Cracking the Code: Essential Steps to Estimate Investment Costs in Your Industrial Feasibility Study

It is the process of estimating the project’s investment cost and consisting of the networking capital, pre-production costs, and fixed assets. The networking capital is current assets subtracted from the current liabilities, and the pre-production costs are expenses made before creating the company; therefore, it is capitalized and considered part of the initial investment. The fixed assets, like machinery, equipment, tools, building, furniture, and vehicles, are considered a significant portion of the initial investment. The feasibility study must carefully estimate the investment cost; otherwise, it will result in cash flow issues. Understanding the investment cost allows investors to make informed decisions, allocate capital efficiently, assess risks, and evaluate the competitiveness and viability of the investment.

Step-By-Step Process

• Clarify the marketing, technical and organizational studies, collecting more precise information about the projected sales, plant assets, staff costs, building and more that will be input into the process of estimating the investment costs.
• Estimate the networking capital of the project by assuming the number of coverage days as sales and cost of goods sold to use it in estimating the initial balances of the account receivables, inventories and payables. The networking capital is the net current assets (e.g., receivables, inventories, and cash) after covering the current liabilities (payables).
• Estimate the pre-production costs by obtaining information about the expenses made before creating the company to prepare, for instance, the feasibility study, marketing surveys, travels, etc.
• Estimate the fixed assets of the project like, machinery, equipment, tools, building, furniture, vehicles, and alike.
• Validate investment cost estimates by sharing them with your teams, experts, and supply chains.

Example

Here is the investment cost of a pharmaceutical manufacturing facility:

Accounts	Sub-accounts	Cost ($)
Current Assets	Receivables	2,914,517
	Inventories	1,689,489
	Cash	4,371,776
	Sub. Total	8,975,782
Current Liabilities	Payables	563,163
	Other Payables	381,615
	Sub. Total	944,778
Net Working Capital	Sub. Total	8,031,004
Pre-Investment Costs	Sub. Total	250,000
Capital Financing Costs	Sub. Total	175,000
Fixed Assets	Secondary Packaging Lines	500,000
	Solid Production Plant	5,566,000
	Construction	4,208,200
	Civil and Electrical Works	210,410
	Licensing Fees	100,000
	Product Formula and Profiling	8,000,000
	IT Systems and PCs	350,000
	Furniture	100,000
	Vehicles	350,000
	Other Fixed Assets	581,538
	Sub. Total	19,966,148
Total Investment		28,422,152

Useful Tips

• Brainstorm investment cost estimates with your team, experts, and supply chains before you decide on them.
• Collect sufficient information on sales projection, cost of goods projection and fixed assets.
• Decompose the investment costs into sub-categories to accurately estimate them.
• Apply multi methodologies (e.g., top-down or down-top) to estimate the investment costs.
• Allocate an additional amount to the total investment costs as a contingency to cover unseen amounts.

Things To Avoid

• Avoid guesswork and assumptions without evidence.
• Overlooking hidden and secondary costs like permit fees, regulatory compliance fees, and capital financing fees.
• Failing to consider inflation rates and price fluctuation.
• Avoid general estimation of costs and instead, break the cost down into smaller subaccounts for accurate estimation.
• Ignoring the economy of scales.
• Over-optimism and underestimating risks.

Final Note

This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study. For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/To register in our newsletter: http://eepurl.com/ggcC29Or email us at: maldawood@growenterprise.co.ukThe author: Munther Al Dawood- Industrial Enterprise Expertwww.growenterprise.co.uk