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8/13/2019 Tema4 Engl

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Lecture Contents:

4.1. Investment process contents

4.2. Stages of the investmentprocess

4.3. The feasibility study ofinvestment project


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Suggested readings: BANACU Cristian Silviu. Investments and risks for

sustainable development. http://www.biblioteca-digitala.ase.ro/biblioteca/carte2.asp?id=347&idb=

Hncu R., Bunu M., Dascaliuc D. Lucrare metodico-didactic Bazele activitii investiionale (sinteze iaplicaii). Chiinu: Departamentul Editorial-Poligrafical ASEM, 2010, 119 p.

Caraganciu A., Domenti O., Ciobu S. Bazele activitiiinvestiionale. Chiinu: ASEM, 2004. p. 28-57.

Cistelecan L. M. Economia, eficiena i finanareainvestiiilor. Bucureti: Ed. Economic, 2002. p. 101-120.

Vasilescu I., Romnu I., Cicea C. Investiii. Bucureti:Ed. Economic, 2000. p. 49-69.

., ., . . : M,2008. c.51-64.


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Definition for investment process

The whole set of actions, methods andmechanisms elaborated by the subjects ofmarket relations to accomplish economic, socialand other objectives with the aim of investing

material, financial and labor resources, as wellas time, into different sectors of the nationaleconomy, intended for a permanent capitalreproduction and insurance of a long-lastingeconomic and social development is called

investment process.


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Macroeconomic and microeconomic

approaches of investment process

At macro level the investment processemphasizes the integrity of the investmentactivity of the state and legal entities,expressed by the national policy, which hasas prior objectives the economic growth andthe population's welfare.

At micro-level the investment process is thewhole set of financial, material and humanresources involved in an investment projectwhich in correlation with its mechanism of

realization, has the final scope to increase thefirm's profitability or to attend other usefulresults.


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The defining elements of the

investment process are:

Subjects of the investment process.

Object of the investment process,

represents the investment project.

Mechanisms of the investment processwhich are reflected in the investment policy ofthe state and the behaviour of the legal

entities when choosing the investmentstrategy.

Investment climate.


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The subjects of the

investment process

are considered to be all the participants atthe investment process:

The basic participants, either the investor being also the beneficiary (receiver) of the

investment, orAffiliated subjects of the investment who

can be the designer, executor, suppliers,creditors, banks, experts and consultants,supervisory bodies and others.

As subjects of the investment process alsocan be: public administration, corporations;financial institutions; individuals; foreignindividuals and legal entities.


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In a public investment project

realization

Among the parties involved, can distinguish between: theproject offerers are also called contractors and

could be international organizations (EuropeanComissions, USAID, UNO, UNIDO, NATO, etc.), national(Moldovan Government, ministries, etc.), public orprivate organizations, etc.

the appliers for projects - are called contractee andcould be universities, R&D institutions, NGOs, legalpersons qualified in the field.

the financial institutions are banks, investment fundsor in some cases foundations. If we are speaking aboutcomplex projects, financing can be offered by abanking syndicate


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Investment Project

The meaning of investment project is toorganize the investment process, and itrepresents the fundamental document thatdetermines the necessity of real investmentrealization and that reflects both the main

projects specific features and financialindices related to the investment activity. In this context, the investment projectcan

be defined as an optimal set of actions ofinvestment based on sector, global andcoherent planning on the basis of which a

defined combination of human, material, etc.resources leads to economically and sociallydetermined development.


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The main purpose of the

investment project

is to prove that the entrepreneur orthe investor is able:

to produce the expected volume of

goods; to market the forecasted quantity of

goods in real terms;

to perform qualitative and improved

services with less efforts and higheffects.


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I. According to their objectives,

investment projects are: Replacement: maintenance of business. One category consists of

expenditures to replace worn-out or damaged equipment used in theproduction of profitable products. Replacement projects are necessaryif the firm is to continue in business.

Replacement: cost reduction. This category includes expendituresto replace serviceable but obsolete (outdated) equipment. Thepurpose here is to lower the costs of labor, materials, and oilier inputssuch as electricity. These decisions are discretionary, and a fairlydetailed analysis is generally required.

Expansion of existing products or markets. Expenditures toincrease output of existing products, or to expand retail outlets ordistribution facilities in markets now being served, are included here.These decisions are more complex because they require an explicitforecast of growth in demand. Mistakes are more costly, so a moredetailed analysis is required. Also, the go/no-go decision is generallymade at a higher level within the firm.

Expansion into new products or markets. These are investmentsto produce a new product or to expand into a geographic area notcurrently being served. These projects involve strategic decisions that

could change the fundamental nature of the business, and theynormally require the expenditure of large sums with delayedpaybacks. Invariably, a detailed analysis is required, and the finaldecision is generally made at the very topby the board of directorsas a part of the firm's strategic plan.


