Investment Project Design: A Guide to Financial and Economic Analysis with Constraints

Acknowledgments xi

Symbols and Most Frequently Used Acronyms xiii

Introduction 1

CHAPTER 1 Investment Environment 9

Systematic Project Analysis 10

Project Environment and Strategy 11

Project Development Process 33

Planning Horizon and Project Life 43

Project Scope 44

Preinvestment Studies 46

Investment Planning Infrastructure 58

Appendix 1.1: Elements of Commercial and Wider Domains 60

Appendix 1.2: Outline of Business Plan for a Manufacturing Enterprise 62

Appendix 1.3: Outline of Design/Study Report 63

Appendix 1.4: Information Flow Details 67

Notes 69

References 74

CHAPTER 2 Preparing Pro-Forma Financial Statements 75

Accounting System 77

Process of Financial Analysis 81

Financial Costs and Benefits 84

Investment Costs 87

Production Cost 116

Operating Cost, Factory Cost, and Cost of Product Sold 122

Financial Statements 127

Appendix 2.1: Depreciation Methods 142

Appendix 2.2: Starting Inventory Balance 148

Notes 150

CHAPTER 3 Financial Indicators and Criteria 155

Static Indicators 155

Types of Static Indicators 156

Dynamic Indicators 169

Financial Criteria for Investment Decisions 188

Analysis of Joint Ventures 203

Project of an Ongoing Enterprise 206

Appendix 3.1: Example of Cost of Capital Calculations 219

Notes 225

References 228

CHAPTER 4 Financing the Project 231

Capital Structure 232

Cost of Capital 249

Notes 255

References 256

CHAPTER 5 The Economic Perspective 257

Private Sector 259

Public Sector 259

General Rationale for Economic Evaluation—Who Needs It? 260

Macroeconomic View—Impact on the National Economy 262

Price Distortions 266

Applicability and Scope 272

Economic Pricing Principles 278

Shadow Prices of Primary Resources (National Parameters) 292

Conversion and Adjustment Factors 297

Appendix 5.1: Costs and Benefits of Revenue Projects 299

Appendix 5.2: Global Pricing Framework—Importable Input Forgone 301

Notes 303

References 307

CHAPTER 6 Economic Cost/Benefit Analysis 309

Adjustments for the Wider Domain 311

Valuation at Market Prices 311

Define the Accounting Unit 317

Value-Added 343

Notes 354

References 358

CHAPTER 7 Investment Decisions under Uncertainty and Risk 359

Forecasting 359

Risk—Dealing with Uncertainty 364

Quantitative Risk Assessment 369

Qualitative Risk Assessment 380

Risk Management 380

Risk Immunization for Financiers 383

International Investors and Risk 385

Appendix 7.1: Discrete Probability Analysis—Multivariate 386

Notes 387

References 390

CHAPTER 8 Project Appraisal 391

Macro-Micro Appraisal 392

SWOT Analysis 393

Stakeholder Perspectives 396

Appraisal Report 399

Caveats for the Appraiser 406

Notes 407

References 408

CHAPTER 9 Implementation Planning and Budgeting 409

Implementation Planning 410

Project Management 412

Conducting the Implementation Project 416

Implementation Budget 437

Appendix 9.1: Sample Responsibility Matrix for a Portion of a Project 438

Appendix 9.2: Checklist of Project Implementation Costs 438

Notes 442

References 443

About the Authors 445

Index 447