Chapter 28

Practical Corporate Investment

Decision Making Guide
 1 – Important Definitions

Front End Engineering and Design (FEED)

• Basic engineering which comes after the Conceptual design or Feasibility study.

• FEED is more than simply providing a project cost estimate, FEED comprises a thorough
project scope, complete project budget, total cost of ownership, implementation timeline
and initial risk assessment. All of these factors combine to help reduce risk and
uncertainty during the detailed engineering and commissioning phases, and can help
create value lasting throughout the production lifecycle

Feasibility and
Design & Installation & Upgrade and
conceptual FEED O&M
Engineering Commissioning Migrations
studies

By . Mohammad Salama
 1 – Important Definitions

Front End Loading (FEL)

• Also Called “pre-project planning (PPP)”

• Develop sufficient strategic information to assess risks to make decisions concerning

resources and insure success

key performance indicators

• The means by which an organization can measure the progress being made to ensure that the
critical success factors are being achieved.

By . Mohammad Salama
 1 – Important Definitions

Average Annual Rate of Return (AARR)

• The average yearly profit over the operating lifecycle of a facility and dividing it by the final cost of
the project.

• The final cost of the project is the total cost required to deliver a project to begin operating and
generating revenue

Investment

• The act of contributing money or capital into an enterprise with the expectation of future profit

By . Mohammad Salama
 2 – Executive Summary

Statement of the problem that the project addresses

• Concise description of the proposed project to evaluate how the project aligns with their strategic
investment portfolio

Project Summary

• Describes the investment opportunity. Diagrams, maps, description of the technology

Key Project Drivers

• A high-level summary of the current operations, current market needs, changes to regulations, new
product lines, new profit opportunities, etc. and how this project is going to address these items
By . Mohammad Salama
 2 – Executive Summary

Primary Risks and Uncertainties

• Since the investor needs to understand how the risks affect pricing, economics, supply, regulations,
and capital

Capital Cost Variance

 2 – Executive Summary

Average Annual Rate of Return Variance

Cash Flow Analysis

• Cash flow is the flow of money in or out

of a business over a finite period of time .

• It is important to understand cash flow because it makes up the third important view of projects,
following Capital Cost Variance and Average Annual Rate of Return Variance
By . Mohammad Salama
 Cash Flow Analysis

Cash flow = Cash Receipts - Cash Payments

Operation

Operations = Revenue generated by operations – Materials – Labor

Financing

Financing = Loan + Cash Received from equity or issue of debt - Loan repayment –
Taxes – Dividends - Share repurchase

Investments

Investments = Sale of Assets + Purchase Capital – Acquisitions

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 3 - Revenue Issues

Technical Issues Commercial Issues

Upside Downside Impact Profit Margin

Analysis

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 4 – Capital Drivers

Cost of land to lease or purchase for the project,

Development costs,

The cost of capitalized interest

(Capitalized interest is the interest on the loan from a financial institution)

Credit risk

Taxation

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 5 – Expense Drivers

Fixed operating costs,

(labor, maintenance, insurance, and office expense)

Variable operating costs,

(chemicals, electrical, maintenance, and raw material costs)

Utilities, (gas, water, electricity, etc.)

Tariffs

Regulatory Issues

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 6 – Other Drivers

Schedule Drivers

For example :

• Force Majeure

• Late Change to Scope or Design&

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 Base Case Economic Indicators

The Profitability Index (PI) The Return On Capital Employed (ROCE)

• Ratio between the present value of the future cash values and the initial investment

،‫ جنيه‬400 ،‫ جنيه‬400 ‫ جنيه في شراء معدات ونتوقع تدفق نقدي خالل األعوام الثالثة األولى قيمته‬1000 ‫ افترض أننا سنستثمر‬: ‫مثال‬
‫؟‬%8 ‫ جنيه فما هو دليل الربحية إذا كان معدل الفائدة‬400

PV 1000

400 400 400

1031 FV
By . Mohammad Salama
 The Return On Capital Employed (ROCE)

The Return On Capital Employed (ROCE) The Profitability Index (PI)

• Profit as a percentage of capital employed. It provides a measure of the rate of return on

capital invested

ROCE = Operating Income / Assets Employed

OR
ROCE = Sales / (Assets Employed - liabilities)

OR
ROCE = (Sales / Assets Employed) X [(Operating Income before taxes and
interest)/Sales]
By . Mohammad Salama