Evaluation of Capital Investment Projects

Why is it important to carry out feasibility studies?

The feasibility study aims to investigate and know with certainty whether the operation of a business or project is economically viable. It also allows us to determine the availability of the resources we need to determine and meet the stated objectives or goals, it is composed of:

operational feasibility
Technical feasibility
financial feasibility
financial viability

What is the evaluation of investment projects for?

It helps us determine a possible Cost – Benefit within a given project in a detailed manner and supported by a proven and used methodology for undertaking various projects and investments. We use it to determine what problems a project will face during any of the following cases:

Installation of a new plant
Development of a product to improve a previous one
Installed capacity or creation of branches
Replacement of machinery, others.

What is the purpose of evaluating investment projects?

The analysis of financial viability allows us to know the returns of each product/service, as well as the returns of the portfolio as a whole to improve investment (or disinvestment) decisions within the company, financial viability also allows us to carry out an analysis exhaustive analysis of costs within the project to determine whether the resources used should be optimized as projected.

In the case of new investment projects, financial viability allows knowing the break-even point to know when the investment will be recovered, as well as the internal rate of both the project and the investors.

The productive feasibility analysis allows to know the minimum units of sales, production and purchases; which allows optimizing the production process by reducing costs, insufficiencies or underutilization of raw material or machinery. It also allows knowing in which cases it is necessary to buy-lease more machinery or hire more staff.

Investment Project Evaluation Stages

The evaluation of an investment project consists of the following steps: A Project checklist is made where all the aspects that are included in the planning are considered, then we move on to the step of reviewing the economic framework of the project in which a review of the financial statements and the budget assigned for the project will be carried out. A market study is carried out in which the amount of demand that the project will have and its viability over time is analyzed, then the appraiser will analyze the engineering of the project, if there is a possibility or if there are investments by partners and bank loans , an analysis of the income and expense budget is carried out and at the end an economic evaluation is carried out.

Investment project evaluation methods

Financial feasibility analysis
Sales projection
marginal contribution
Internal rate of return of the project VS internal rate of return of the investor
Breakeven
initial investment
return point
Costs and margins