Manual for the preparation of industrial feasibility studies

MANUAL FOR THE

PREPARATION OF

INDUSTRIAL

FEASIBILITY STUDIES

Newly revised and expanded edition

W. Behrens P. M. Hawranek

UNIDO

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Vienna, 1991

The designations employed and the presentation of the material in

this publication do not imply the expression of any opinion whatsoever on

the part of the Secretariat of the United Nations concerning the legal

status of any country, territory, city or area or of its authorities, or

concerning the delimitation of its frontiers or boundaries.

Mention of firm names and commercial products does not imply the

endorsement of the United Nations Industrial Development Organization

(UNIDO)

ID/372

UNIDO PUBLICATION

Sales No. E.91.III.E.18

ISBN 92-1-106269-1

Copv'right © United Nations Industrial Development Organization 1991

All rights reserved

Foreword to the second printing

Developing and developed countries alike are increasingly in need of

properly prepared feasibility studies for taking sound investment decisions.

In the past, too many investment projects did not produce the outputs for

which they were originally designed or their actual construction costs ex￾ceeded those that had been envisaged. For this reason, many financial insti￾tutions are increasingly relying on well-prepared investment studies to avoid

cost overruns later on, for the investors as well as for themselves. One result

of this growing interest was that the first printing of the revised and expanded

edition of the Manual for the Preparation of Industrial Feasibility Studies

was sold out sooner than anticipated.

The Manual was first published by UNIDO in 1978. By early 1992

more than 150,000 copies had been sold in 20 different languages, making

it one of the best-selling publications of the whole United Nations system.

The Manual was originally designed to provide developing countries with a

tool for improving the quality of investment proposals and to contribute to

the standardization of industrial feasibility studies, which had often been

found to be both incomplete and ill-prepared. UNIDO efforts to achieve

those objectives have since met with a positive response in both developing

and developed countries. The approach promoted by UNIDO for the prep￾aration of feasibility studies has been adopted by investment promotion

agencies, government ministries, universities and other institutions of higher

learning, as well as by banks, consulting firms and the investors themselves.

To improve their ability to make investment decisions, many institutions and

firms have cooperated with UNIDO, either by applying the advanced project

preparation systems, appraisal methodologies and group training pro￾grammes developed by the organization or using them as models for their

own efforts.

The revised and expanded edition of the Manual, of which this is a

second printing, focuses on a strategic approach to investment. It devotes

particular attention to environmental impact assessment, technology transfer,

marketing, human resources and the mobilization of funds. It should be used

in conjunction with other UNIDO publications on economic analysis and

with the latest version of the UNIDO Computer Model for Feasibility

Analysis and Reporting (COMFAR III Expert), which was issued in 1994.

I hope that this second printing of the revised and expanded edition will

attract further interest from all who are concerned with improving the indus￾trial development process in developing countries and that it will be of

continued practical value to an ever broader range of users.

Maurcio de Maria y Campos

Director-General

1995

iii

Acknowledgement

Special acknowledgement is due to the Federal Ministry of

Economic Cooperation of Germany for its generous financial support,

without which this second edition would not have become reality.

iv

Preface

The publication of this revised and expanded second edition of the

Manualfor the Preparation of Industrial Feasibility Studies is the result of

the long and dedicated efforts of all those involved in this production.

The revision of the text required a careful analysis of voluminous

correspondence and comments from readers before a decision could be

made on its scope and contents. The complexities of drafting the final

version were increased by the inclusion of new subject-matter based on

contributions by selected experts.

In its conception, organization and scope, this Manual is due to the

close collaboration of its principal authors, Werner Behrens and Peter

M. Hawranek, of the UNIDO Division of Industrial Operations Support,

who drafted the bulk of the text and shared overall responsibility for its

final preparation. In carrying out this task, they received valuable

assistance and advice from numerous UNIDO consultants and staff. The

authors are particularly grateful to UNIDO consultants for the

contributions described below.

The introduction of the concept of strategic orientation was

proposed by H. R. Arm, who drafted the analysis of this concept

presented in part one, section B, and who also made a valuable

contribution to the contents and restructuring of part two, chapter III,

which covers market analysis and the marketing concept. R. Irvine

revised the annexes covering demand forecasting techniques, sampling

principles and field surveys, and helped with the revision of chapter III.

