PROJECT FEASIBILITY STUDIES (Lecture Notes) Project Feasibility Study “It involves an examination of the feasibility or viability of a new business venture; major modifications of existing products, or product-line acquisitions. It convinces the reader (financing entity) that the project is worth funding Document relevant information and aspects regarding the project Assess whether the project is relevant, viable and implementable Enable the project proponent to prepare financing application and present the project to sources of financing Benefits of Project Feasibility Study 1. For the project promoter/proponent - better assessment of the demands for the projects, the resources available, and establishes the project's timeline. Having a project feasibility study also improved the marketability of the project to investors and creditors. 2. Forthe investors and creditors ~ it helps them to deeply evaluate the project and the level of, risks involve, 3. For the government - Feasibility study will help assess the incentives may be given to the project and ascertain its compliance with existing laws and regulation. Stages of a Project Feasibility Study: ‘1. Identification of Investment Opportunity ~ the establishment of the objectives to be attained. 2. Pre-Selection Stage ~ should include: a. A description of the market b. An outline of the manufacturing process and information concerning availability of raw materials and labor cc. An estimate of necessary investment and cost of operation. d. An estimate of the return on investment fe, Statement of anticipated major problems and risks 3. Feasibility Study ‘a. Gathering and Collection of data b. Evaluation and analysis of data collected c._ Formulation of conclusion and recommendation Components of a Project Feasibility Study 1. Economic Feasibility ~ contains a brief description of the market, analysis of past and present demand and supply broken down as to sources or segments, estimated future demand for the product with the estimate of the project's share of the market. 2. Marketing Feasibility ~ contains the product description, the related prices, places of distribution, and promotional activities. 3. Technical Feasibility -the manufacturing process, plant sizes, lay-out and location, production schedule, machinery and equipment required, study of the availability of ram materials, Utilities, and labor required, determination of type and quantity of wasted to be disposed of, and estimated of the production cost of the product. 4, Management Feasibility - Management structure, human resource policy on hiring, promating, and terminating employees, salary and compensation scheme, compatibility with industry 5. Financial Feasibility ~ Audited Financial Statements for the existing company, statement of total project costs, Financial projections, supporting schedules, financial analysis showing ROI, ROE, BEP and Price Analysis, and Sensitivity Analysis if necessary. 6. Social Desirability Analysis - to evaluate the project's contribution to the economy. Purpose of the financial analysis 1. Assessment of project viability and implementability for the municipal utility and the local community and economy A tool for analyzing, structuring and selecting different project options Assessment of project returns on overall investment and capital A tool for identifying appropriate types of project financing Analysis of project broader socio-economic impact to the community geenFinancial Cost-Benefit Analysis of a Project The unit of analysis is the project, not the company Evaluates and calculates the project's financial Revenues G_ Only the project contributed revenues, i.e. water/wastewater sales to the utility are estimated: © The project revenues are determined for different groups of users (Households, Govern ment/public institutions, Commercial/industrial users, Other) Costs Investment costs: Capital costs: land, civil works, equipment, studies, Education programs, lab equipment & training, Institutional Development (consulting services, capacity building programs) Operation and maintenance costs: labor, electricity, chemicals, materials, overheads, ran water charges, insurance, etc. Residual values (of project assets at the end of the project life) O_ Net benefits (of revenues over the costs) © Project revenues, costs and net benefits are determined on a with-project and without project basis. Preparation of projected financial statements Projected Financial Statement ‘Assumption Required I. Projected Income ~Tnerease in units sold and unit Statement selling price ~ Variability of Expenses with sales 7. Projected Cash Budget = Mode of sales and collection pattern - Mode of payments and payment patter Z._ Projected Balance Sheet ~ Average collection period far receivables - Average holding period for inventories - Depreciation method for PPE - Average deferral period for Payables - Pay-out ratio for retained earnings Analysis of financial projections 1. Financial Statement Analysis - trend analysis, common-size financial staternent, ratio analysis 2. Break-Even Analysis ~ Break-even point in units and peso sales, margin of safety, and degree of operating leverage. 3. Capital Budgeting Techniques ~ Net Present Value, Profitability Index, and Payback Period Project Fea: Studies (Quizzer: 1. Which of the following is not an activity covered by feasibility study? b. Collection of data ©. Evaluation and analysis of data collected d. Formulation of the recommendation 2. Among the following major parts of the project feasibility study, which grouping is considered critical? a. Management, financial and social returns b. Technical, financial, and environmental aspects c.__ Economic benefits, management, financial10 In project feasibility studies accountants are usually involved in the financial aspect. Included in this portion of the study is a set of staternents expressing projected scenario that will serve as basis for the financial projections. The set of expressed statements is called: ‘a. Statement of Projected Cost b._ Project Financial Statements d. Statement of Accounts ‘The relevance of a particular cost of a decision is determined by the ‘a. Size of the cost b._Riskiness of the decision d. Accuracy and verifiability of the cost Ina project feasibility study, which of the following is true? a. The study is not affected by any significant change in actual business conditions as compared to the assumptions used in making the forecast, ©. (a) and (b) d. None of the above Which of the following is not included as major part of a feasibility study report? a. Financial ¢. Organizational Study d. Marketing A systematic gathering and analysis of data concerning a proposed project and the formulation of conclusions therefrom for the purpose of determining whether or not itis viable and, if so, its degree of profitability. ‘a. Return on investment study b. Long-range planning c._ Information flow analysis Basic steps in the preparation of a project study '2. Gathering and collection of data through research work which are necessary and relevant to all aspect of the undertaking b. Evaluation and analysis of the data obtained . Formulation of conclusion and recommendations 4. All of the above ‘The statement below about project feasibility studies are true, except: 2. Any change which can materially alter the assumptions used in the preparation of the forecast will render it useless b._Itis important for government agencies in order to determine entitlement to incentives c._ It also covers the social desirability aspects of a proposed undertaking In project feasibility study, which of the following statements is false? a. Itis based on available information and opinions of the party involved in the preparation of the study. c. The characteristics of a good feasibility study are comprehensiveness, objectivity, and simplicity d. One of the parties interested in feasibility studies is the stockholders.