- Nabil Shaker, “Preparing feasibility studies and evaluating new
projects, second edition”, Ain Shams University, Egypt, 1996.