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.. Safety and/or environmental projects.

Expenditures necessary to comply with governmentorders, labor agreements, or insurance policy termsfall into this category. These expenditures are calledmandatory investments, and they often involvenonrevenue-producing projects. How they are handleddepends on their size, with small ones being treatedmuch like the Category 1 projects described above.

Research and development. For many firms, R&Dconstitutes the largest and most important type ofcapital expenditure. Since R&D results are almostalways highly uncertain, and since continuing to fund aproject will depend on results at earlier stages, thedecision tree analysis and real options approach areoften used.

Other. This catch-all includes office buildings, parkinglots, executive aircraft, and so on.


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II. According to the volumeof required resources:

small investmentprojects (till 100thousand monetary

units); middle investment

projects (100 thousand 1 mlln monetary units);

large investment projects

(more than 1 mllnmonetary units)

III. After the projectscheduled time:

long time projectinvestment (more than 5years),

medium time projectinvestment (1-5 years),

short time projectinvestment (under 1year).


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IV. On the financingsource:

private investmentfinancing projects(with own resources

and borrowedresources), public investment

financing projects, mixt public-private

investment financingprojects (public -

private partnershipinvestment projects).

V. After the degree ofcomplexity:

complex integratedprojects orindependent,

simple projects.


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VI. According to the level of the

implementation dependence, investment

projects are:

independentinvestment projects are projectswhose cash flows are independent of one another.

mutually exclusive investment projects, means thatif one project is taken on, the another must berejected.

complementary, these projects within a companyare not competitive, following the same or differentobjectives, do not suppose the same space orfinancing from the same source but are gatheredfor reducing the investment risk.

Hereby, in the frame of the investment processthere can be included a wide variety ofindependent, exclusive and complementaryinvestment projects according to the investmentstrategy of the company.


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VII. After the domain of project

investment there:


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II. Stages of the investment process

The investment process performed in anenterprise consists of a set of actions anddecision taken, which suppose passingsome chronological stages.

The investment project life cycledefines the phases that connect thebeginning of a project to its end.

So the cycle is really a spiral, circling

through the required steps, but alwaysmoving on to new projects.


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Contents of investment project cycle

The cycle consists of a series ofsteps separated by decision points.

These regards the selection of

projects based on economic,financial and technical analysis,selection of an optimal variant,financing, implementation and theirefficient administration all together

to attend the common target of theinvestment strategy.


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Stages of investment process

According to the international practices,in order to evaluate the fundamentalcomponents of a business, the investmentproject cycle is generally divided intothree distinct phases:

the pre-investment phase,

the investment phase and

the operational (post-investment)

phase.


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Generally speaking, the investment process with all

its phases can be presented as in Figure


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The first phase is

pre-investment, with the stages:

Identifying stage in which the opportunitystudies and support studies are made.

The preselection stage in which the pre-feasibility studies are made.

Preparation stage in which feasibilitystudies are made.

The evaluation stage in which the

valuation report is completed


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Significance of the preinvestment stage

An important role at this stagedoes to getting information, whichrefers to possible alternatives andtheir way of realization

The final aspect of this stage is toensure that the investment isconsistent with the organization'sstrategic goals.


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Studies made during the first phase are:

Opportunity study;

Pre-feasibility study;

Feasibility study.


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The opportunity studies

are used to quantify the parameters,information, and data needed to developthe project idea and are referring to:

natural resources,

future demand for the product or service; the environmental impact;

the competition on the local market;

the possibility to integrate productionlocally or internationally;

the general investment climate; estimated general costs and benefits.


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pre-feasibility study feasibility study

In the pre-investment stage is necessary tomake a pre-feasibility study which havea similar structure with the feasibility studyexcept for the more general informationcontained in the study.

The feasibility studies are complextechnical- economical- environmentalstudies to justify an investment project.

This time, the estimations must bring aproved aquracy and to take very seriouslyinto consideration the economic analyses,

the financial analyses, the risk analysesand the impact assessment.


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II. The Investment phase includes:

Establishing the legal, financial andorganizational basis for theimplementation of the project.

Negotiation and contract.

Technology acquisition and transfer. Acquisition of land, construction works

and installation.

Pre-production, Marketing.

Recruitment and training. Plant commissioning and start up.


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Cash and other resources are invested, and

operations related to the investment - begin.

It involves activities related to the decisionsthat are necessary to be taken:

Decisions referring to establishment of thelegal, financial, and organizational base for theprojects realization;

Decisions referring to purchase andtransmission of technologies;

Decisions regarding the optimal periods ofrealizing the projects;

Decisions regarding the purchase of land,realizing construction works and setting up ofthe equipment;

Decisions regarding hiring and trainingpersonnel;

Decisions regarding the period to start theactivity.