The analysis of maintenance and replacement requirements, as well as

various revisions in the treatment of organization, personnel training

and implementation planning, were drafted by B. Knauer, who also

checked the whole manuscript from the point of view of the practical

application of the Manual by engineers. Rana K. D. B. Singh, who had

already contributed to the first edition, drafted the revision of

chapter VI, which deals with engineering and technology. Increasing

concern about the environmental impact of industrial projects has led to

the expansion of chapter IV, which now covers location, site and

evironment. Valuable material, including information on the practical

application of environmental impact assessment, was provided by

R. Schoenstein, G. Schoerner and D. Sussman. The text of chapters IV,

V and VIII was reviewed by B. Andersson, and that of chapter X by

J. Bendekovic and G. Eckstein.

Although this Manual is based on the first edition, as well as on

contributions by consultants, responsibility for the final text remains

that of the authors, who hope that readers will find this revised and

expanded Manual as useful for their work as the first edition published

over 10 years ago.

v

Explanatory notes

References to dollars ($) are to United States dollars, unless otherwise

stated.

In tables:

Totals may not add precisely because of rounding.

A hyphen indicates that the item is not applicable.

An em dash (-) indicates that the amount is nil or negligible.

Two dots (..) indicate that data are not available or are not separately

listed.

The following abbreviations are used in this publication:

c.i.f. cost, insurance, freight

COMFAR Computer Model for Feasibility Analysis and Reporting

FAO Food and Agriculture Organization of the United Nations

ILO International Labour Organisation

INTIB Industrial and Technological Information Bank

IRR internal rate of return

NCU national currency unit

NPV net present value

NPVR net-present-value ratio

UNDP United Nations Development Programme

UNEP United Nations Environment Programme

vi

CONTENTS

Page

Forew ord ....................................................... iii

Preface ......................................................... v

Explanatory notes ................................................ vi

Introduction ..................................................... 1

PART ONE.

PRE-INVESTMENT STUDIES

AND THE INVESTMENT PROJECT CYCLE

A. Investment project cycle and types of pre-investment studies ........ 9

B. Basic aspects of pre-investment studies ......................... 22

C. Rehabilitation and expansion projects ........................... 39

D. Role of institutions, consultancy services and information systems ... 46

PART TWO.

THE FEASIBILITY STUDY

I. Executive summary ......................................... 55

II. Project background and basic idea ............................. 59

III. Market analysis and marketing concept ........................ 62

A. M arketing ............................................ 62

B. Marketing research ......... ................. 66

C. Outline of the project strategy ........................... 81

D. Outline of the marketing concept ....................... 88

E. Marketing costs and revenues............................ 95

IV. Raw materials and supplies .................................. 106

A. Classification of raw materials and supplies ................ 106

B. Specification of requirements ............................ 111

C. Availability and supply ................................. 114

vii

D. Supply marketing and supply programme .................

E. Costs of raw materials and supplies .......................

V. Location, site and environment ...........................

A. Location analysis ...........................

B. The natural environment................................

C. Environmental impact assessment ........................

D. Socio-economic policies ................................

E. Infrastructural conditions ...............................

F. Final choice of location .................................

G. Site selection ......... .................................

H. Cost estimates ......... ................................

Page

116

119

126

127

127

128

142

143

146

148

151

VI. Engineering and technology ................................. 161

A. Production programme and plant capacity ................ 162

B. Technology choice ..................................... 167

C. Technology acquisition and transfer ...................... 174

D. Detailed plant layout and basic engineering ................ 179

E. Selection of machinery and equipment ................ .... 181

F. Civil engineering works .................. .............. 185

G. Maintenance and replacement requirements ............... 186

H. Estimates of overall investment costs .................... 187

VII. Organization and overhead costs ...............

A. Plant organization and management.......

B. Organizational design ...................

C. Overhead costs .........................

............... 204

............... 204

............... 206

............... 212

VIII. Human resources ...........................................

A. Categories and functions ................................

B. Socio-economic and cultural environment .................

C. Project-related requirements .............................

D. Availability and recruitment.............................

E. Training plan .........................................

F. Cost estimates .........................................

219

219

221

222

225

227

228

IX. Implementation planning and budgeting ............... ..... 234

A. Objectives of implementation planning .................... 234

B. Stages of project implementation ......................... 236

C. Implementation scheduling .............................. 243

D. Projecting the implementation budget ..................... 245

X. Financial analysis and investment appraisal ....

A. Scope and objectives of financial analysis.

250

250

viii

Page

B. Principal aspects of financial analysis and concept of invest￾m ent appraisal ........................................

C. Analysis of cost estimates ...............................

D. Basic accounting statements .............................

E. Methods of investment appraisal .........................

F. Project financing ......................................

G. Financial and efficiency ratios ...........................

H. Financial evaluation under conditions of uncertainty ........

I. Economic evaluation ...................................

Appendix. Schedules for financial analysis .....................

