Project Preparation and Evaluation: Key Stages

Chapter 3: Project Preparation and Evaluation

Pre-Investment

This stage determines the amount to be invested, and the project will be evaluated by measuring its profitability.

• Project Profitability: Measures the profitability of the business, regardless of who undertakes it.
• Investor Profitability: Measures the return on equity for the investor if they carry out the project.

Project Classification

A) According to the Objective of the Study:

• Project profitability
• Investment
• Capacity to pay for the project

B) According to the Type of Investment:

• Creation of a new business
• Modernization project:
  • Internalization
  • Externalization
  • Replacement
  • Expansion
  • Abandonment

Social Assessment of Projects

Compares the benefits and costs that a particular investment may have on the community of a country as a whole. This study considers:

• Direct Benefits and Costs: Measures the increase that the project generates in national income and measures the purchases of inputs.
• Indirect Costs and Benefits: Correspond to the changes that the project produces in the production and consumption of goods and services.
• Intangible Costs and Benefits: The effects that the project's implementation can have on the community.
• Externalities: Positive and negative effects.

Before starting a project, it is important to determine the amount of investment by analyzing market projections, population growth, income, and demand.

Feasibility Study

1) Commercial Viability: Indicates whether the market is sensitive to the good or service offered and whether it would have acceptability in consumption or use, thereby determining the rejection or deferral of a project without incurring the costs involved in completing a full economic study.

2) Technical Feasibility: Examines the conditions required to produce the good or service.

3) Organizational Viability: Determines if there are minimal conditions to ensure the feasibility of implementation, both structurally and functionally.

4) Financial Viability: Determines approval or rejection by measuring the profitability and returns on investment.

5) Environmental Impact Feasibility: There may be legal restrictions preventing operation, or the project may not be recommended. All of this corresponds to a financial feasibility study.

Project: Idea

This represents the realization of a diagnosis that identifies different ways of solving a problem.

Pre-Investment

Three feasibility studies are performed:

1) Profile: Presents highly aggregated estimates of investment costs and revenues, without going into field research. It seeks to find a reason to justify abandonment before providing funding.

2) Pre-Feasibility: Estimates probable investments, operating costs, and revenue demand that the project will generate. As a result of this study, a recommendation for approval is made.

3) Feasibility: This is made based on accurate records obtained mostly through primary information sources.

Project Studies

Formulation and Preparation

Defining characteristics that have some degree of effect on the flow of cash income and expenses, calculating their magnitude.

Assessment

This seeks to determine the profitability of the project. In this process, we look at:

Cash Flow: Measures the profitability of the entire investment of resources contributed by the investor and also the ability to separate payments from the rent. This stage looks at profitability measurement, analysis of qualitative variables, and awareness of the project.

The complete analysis requires the following studies:

• Market: Studies the consumer and market demands, competition and market offerings, product marketing, suppliers, and the availability and price of inputs.
• Technical: Provides information to quantify the amount of investment and operating costs.
• Organizational-Administrative-Legal: Defines the organizational structure that adapts to its subsequent operation.
• Financial: Sorts items in investments, costs, and revenues that can be derived from previous studies. Builds cash flows and evaluates the project.

Market Structure

The environment in which the project unfolds can take four general forms:

• Perfect Competition
• Monopoly: Where a single supplier sells a product for which there are no perfect substitutes.
• Monopolistic Competition: Characterized by numerous sellers of a differentiated product. In the long term, there is no difficulty in entering or leaving the industry.
• Oligopoly: Few sellers of a homogeneous or differentiated product. Entry or exit from the industry is possible but difficult.

Demand for a Product