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Analyzing project viability:Three factors to be considered: Technical Feasibility Economic Viability Creditworthiness

Important question before undertaking the projects:1. What are the risks? 2. Who will bear them? 3. Weather returns are adequate to compensate the risk

A. Technical Feasibility: Does technological process and facility design is proper Is technology new or proven? Suitability of scale Ability to scale up / accommodate future requirements Impact of environment factor Project can be completed in time Project will be able to work at design capacity after its completion

Construction cost: Include all facilities required for project operation as free standing unit Also included additional facility is cost is to be borne by project like road, schools, electric line etc Provision of Contingency cost sufficient to co possible design error or unforeseen circumstances. (generally 10% is design is finalized)

B. Economic Viability
Market Study: Competitive products and relative cost of productions Life cycle of project output Analysis of potential impact of technology obsolescence Potential impact of regulatory decision on production level, price and profitability Operating Cost Projection of operating cost is prepared once designing work has been completed. Identification and quantification of cost elements o Raw materials o Labor

o Overhead o Taxes o Royalty o Maintenance Important of access reasonableness of the cost of estimate and extent of effect of inflation.

Cost of capital Adequacy of supply of raw materials

C. Creditworthiness
Depends on three factors in new projects Inherent value of asset included in the project o Adequate proven reserves o Proven technology to recover these resources o Assured market for the product Expected profitability of the project Amount of equity project sponsor have at risk Pledges of creditworthy third parties or sponsors involved in the project

Assessing Project Risks


1. 2. 3. 4. Completion risk Technological risk Raw material supply risk Economic riska. Efficiency at which project work imp to determine b. Hedging with forwards and futures Financial risk a. Interest rate hedging i. Interest rate swap agreement ii. Interest rate cap contract Currency risk a. Borrowing an appropriate portion of project debt in major currency b. Hedging using currency forward and futures c. Arranging one or more currency swaps Political risk Environmental risk Force majeure risk

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The cogeneration Project

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