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III. The Operational phase can be divided into:

1. Initial period after start-up (short-term view),including:

- Adaption of production techniques.

- Operational difficulties with equipment.

- Low labour productivity.

2. Full production (long-term view), including:

- Review of chosen strategies and related productionand marketing costs as well as sales revenues.

- Comparison of projections made in the pre-

investment phase with reality.


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Monitoring the investment project

is realized during and subsequent to theimplementation stage.

This activity supposes the control over allthose parameters of the investmentobjectives that had been foreseen in theinvestment decisions are respected in theexploration process.

The monitoring process determineswhether the investment proposal is fulfillingexpectations; if it is not, the project may be

closed down before the planned termination.


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The disinvestmentis a reduction in capitalexpenditure, or the decision ofa company not to replenish depleted capitalgoods. A company will likely not replace

capital goods or continue to invest incertain assets unless it feels it is receiving areturn that justifies the investment. If thereis a better place to invest, they maydeplete certain capital goods and invest inother more profitable assets. Alternatively

a company may have to divest unwillingly ifit needs cash to sustain operations.


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Once the investment project is

completed

an audit of the project is performedto evaluate the performance of itsmanagers and to determine

appropriate adjustments to theinvestment process in the future.


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The post-audit has three main

purposes:

Improve forecast. When decision makers are forced to comparetheir projections to actual outcomes, there is a tendency forestimates to improve. People simply tend to do every thingbetter, including forecasting, if their actions are beingmonitored.

Improve operations. When a team has made a forecast aboutinvestment, its member are putting their reputation on the line.If costs are above predicted levels, sales below expectations,and so on, executives in production, sales and other areas willstrive to improve operations and to bring results into line withforecasts.

Identify termination opportunities. Although the decision toundertake a project may be the correct one based on realinformation, things dont always turn out as expected. If initialoperating results indicate that a project is not likely to achieve

its expected profitability, it may be best for the firm to terminaterather than continue the project (disinvestment). Furthermore,most projects at some point in their lives lose their economicviability and should be terminated.


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III.

During, the first stage of an investmentproject lifecycle, project initiation,

planners should focus whether to proceedwith the project or not.The feasibility studyshould be conductedduring this stage, before the groupdecides to implement or terminate theproject.Planners need to know the requirementsfor a successful project.

The Feasibility Study


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There may be various definitions used

to describe a feasibility study

A FEASIBILITY STUDY

A preliminary study undertaken to determine and document a project's viability or the

discipline of planning, organizing, and managing resources to bring about the successful

completion of specific project goals and objectives

The preliminary analysis of an existing system used to see if it is worth upgrading all ora part. Also known as feasibility analysis.

The term is also used to refer to the resulting document. The results of this study are

used to make a decision whether or not to proceed with the project. If it indeed leads to a

project being approved, it will before the real work of the proposed project starts and

be used to ascertain the likelihood of the project's success.

One way to plan the start up process and resolve many of the issues , being an exercise

that involves documenting each of the potential solutions to a particular business

problem or opportunity

A logical tool to employ before any resources are invested in the new project


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The feasibility study evaluates the

projects potential for success.

The study is the first time in a projectdevelopment process that the piecesare assembled to see if they performtogether to create a technical andeconomically feasible concept.

The study also shows the sensitivityof the business to changes in thesebasic assumptions.


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Figure 2 shows the stage when a feasibility study is

needed based on the example of a 20 years

investment project.

Figure : Time scale of an investment project


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A typical feasibility study may have the

following contentsContents of a Feasibility Study

I. Executive summary.

II. Project concept and history.

III. Market analysis and marketing concept.

IV. Raw materials and supplies.

V. Location, site and environment.

VI. Engineering and technology.

VII. Organization and overhead costs.

VIII. Human resources.

IX. Implementation planning and budgeting.

X. Financial analysis and investment appraisal.

XI. Economic cost-benefit analysis.


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The information gathered and presented in

the feasibility study is useful to:

List in detail all the things needed to makethe business work;

Identify logistical and other business-

related problems and solutions; Develop marketing strategies to convince

a bank or investor that the business isworth considering as an investment; and

Serve as a solid foundation for developinga business plan.


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Who is responsible for feasibility study

A consultant often is hired to conduct thefeasibility study. Time and money spent inchoosing and using a good consultant is animportant investment that will paydividends later.

The individual conducting a feasibility studyshould have the following characteristics: Experience in conducting feasibility studies Fair and neutral with no prior opinion about what

decision should be made. It is important that all necessary data are

collected and presented so that the best decisioncan be made.


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Functions of Feasibility Studies

Information

Control

Testing etc.


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Individual task

Find out about internationalmethodologies for feasibility studies

Documents

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