Investment Project Design

LECH KUROWSKI is an economist with over twenty-five years of experience in investment projects analysis. Currently a professor of economic analysis at the Wroclaw University of Economics in Wroclaw, Poland, he has performed investment studies and has served as analyst for investment proposals prepared by consulting companies for governments and private investors in over forty countries in Europe, Asia, and Africa. DAVID SUSSMAN is an industrial engineer who has served as consultant to medium and small-scale enterprises and has conducted workshops and seminars throughout the world, particularly in Latin America. He was responsible for most of the important systems design and developed many of the concepts used in the investment project analysis program of the U.N. Industrial Development Organization. He has designed financial management systems in both the public and private sectors. Please visit the companion website for case descriptions, spread sheets, and supplementary discussion of markets and other topics. www.wiley.com/go/investmentprojectdesign

• Acknowledgments xiSymbols and Most Frequently Used Acronyms xiiiIntroduction 1CHAPTER 1 Investment Environment 9Systematic Project Analysis 10Project Environment and Strategy 11Project Development Process 33Planning Horizon and Project Life 43Project Scope 44Preinvestment Studies 46Investment Planning Infrastructure 58Appendix 1.1: Elements of Commercial and Wider Domains 60Appendix 1.2: Outline of Business Plan for a Manufacturing Enterprise 62Appendix 1.3: Outline of Design/Study Report 63Appendix 1.4: Information Flow Details 67Notes 69References 74CHAPTER 2 Preparing Pro-Forma Financial Statements 75Accounting System 77Process of Financial Analysis 81Financial Costs and Benefits 84Investment Costs 87Production Cost 116Operating Cost, Factory Cost, and Cost of Product Sold 122Financial Statements 127Appendix 2.1: Depreciation Methods 142Appendix 2.2: Starting Inventory Balance 148Notes 150CHAPTER 3 Financial Indicators and Criteria 155Static Indicators 155Types of Static Indicators 156Dynamic Indicators 169Financial Criteria for Investment Decisions 188Analysis of Joint Ventures 203Project of an Ongoing Enterprise 206Appendix 3.1: Example of Cost of Capital Calculations 219Notes 225References 228CHAPTER 4 Financing the Project 231Capital Structure 232Cost of Capital 249Notes 255References 256CHAPTER 5 The Economic Perspective 257Private Sector 259Public Sector 259General Rationale for Economic Evaluation—Who Needs It? 260Macroeconomic View—Impact on the National Economy 262Price Distortions 266Applicability and Scope 272Economic Pricing Principles 278Shadow Prices of Primary Resources (National Parameters) 292Conversion and Adjustment Factors 297Appendix 5.1: Costs and Benefits of Revenue Projects 299Appendix 5.2: Global Pricing Framework—Importable Input Forgone 301Notes 303References 307CHAPTER 6 Economic Cost/Benefit Analysis 309Adjustments for the Wider Domain 311Valuation at Market Prices 311Define the Accounting Unit 317Value-Added 343Notes 354References 358CHAPTER 7 Investment Decisions under Uncertainty and Risk 359Forecasting 359Risk—Dealing with Uncertainty 364Quantitative Risk Assessment 369Qualitative Risk Assessment 380Risk Management 380Risk Immunization for Financiers 383International Investors and Risk 385Appendix 7.1: Discrete Probability Analysis—Multivariate 386Notes 387References 390CHAPTER 8 Project Appraisal 391Macro-Micro Appraisal 392SWOT Analysis 393Stakeholder Perspectives 396Appraisal Report 399Caveats for the Appraiser 406Notes 407References 408CHAPTER 9 Implementation Planning and Budgeting 409Implementation Planning 410Project Management 412Conducting the Implementation Project 416Implementation Budget 437Appendix 9.1: Sample Responsibility Matrix for a Portion of a Project 438Appendix 9.2: Checklist of Project Implementation Costs 438Notes 442References 443About the Authors 445Index 447