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Chapter 1

Chapter 1 provides an overview of investment projects, detailing their characteristics, roles, and the stages of the project cycle. It emphasizes the importance of project appraisal in determining the feasibility and potential risks associated with investment projects. The chapter also distinguishes between project-based investment activities and regular business operations, highlighting their unique objectives and operational timelines.

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24 views40 pages

Chapter 1

Chapter 1 provides an overview of investment projects, detailing their characteristics, roles, and the stages of the project cycle. It emphasizes the importance of project appraisal in determining the feasibility and potential risks associated with investment projects. The chapter also distinguishes between project-based investment activities and regular business operations, highlighting their unique objectives and operational timelines.

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050610220374
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF or read online on Scribd
‘cHaPTER 1 ‘Overview of projetsetup appraisal Chapter 1 OVERVIEW OF SETUP & PROJECT APPRAISAL Introduction ‘After reading this chapter, students will have the understanding, ability to apply and analyze: What are the basic characteristics of an investment project? What is the role of an investment project for investors, funding organizations ‘and competent state management agencies? What are the differences between investment projects in practice? What are the stages of an investment project eycle? What are the subjects involved in a project? © What requirements must a project meet? What are the steps in the investment project establishment process? What are the main research aspects of a project? What is the role of project appraisal? At what stages of the project cycle is project appraisal carried out? What are the main appraisal aspects of a project? Projects are usually appraised from which appraisal perspectives? In this first chapter, we will discuss general issues about investment projec including the history of formation and characteristics of investment projects. Based ‘on these basic charneteristies, we will distinguish the difference between project based investment activities and normal business activities of enterprises. Unlike the duration of an enterprise whose termination date is not predetermined, investment projects will have a definite life span, Therefore, discussing the concept of the project eyele isa very typical content when studying ‘CHAPTER 1 ‘Overview of projet setup & appraisal investment projects. We will also lear about the role, eriteria for classifying projects and subjects participating in the project In the next part, we will learn about the general requirements of a project profile in terms of legality, scientific nature, project establishment or drafting, procedures and the main contents of a project. ‘The final part of the chapter will discuss the role of investment project appraisal, the stages of the project as well asthe perspectives of eack: subject when appraising a project, Investment project appraisal plays a very important role in “deciding whether to invest in that project or not. However, for the same project, evaluate the project management aspect after the project has been put into official operation. In addition, the project also needs to conduct an appraisal of the actual results ‘obtained during the project's operation period. From the results ofthis appraisal, it will help the managers know which variables are the most important in the design and implementation stages that determine the success or failure of the project. Post-project evaluation also aims to develop appraisal skills, improve the ‘accuracy of appraisal results and draw lessons from successes or failures for future projects. 1.3.4, Project Appraisal Viewpoints ‘A project can be appraised from a financial, economic or social perspective, If a project is appraised from a financial perspective, it is appraised from the Perspective of the investor, ered institutions, and shareholders, then a project is appraised from an economic and social perspective, it is appraised from the perspective of the government or local authorities, Table 1-5 below summarizes the project appraisal perspectives ofthe subjects participating in the project Appraisal of the project from different perspectives is meaningful in helping the competent person make a reasonable decision. Ifthe appraisal results show that the project brings financial efficiency to the investor, owner and credit institutions, ‘but does not bring economic and social benefits, the project may encounter difficulties in obtaining an investment license. On the contrary, ifthe appraisal results show that the project brings benefits to the economy and society but does ‘not bring financial efficiency to the investor, shareholders or sponsors the project cannot be implemented. In other words, for a project to be implemented, it must achieve financial, economic and social efficiency. 35 ‘CHAPTER 1 ‘Overview of projet setup & appraisal Viewpoint of | Financiat | Economies | Basie needs [Distributional] Investor: x - et - EE Banker - x - oar . ee ee ee : Government : = x x On the other hand, from the appraisal perspectives of the subjects participating in the project, it shows that a project may be feasible from one Perspective but not from another. For example, if only considering two typical project appraisal perspectives, the investor's perspective (representing the financial Perspective) and the government's perspective (representing the economic perspective), the appraisal result may occur in one of the following four cases ‘Table 1-6: Project Appraisal Results from the Investor's Financial Perspective and the Government's Economie Perspective sono (Goer Financial ah ae ee aa garets) [eu eveur Ne (1) The project is implemented because and beneficial to the economy. (2) The project is not implemented because it is not financially efficient for the investor and does not benefit the economy. (3) The project is not financially effieicnt forthe investor but dors not benefit the economy. In this ease, if the government decides to impese high taxes ‘on the project, the investor feels that the investment is no longer profitable (uch as projects producing and trading tobacco, beer, alcohol, addictive substances, ete). (4) The project is beneficial to the economy but does not bring financial financially efficient forthe investor 36 cHAPTER A Overview ofprojecsetup & appraisal efficiency to the investor. In this ease, the investor will not implement the project. However, ifthe Government or local authorities decide to support such projects, it will encourage investors to accept that the project will be both effective for the investor and beneficial to the economy (such as afforestation projects, river basin improvement, biodiversity, erosion control.) How Investment Projects & Business Plans Are Different? ‘A question that is often asked by those who practice credit granting activities is, what is the difference between a feasibility project and a business plan? To answer this question, we must start from the characteristics of form, duration, content and ‘implementation between a feasibility projet and a business plan. First of all, we need to understand that a feasibility project aims