Investment project preparation and appraisal

Investment Project Preparation and Appraisal

Growth is an absolute requirement for survival. As products go through various stages during
their life cycles, companies must invest in new projects in order to maintain or increase growth.
Investment costs in new projects are continuously increasing, either because of new
breakthrough technologies or shorter product life cycles, or a combination of both. Before
embarking on any investment project, it is a pre-requisite that pre-investment studies be carried
out.
Our planet is littered with remnants of investment ideas gone awry, projects that failed mainly
because some critical design factor was improperly assessed. One of the main deficiencies in
project planning is that there is usually not enough of it, with decisions often made on the basis
of anything from intuition to inadequate analysis. Pre-investment studies of appropriate breadth
and depth vastly improve chances of successful outcome.
Investment decision is predicated on a sound footing of information and risk assessment.
Unanticipated impediments to the success of investment projects have included mismatches
between internal characteristics of the enterprise, its personnel, and other project needs, and
external aspects of the operation setting such as market dynamics, supply constraints, or
environmental impacts. Often, there is failure to consider alternatives that would constitute more
profitable applications of the time, energy, and other resources applied to the contemplated
project.
Pre-investment studies consist of the following components:
•

Opportunity studies

•

Pre-feasibility studies

•

Feasibility studies

•

Support studies


Opportunity Studies
The main instrument used to quantify the parameters, information and data required to develop a
project idea into a proposal is the opportunity study. Depending on the prevailing conditions
under investigation, either a general opportunity study (sector approach) or specific project
opportunity study (enterprise approach), or both, have to be undertaken. General opportunity
studies may be divided into the following three categories:
•

Area studies designed to identify opportunities in a given area

•

Industry studies designed to identify opportunities in a delimited industrial branch

•

Resource-based studies designed to reveal opportunities based on utilization of natural,
agricultural or industrial products

A specific project opportunity study, which is more common than a general opportunity study, is
a transformation of a project idea into a broad investment proposition. The objective is to
stimulate investor response and as such, a specific opportunity study must include certain basic
information. The purpose of such a study is to arrive at a quick and inexpensive determination of

the salient facts of an investment possibility. When entrepreneurial response is forthcoming after
an opportunity study, a pre-feasibility study has to be carried out.
Pre-feasibility Studies
After an opportunity study, a project idea must be elaborated in a more detailed study,
However, formulation of a feasibility study that enables a definite decision to be made on the
project is a costly and time-consuming task. Therefore, before assigning larger funds for such a
study, a further assessment of the project idea might be made in a pre-feasibility study, the
principal objectives of which are to determine whether:
•

All possible project alternatives have been examined;

•

The project concept justifies a detailed analysis by a feasibility study;

•

Any aspects for the project are critical to its feasibility and necessitate in-depth
investigation through functional or support studies such as market studies, laboratory or
pilot-plants tests;

•

The project idea, on the basis of the available information, should be considered either
non-viable or attractive enough for a particular investor or investor group;

•

The environmental situation at the planned site and the potential impact of the projected

production process are in line with national standards.

A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study, the difference being in the degree of detail of the


information obtained and the intensity with project alternatives are discussed. The structure of a
pre-feasibility study should be the same as that of a detailed feasibility study.
Support (functional) studies
Support or functional studies cover specific aspects of an investment project, and are required as
pre-requisites for, or in support of, pre-feasibility and feasibility studies, particularly large-scale
investment proposals. Examples of such studies include the following:
•

Market studies

•

Raw material and factory supply studies

•

Laboratory and pilot-plant tests

•

Location studies

•

Environment impact assessment

•

Economies-of-scale studies

•

Equipment selection studies

The contents of a support study vary, depending on its type and the nature of the projects.
However, as it relates to a vital aspect of a project, the conclusions should be clear enough to
give direction to the subsequent stage of project preparation. In most cases, the results of a
support study, when undertaken either before or together with a feasibility study, form an
integral part of the latter and lessen its burden and cost.
When a basic input may be a decisive factor in determining the viability of a project, then a
support study is carried out before commissioning a pre-feasibility study or a feasibility study.
When detailed work required for a specific output is too involved to be undertaken as part of the
feasibility study, a support study is commissioned separately but simultaneously with a prefeasibility study. A support study is undertaken after the completion of a feasibility study when
it is discovered in the course of the study that it would be safer to identify a particular aspect of
the project in much greater detail, although the preliminary evaluation as part of the decisionmaking process may commence earlier.
Feasibility studies
A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic, legal and regulatory and environmental prerequisites for an investment project should be defined and critically examined on the basis of
alternative solutions already reviewed in the pre-feasibility study. The depth of investigation in
all areas provides information adequate for potential investors, financiers, guarantors, and
licensing agencies to decide whether to go ahead with a project.


Although feasibility studies are similar in content to pre-feasibility studies, the industrial

investment project must be work out with the greatest accuracy in an iterative process, with
feedback and inter-linkages, including identification of all commercial, technical and
entrepreneurial risks.
Appraisal report
When a feasibility study is completed the various parties involved in the project will carry out
their own appraisal of the investment project in accordance with their individual objectives and
evaluation of expected risks, costs and gains. In investment project appraisal, the project
performance is compared to each participant's criteria. Investment project appraisal address the
following key issues:
•

To understand the likely consequences of an investment

•

To ascertain the risks involved

•

To decide if the investment should be undertaken

Stratdigm's approach to investment project development process involves a series of states of
preparation, essentially in a logical progression. The process involves the following key
activities:
•

Identification

•

Preparation

•

Appraisal

•

Implementation

•

Promotion

Stratdigm works with a multi-functional team from the client to synthesize a bankable preinvestment study. Our approach is mainly based on the United Nations Industrial Development
(UNIDO)'s "Manual for the Preparation of Industrial Feasibility Studies." Stratdigm is a licensee
of UNIDO's Computer Model for Feasibility Analysis and Reporting (COMFAR) and is thus
able to do rigorous project analysis using the capabilities of COMFAR.

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