Annexes

252

259

272

275

289

298

301

307

310

I. C ase-study ..................................................

II. Outlines of general opportunity studies .........................

III. Outline of pre-feasibility study .................................

IV. Types of decisions to be taken during different pre-investment stages

V. Status of an existing industrial enterprise ........................

VI. Demand forecasting techniques ................................

VII. Sam pling principles ..........................................

V III. Field surveys ................................................

Index........................................·.... ....... .......

.....

.....

.....

.. ...

.. ...

.....

.....

.....

.....

344

349

352

355

356

362

372

375

377

Tables

I. Computation of net-present-value ratios ...............................

2. Example of cash flow discounting .....................................

3. Comparison of project alternatives ....................................

4. Example of different rates of return ...................................

5. Annual rate of return on equity capital ...............................

6. Net profit of project alternatives ......................................

7. Example of investment outlay and structure of finance ...................

8. Calculation of weighted IRR .........................................

9. Minimum days of coverage for computation of net working capital ........

10. Coverage of fixed costs ......... .....................................

11. Production costs factors .............................................

12. Income and demand projections ......................................

13. Forecast of petrol consumption .......................................

Figures

I. Pre-investment, investment and operating phases of the project cycle ..

II. Project promotion and capital expenditures .......................

III. The firm and its environment ....................................

IV. Coordination and harmonization of the functional strategies .........

V. Interrelationship between the components of the feasibility study .....

280

281

282

288

289

289

293

306

346

347

348

367

370

10

17

23

26

27

IX

Page

VI. Information flow chart for the preparation of industrial feasibility

stu dies .......................................................

VII. Reliability of different types of pre-investment studies ...............

VIII. The phases of rehabilitation projects .............................

IX. Marketing research and preparation of a marketing concept .........

35

37

42

64

X.

XI.

XII.

XIII.

XIV.

XV.

XVI.

XVII.

XVIII.

XIX.

XX.

XXI

XXII.

XXIII.

XXIV.

XXV.

XXVI.

XXVII.

XXVIII.

XXIX.

XXX.

XXXI.

The m arketing m ix ............................................. 65

Marketing research and the marketing system ...................... 67

Problem classification .......................................... 69

Market volume and market share ................................ 73

Assessing the profile of possible reactions of competitors ............ 77

The life cycle of a subsector ..................................... 78

Intensity of competition ................... ..................... 78

Outline of the project strategy and marketing concept ............... 82

Types of geographical project strategy ............................ 83

Profitability and market share ................................... 84

Basic strategic options .......................................... 84

Product-market relation ........................................ 86

Competition and market expansion strategy ....................... 87

Basic elements for the determination of a project strategy ............ 88

Assessment of product-target-group fields ......................... 89

Development of a marketing concept ............................. 95

Phases of environmental impact assessment ................... ..... 134

Example of an organization chart for an industrial enterprise ........ 205

Structure of the balance sheet ................................... 267

Origin of cost items for profitability calculation (return on equity) .... 270

NPV method and ranking problem ............................... 284

Determination of the break-even conditions ....................... 305

Check-lists and worksheets

Functional objectives and strategies ...............................

III-1. Definition of the market and analysis of the market structure .........

III-2. Analysis of the marketing system ..................................

III-3. Analysis of market characteristics .................................

III-4. Analysis of the competitors ......................................

I-5. Analysis of the environment ......................................

III-6. Corporate (internal) analysis .....................................

V-l. Domains of the natural environment subject to and generating environ￾m ental im pacts .................................................

V-2. Domains of the social environment subject to and generating environ￾m ental im pacts .................................................

V-3. Environmental impacts and factors ................................

V-4 Matrix for the identification of environmental impacts ...............

VI-1. Engineering and technology ......................................

VI-2. Subdivision of cost estimates .....................................

VII-1. Cost centres ....................................................

V II-2 O verhead costs .................................................

26

98

98

99

99

100

101

154

155

155

156

192

194

215

215

x

Page

VIII-I. Human resource planning ........................................ 230

VIII-2. Computation of surcharges on wages and salaries ................... 231

IX-I. Sample breakdown of project implementation costs .................. 246

Schedules

II. Costs of pre-investment studies and preparatory investigations ........ 61

III.1. Projected sales programme ....................................... 103

111.2. Estimate of total marketing costs .................................. 104

111.3. Projection of total marketing costs ................................ 105

IV-1. Estimate of costs of raw materials and supplies ...................... 123

IV-2. Estimate of costs of raw materials and supplies ...................... 124

IV-3. Projection of total costs of raw materials and supplies ................ 125

V-l. Estimate of investment costs: land and site preparation ............... 157

V-2. Estimate of investment costs: environmental protection measures ...... 158

V-3. Estimate of operating costs related to the site ....................... 159

V-4. Estimate of operating costs related to environmental protection measures 160

