PROJECT

FEASIBILIT
Y STUDY
PROJECT DEVELOPMENT CYCLE

PRE-INVESTMENT

INVESTMENT

OPERATIONAL
 PROJECT DEVELOPMENT CYCLE

PRE-INVESTMENT

Identification of investment opportunities

Preliminary project selection and definition

Project formulation

The final evaluation and investment decision

A Project Feasibility Study is the
systematic investigation which ascertains
whether a business undertaking is viable
and if so, the degree of its profitability.
BENEFITS

Minimizationof the risk of failure

of business ventures thereby
reducing the waste of valuable
resources.

Givesbenefits to promoters,
shareholders, management,
lending institutions and to the
government agencies.
LIMITATIONS

Certain
necessary information
may not be available.

Error in judgment

The study is basically a forecast.

AREAS COVERED IN A PROJECT STUDY

Organization
and
Management
Social
Desirability
Marketing

Project
Profitability Feasibility Technical
Study

Financial
Taxation
Projections

Financing
STEPS IN PREPARATION OF A
PROJECT STUDY

1. Gathering and collection of data

through research work, which are
necessary and relevant to all
aspects of the undertaking.
2. Evaluation and analysis of the
data obtained.
3. Formulation of conclusions and
recommendations.
OUTLINE OF A FEASIBILITY STUDY

A. Executive summary
B. Project Background and
history
C. Economic aspect
D. Technical aspect
E. Management
F. Manpower
G. Financial aspect
H. Social desirability aspect
EXECUTIVE SUMMARY

It covers all critical aspect of

the study

a. Name of applicant
b. Business name
c. Location (head office, project
site)
d. Brief description of the
EXECUTIVE SUMMARY

e. Highlights of major assumptions

and summary of findings and
conclusions regarding the following:
1. Market feasibility
2. Social or Economic desirability
3. Technical feasibility
4. Financial feasibility
PROJECT BACKGROUND AND HISTORY

a. Project Background
b. Project promoter and/or
initiator
c. Project history
d. Feasibility study
e. Cost of preparatory studies
and related investigations
PROJECT BACKGROUND AND HISTORY

It covers all critical aspect of

the study

a. Name of applicant
b. Business name
c. Location (head office, project
site)
d. Brief description of the
ECONOMIC ASPECT
MARKET ANALYSIS

Determination of size and

composition of the effective
market demand, by segment
Projection of sales
 A. DEMAND AND MARKET STUDY

Demand and market of each product

Estimated market penetration by
products

Forecasting techniques that may be

used for demand forecasting include:
1.The trend (extrapolation) method
2.Consumption coefficient (end-use)
method
3.Consumption level method
4.Regression method
TREND (EXTRAPOLATION METHOD)

One of the many methods but

most commonly used is the
Arithmetic trend which uses the
following equations:
(1) y = a + bx and
(2)
 ILLUSTRATIVE CASE

XYZ Corp., a manufacturer of car tires wishes to project their sales for the year 2014. The
marketing research department of the company compiled the data shown below:

The relationship between passenger cars and tire sales is so close that management
decides to use this information for forecasting next years sales. If the passenger car
population is expected to reach 68,000 next year, find the tire sales function and predict
sales for year 2014.
Let two points be given on the straight line with coordinates (41,1.6) and (65,5.2) read
from the detail chart.
B. SALES FORECAST AND MARKETING OF
PRODUCTS AND BY-PRODUCTS

Presentation of the sales program

(using graphs, tables, and maps)
Presentation of marketing
strategy
Product pricing
Promotional measures
Distribution system
TECHNICAL
ASPECT
TECHNICAL ASPECT OF A
FEASIBILITY STUDY

A. Production Program
B. Plant Capacity
C. Materials and Inputs
D. Location and Site
E. Process Engineering
A. PRODUCTION PROGRAM

PRODUCTION PROGRAM the

production process discusses how
the products will be produced,
specifying each step that will be
involved, and the time involved.
 A. PRODUCTION PROGRAM

Product
a. Description and specifications of
the product, including weight, size,
and physical and chemical
properties.
b. Principal uses, both as finished
goods and industrial inputs.
c. Tests for the product (prototype)
d. Assurance that the products will
be of the expected quality and
 A. PRODUCTION PROGRAM

Waste Disposal
a. Description and quantity of the
waste to be disposed of
b. Description of the waste disposal
method selected (as by chemical
treatment, burning, or further
processing to by-products)
c. Reliability and superiority of the
method
 A. PRODUCTION PROGRAM

Waste Disposal
d. Alternative methods considered,
and factors used in the selection
e. Methods used in other plants
f. Methods being developed
g. Cost of waste disposal
h. Clearance from the proper
authorities or compliance with legal
requirements
B. PLANT CAPACITY

Waste Disposal
Describe data for the
determination of plant
capacity and list of possible
alternatives
Select and describe the
feasible normal plant
capacity
C. MATERIALS AND INPUT

Describe data for the

selection of materials and
inputs

List all required materials

and inputs and the
alternatives
D. LOCATION AND SITE

Location:
1. Data and Alternatives
Site:
1. Data and Alternatives
2. Site selection
3. Cost estimate
E. PROJECT ENGINEERING

