Industrial feasibility analysis: Introduction

Nur Aini Masruroh

http://aini.staff.ugm.ac.id/ ; Email: aini@ugm.ac.id; n_masruroh@yahoo.com

Questions
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What is feasibility analysis? Why should we perform it? What do you expect to get from this course?

Materials
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Introduction
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Business concept Marketing aspect Technical and operational aspect Legal aspect Environmental aspect

Non-capital analysis
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Capital planning and budgeting

Materials (contd)
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Basic capital investment analysis Capital asset pricing model Replacement analysis Capital investment analysis in uncertain world Feasibility report

Grading
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Assignments Mid term Final exam

: 50% : 25% : 25% (compulsory)

Text books
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J.R. Canada, W.G. Sullivan, D.J. Kulonda, and J.A. White, 2005, Capital Investment Analysis for Engineering and Management, 3rd Ed., Prentice Hall, New York. Bodie, Z., Kane, A., and Marcus, A.J., 1999, Investments, 4th Ed., McGraw Hill, Singapore Bodie, Z., Kane, A., and Marcus, A.J., 2007, Essentials of Investments, 6th Ed., McGraw Hill, Singapore E.M Tainer, 1998, Using Economic Indicators to improve investment analysis, John Wiley & Son, New York.

Whats business?
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Wikipedia: a legally recognized organization designed to provide goods and/or services to consumers Activity to create money in a responsible way

What is the most valuable company today?

CNN Money, 23 Oct 2009

Sales revenues Profit Employees Market Capitalization

USD 372.824 bio USD 40.610 bio 107,100

sales revenues profit

USD 60.42 bio

USD 17.681 bio 91,000

employees market

USD 353.23 bio

capitalization

USD 249.9 bio

GDP Indonesia 2009 USD 629.244 bio !! (231 mio people@ USD 2,724)
*GDP = consumption + gross investment + government spending + (exports imports)

US most valuable company

CNN Money, 23 Oct 2009

Based on market capitalization

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Exxon Mobil: $353.23 billion Microsoft : $249.9 billion Wal-Mart : $194.3 billion Apple: $183.88 billion JP Morgan Chase: $179.84 billion Google: $175.93 billion Procter & Gamble : $167.3 billion Johnson & Johnson : $166.2 billion General Electric : $161.42 billion IBM : $159.08 billion

Value chain evolution

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70s : COSTS + PROFIT = PRICE 80s : PRICE COSTS = PROFIT 90s : PRICE PROFIT = COSTS Now: SET TARGETS PROFIT PRICE COSTS

Activities
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New product/process/project/plant/ Ongoing Replacement the existing tools

plan

Question: should we continue/realize or stop?

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What aspects should we consider to make the decision?

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In what extent an alternative is said to be feasible?

Industries
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Manufacture Service feasibility studies can be done for both Different in product, process, problem faced, performance measurements, etc.

Investing, whats for?

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Investor: financial benefit Government: economic benefit (economic growth, increase GDP (gross domestic product), export, import substitution, etc) Community: social-economic benefit (jobs, public facilities, etc)

Investment characteristics
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Capital intensive Long term period

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Usually need time before getting profit

Resource constrained Risky wrong decision needs money and time to improve

Steps of feasibility study

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Pre-evaluation study
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Non-capital analysis

Feasibility study (bankable) Start by simplifying the problem (make necessary assumptions), if looks beneficial, make it in detail

The top 10 risks for business

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Regulatory and compliance risk Global financial shocks Aging consumers and workforce The inability to capitalize on emerging markets (rapidly
developing economies)

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Industry consolidation/transition Energy shocks Execution of strategic transactions Cost inflation Radical greening Consumer demand shifts

Weighting of the top 10 strategic business risks across the sectors studied

Who may use the feasibility report?

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Investor Funding resources, i.e. bank Partner(s) to be Benefactor (donor) Government