to evaluate the feasibility of investment ideas while a business plan aims to implemert the business ideas of the enterprise. Interms of form, a investment project is # detailed assessment ofthe fesibilty of the ‘marke, technology and input needs, management and human resources, finance, and soeio-economic aspects ofthe investment idea. The business idea will alsa be evaluated similarly when we make a business plan, however, it will not require deailed analysis as in an investment project. In credit activities, credit instiutions usually require borrowers to prepare a Feasibility Study Report for large-scale and highly complex investment ideas. Meanviile, For business ideas with small investment capital and not too complex, a business plan (a type of business plan) of the borrower will often be require. In terms of duration, a business plan in this case can be a long-term business plan of 8 ‘mealium-tcrin business plan or a short-term implementation plan, A long-term business plan will help the business see the future development direction of the tusiness based ‘on the business's operational strategy. Meanwhile, medium-term businss plans will help the business achieve medium-term goals to achieve the long-term goals of the business strategy, Finally, short-term operational business plans will help the business achieve medium-term goals Feasibility projects are usually implemented in the medium and long term and aim to implement investment ideas in line withthe business strategy ofthe enterprise, Interms of content, feasibility projects also include the contents ofa medium and long term business plan when itis necessary to fully research the aspects of the market or sales plan, technical aspects and input needs, human resources or cost plans, financial aspects or profit plans 7 uarrer 1 (Overview of project setup & appraisal Tn eas of plementation, whe the fvesimsat project spa no oration, wil ned to have accompanying business plans, At his time, the business pans wil ae operational plans for each relevant departmentin the projet, helping the project shee ‘he proposed ress cach year inthe projet life cele. Summary ‘The concept of investment projects was only mentioned more sfter the World Bank was established and up to now, many definitions of investment projects have been put forward. However, in general, the definitions of investment projects all show basie characteristics such as having initial investment capital to implement the project; must determine the results brought by the project and must determine the start and end time of the project. In addition to these basic characteristies, the project also has other basic characteristics such as having to determine the human resources needed for the project, must identify the risks that may ooeur during the implementation and operation of the project, must describe the distinetiveness of the project's output products. Project investment activities are different from the ily business activities of an organization, Investment projects act as a means for investors and businesses to realize profitable investment opportunities, a tool for investors to mobilize eapital, help investors identify and prevent risks during the implementation and operation of projects, help credit institutions select feasible projects to finance and a tool for the ‘government to call on private economic sectors to participate in investing in the infrastructure sector for the economy. Projects ean be classified based on many different criteria Based on the form of investment, investment projects are divided into separate investment projects, ‘expanded investment projects and in-depth investment projects. Based on the project establishment sequence, investment projects are divided into pre-feasbility projects and feasibility projects. Based on the nature of the project, investment projects are divided into independent projects, excluded projects and supplementary projects, etc. The classification of investment projects according to the above criteria is to help those who analyze or appraise the project apply the principle of increased cash flow apprapristely for each type of project, help investors st up projects suitable to the scale of each projec, save or avoid wasting investment preparation capital, help people with the authority to make investment decisions choose optimal investment projects. ‘The investment project starts from the time of project identification until the time of project completion is called the project cycle. The project eyele includes 38 cuaPTER 1 ‘Overview o projectsetup&apprasal successive stages such as investment opportunity research; project establishment; implementation; operation and project closure. ‘There are many subjects involved indifferent stages ofthe project eycle with 4ifferent roles. These subjects include initiators, shareholders, investors, banks, bond investors, credit rating agencies, construction contractors, customers, suppliers, operators, consulting organizations, governments, multinational fAnancial institutions, ete, For the project to be implemented in practice and bring about efficiency, the project setter must comply with the requirements of legality, science and feasibility. Project management, project appraisal and project financing also have ferences in research scope and research content as wel as different results. ‘The procedure for establishing an investment project in case the investor has sufficient conditions and capacity to organize the project includes stages such as: project identification, project drafting plan, preliminary outline, detailed outline, ‘work assignment, investment project drafting, research results presentation, and completion of feasibility study report. In case the investor does not Lave sufficient conditions and capacity to organize the project, they will have to hte a qualified ‘consulting organization to establish the investment project for them, ‘The aspects that need to be studied in the project preparation process include: ‘market, technology, human resources and management, finanee, economy and society. These aspects are arranged in a certain order called the investment project analysis framework. Based on the analyzed aspects of a project, the appraiser will conduct an appraisal and conclude on the feasibility of each aspect and the entire project. Project appraisal plays a role in helping to select a valuable investment project, limit damage to the participants, and save resources and economie resources, Project appraisal can be carried out atthe stages of investment opportunity research, pre-feasibility study andor feasibility study, operation, post-evaluation and project completion. At each appraisal stage, the competent person will make decisions on approval or rejection to serve as a basis for continuing to implement the project in the following stages, From the aspects of project appraisal, it can be seen that a project can be appraised from a financial, economic or social perspective. In which, project appraisal from a financial perspective i project appraisal from the perspective of Fo cuarren 1 (Overview of projet setup & appraisal investors, credit institutions or shareholders, and project appraisal from an economic or social perspective is project appraisal from the perspective of the ‘government or local authorities. Fora project to be feasible, it must be financially, ‘economically and socially feasible. 40

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