VI-1. Estimate of technology costs ..................................... 197

VI-2/1 Estimate of investment costs: plant machinery and equipment ......... 198

VI-2/2. Summary sheet of investment costs: machinery and equipment ........ 199

VI-3/1. Estimate of investment costs: civil engineering works ................. 200

VI-3/2. Summary sheet of investment costs: civil engineering works ........... 201

VI-4/1. Estimate of factory costs ......................................... 202

VI-4/2. Projection of factory costs ....................................... 203

VII-1. Estimate of overhead (indirect) costs ............................... 217

VII-2. Projection of overhead (indirect) costs ............................. 218

VIII-1. M anning table.................................................. 232

VIII-2. Estimate of personnel costs ....................................... 233

IX-I. Project implementation charts .................................... 248

IX-2. Estimate of investment costs: project implementation ................ 249

X-l/l. Total fixed investment costs ...................................... 310

X-1/2. Total fixed investment costs: foreign or local components ............. 311

X-2/1. Total pre-production expenditures ................................ 312

X-2/2. Total pre-production expenditures: foreign or local components ....... 313

X-3/1. Total annual costs of products sold ................................ 314

X-3/2. Total annual costs of products sold: foreign or local components ...... 316

X-3/3. Total annual costs of products sold: variable or fixed components ..... 318

X-4/1. Total net working capital requirements ............................ 320

X-4/2. Total net working capital requirements: foreign or local components ... 321

X-5/1. Calculation of working capital requirements according to seasonal

fluctuations .................................................... 322

X-5/2. Calculation of the short-term liquidity ............................. 323

X-6/1. Total investment costs ........................................... 324

X-6/2. Total investment costs: foreign or local components ................. 325

X-7/1. Sources of finance .............................................. 326

X-7/2. Flow of financial resources ....................................... 327

X-7/3. Flow of financial resources: foreign or local components ............. 328

xi

Page

X-7/4. Total debt service ............................................... 329

X-7/5. Total debt service: foreign or local components ..................... 330

X-7/6. Debt service: foreign or local currency loans ........................ 331

X-8/1. Cash-flow table for financial planning ............................. 332

X-8/2. Cash-flow table for financial planning: foreign or local components .... 334

X-9/1. Discounted cash flow - total capital invested ....................... 336

X-9/2. Discounted return on equity capital invested ........................ 338

X-10. Net income statement from operations ............................. 340

X-1 1. Projected balance sheet .......................................... 342

xii

Introduction

Since its first publication in 1978, the Manual for the Preparation of

Industrial Feasibility Studies has demonstrated the usefulness of its methodo￾logical approach by having been translated into 18 languages and applied

throughout the world, with 11 reprints of the English edition alone, and four of

the French.' In recent years many developing countries have standardized their

project planning in line with the UNIDO approach. Consulting firms, industrial

enterprises, banks and investment promotion agencies in developed countries

have also introduced the UNIDO procedure or have adapted it to their own

requirements.

Many new problems have emerged during the 1980s. In particular, there

has been a great change in the general economic situation, with high foreign

debts, low raw-material prices and a widespread shortage of foreign exchange

making it difficult for developing countries to secure fresh investment

resources. In addition, major projects completed in the 1970s very often failed

to generate the cash flow necessary to service the debt and finance new

investment in expansion, modernization, rehabilitation and other projects. A

shortage of international capital and foreign exchange earnings, combined with

a low level of national savings, have created a need for more efficient project

planning and for project design with a strategic orientation, on the basis of an

integrated financial and economic analysis.

UNIDO has had more than 10 years to accumulate wide experience in

applying the Manual in the preparation of a vast number of feasibility studies

carried out under its technical cooperation programme. The Manual is also

used in UNIDO institution-building and training programmes. The successful

identification, formulation, preparation, appraisal and promotion of industrial

investment projects rests to a large extent on the availability of national

institutions capable of performing such tasks. The UNIDO technical coopera￾tion programme, which focuses mainly on the establishment and strengthening

of consulting firms, investment promotion agencies, project appraisal units in

development finance institutions and industrial development centres, contributes

to the upgrading of national capabilities of developing countries in the

preparation of pre-investment studies and the appraisal of investment projects.

This activity has expanded considerably and led to the creation of an inter￾university cooperation network, with members from developing and developed

countries, using UNIDO manuals and guidelines on pre-investment studies as

student textbooks and conducting joint training programmes and research.

'After its publication in English, UNIDO provided translations of the Manual into Arabic,

Chinese, French, Russian and Spanish. Users of the Manual prepared translations into Czech, Dari,

Farsi, German, Greek, Hungarian, Japanese, Laotian, Polish, Portuguese, Serbo-Croatian, Turkish

and Vietnamese.

1