This area of feasibility study

covers the following:
1. Project Layouts
2. Scope of the Project
3. Technology
4. Equipment
FINANCIAL
ASPECT
FINANCIAL
ASPECT
Investment
Costs
At every level of the feasibility study, the team is expected to
consider the financial implications of each decisions. Such
financial implications shall be evaluated using discount
methods and sensitivity analysis.
FINANCIAL ASPECT -
INVESTMENT COSTS

The Financial Aspect of the PFS requires the

determination of the ff:
1. Total Investment Cost resources
needed to construct or equip and operate a
project.
2. Project Financing determination of
funds required and sources of such using
FS.
3. Commercial Profitability Criteria (i.e
Break-even Time or Discounted Payback
Period, Sensitivity Analysis)
FINANCIAL ASPECT -
INVESTMENT COSTS

Investment Costs
=
Fixed Investments + Pre-operating
Expenditures + Minimum Working
Capital required at full capacity
 Investment Cost = Fixed Investment +
Pre-operating Expenditures + Minimum
Working Capital required at full capacity
Fixed Investment
Basically the FIXED or non-current assets
needed for the project such as:
1. Land & site preparation
2. Buildings & civil works
3. Plant machinery & equipment including
auxiliary equipment
4. Industrial Property rights
 Investment Cost = Fixed Investment +
Pre-operating Expenditures +
Minimum Working Capital required at full
capacity
Pre-Operating Expenditures
Basically all expenses incurred before the
project implementation/operation which
have to be capitalized such as:
1. Preliminary & capital issue expend. (i.e
legal fees, capital issue expenditures
etc.)
2. Expenditures for preparatory studies
(i.e consultant fees)
3. Pre-production Expenditures (i.e
salaries; travel expenses)
4. Trial runs, start-up & commissioning
expenditures
 Investment Cost = Fixed Investment +
Pre-operating Expenditures + Minimum
Working Capital required at full
capacity
Minimum Working Capital Required
at Full Capacity
All the financial means required to operate
the project.
1. Current Assets (i.e AR, Invty, WIP, FG, &
cash)
2. Current Liabilties (i.e Mainly AP free of
interest)
Steps in calculating Minimum Working Capital Required at Full Capacity
STEP 1

Determine the minimum

coverage of days for current
assets & liabilities
Example:
STEP 2

Compute the annual

production, selling &
administrative costs
STEP 3

Find the coefficient of

turnover and divide the cost
data developed in Step 2 by
their respective coefficient
turnover.
In summary:
 PROJECT
FINANCING
AND
EVALUATION
FINANCIAL ASPECT OF PFS

Project Feasibility Studies

should be backed by the
assurance that capital resources
are available.

Preliminary Assessment of
project financing possibilities
should be made before PFS is
undertaken.
FINANCIAL STATEMENTS

To determine economic viability

and fund requirement projected
financial statements are used:

Projected Statement of Comprehensive

Income
Projected Statement of Financial
Position
Projected Cash Flow Statement
PROJECTED STATEMENT OF
COMPREHENSIVE INCOME

Sales projection (sales forecast) based on

the results of economic aspect
Estimation of net income or loss
Operating Cost Ratio
Tax Rate
Interest Charges
Dividend Payout
If projections look poor Reformulate
PROJECTED STATEMENT OF
FINANCIAL POSITION

Determinationof assets
necessary to support the
determined sales level

Projectsboth resources and

sources of financing required to
finance the project
PROJECTED CASH FLOW
STATEMENT

Synchronization between cash

inflows and outflows
Cash Flow Tables
indicate timing of finance required
Ensures the availability of cash during
production period
SOURCES OF FINANCING

EQUITY LOAN
FINANCING FINANCING

Resources Resources
provided by provided by
internally by externally by
investors lenders
Short-Term Loans
Long-Term Loans
ECONOMIC EVALUATION

Break-Even Analysis
Net Present Values
Internal Rate of Return
Break-Even Time or Discounted
Payback Period
Simple or Accounting Rate of
Return
 BREAK-EVEN ANALYSIS

Point where REVENUES = EXPENSES

Break Even Point Formula (units)
NET PRESENT VALUE ANALYSIS

Net
Present Value Rule dictates that only
projected investments with a net present
value greater than zero should be
engaged in

Decisions:
NPV is Positive ACCEPT
NPV is Negative REJECT
 INTERNAL RATE OF RETURN

IRR
is a discount rate that makes the NPV
of all projected cash flows equal to zero
Rate of Growth a project is expected to
generate throughout its lifetime

Decisions:
ACCEPT
REJECT
 DISCOUNTED PAYBACK PERIOD

Length of time required for the net

revenues of a projected investment to
cover its costs
Computes the NPV of cash inflows
and outflows to be incurred and the
number of periods it takes to reach a
positive figure
Decision:
Whichever investment alternative that requires
the shortest discounted payback period
 PAYBACK PERIOD

Computation
of the length of time it takes
for an investment to recoup its costs
disregarding the Net Present Value or any
discount rate of cash inflows and outflows

Decisions:

REJECT
 SIMPLE OR ACCOUNTING RATE
OF RETURN
Rate
of return promised by an
investment when time value of
money is not considered

Decisions:
ACCEPT
REJECT
 FINANCIAL ANALYSIS

assessment of the viability, stability

and profitability of a project

SENSITIVITY ANALYSIS
shows how values of an independent
variable affects the projected
investment as a whole under a given
set of assumptions
end