Project Feasibility

A systematic investigation which ascertains whether a business undertaking is viable and if so, the degree of
it profitability

Benefits:
One of the most important uses of a project feasibility study is the minimization of the risk of failure of
business ventures thereby reducing the waste of valuable resources.
a) Undetected presence of a more superior competing product
b) Failure to perfect the manufacturing process
c) Failure to sell the goods at a reasonable price
d) Failure to raise adequate working capital and many more

Areas covered in a project study

A thorough project study should cover the various phases of the operations of a project: organization and
management, marketing, technical, taxation and financing. Also, the study should include the projections of
the profitability and capital requirements of the project.

These areas are briefly described as follows:

1. Organization and Management

this will cover the study of the type or form of business organization, requirements as t control of
Filipinos in the stockholdings of a corporate form of organization and organizational structure within the
enterprise.

2. Marketing

this will involve the study of the present and future demand and supply for the product, competition,
selling prices and marketing plan for the product.

3. Technical

this will cover the study of the production process, plant capacity, plant location and layout,
structural specifications and other operating requirements

4. Taxation

This will involve the study of tax implications of the project, possible tax-saving measures and all
applicable taxes which should be incorporated in the estimates of profit.

5. Financing

This will cover the determination of the financing requirements, financing leverages as well as the
possible sources of financing

6. Financial Projections

This will cover the presentation of the expected profitability, cash needs and cash sources based on
the results of the study of the marketing, technical and financing requirements

7. Profitability
 This will show the relationship between capital to be invested and expected net profit known as the
return on investment.

8. Social Desirability

This will cover the study of the benefits to be obtained from an undertaking in terms of its contibution to the
community, to other business firms and to the national economy as a whole, the social benefits that may be
derived from a project could be in the nature of benefits that many be derived from a project could be in the
nature of

1. Increased taxes paid to the government

2. Provision of employment opportunities

3. Construction of roads, bridges, etc.

4. Increased peso inflows to the country

This will cover the study of the benefits to be obtained from an undertaking in terms of its contribution to
the community, to other business firms and to the national economy as a whole, the social benefits that may
be derived from a project could be in the nature of benefits that many be derived from a project could be in
the nature of

1. Increased taxes paid to the government

2. Provision of employment opportunities

3. Construction of roads, bridges, etc.

4. Increased peso inflows to the country

Outline of Feasibility Study
The management consultant may use the following comprehensive outline in the preparation
of a Feasibility Study

A. Executive summary
A feasibility study should arrive at definitive conclusions on all the basic issues
of a project after consideration of various alternatives. For convenience of
presentation, these conclusions and recommendations should be summarized in the
“Executive Summary” which should cover all critical aspects of the study.
a) Name of applicant
b) Business name
c) Location
head office
project site
d. Brief description of the project
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
B. Project background and history
a. Name and address of a project promoter
b. Project orientation: market or raw material oriented
c. Market orientation: domestic or export
d. Economic and industrial policies supporting the project
C. Economic aspect:
Sales forecast and marketing
1. Expect competition for the project from existing and potential local and foreign
producers and supplies;
2. Localization of market (s);
 3. Sales program;
4. Estimated annual sales revenues from products and by-products (local/foreign);
5. Estimated annual costs of sales promotion an marketing;

D. TECHNICAL ASPECT

a. Production program (approximate)

1. Products;
2. By-products
3. Wastes (estimated annual cost of waste-disposal)
b) Determination of plant capacity
1. Feasible normal plant capacity;
2. Quantitative relationship between sales, plant capacity and material inputs
c) Material inputs (approximate input requirements, their present andpotential supply positions,
and a rough estimate of annual costs of local and foreign material inputs):
1. Raw materials
2. Processed industrial materials
3. Components
4. Auxiliary materials

d. Project engineering
Preliminary determination of scope of project
Technology(ies) and equipment;
a. technologies and processes that can be adopted, given in relation to capacity size
b. rough estimate of costs of local and foreign technology
c. rough layout of proposed equipment (major components)
(1) production equipment
(2) auxiliary equipment
(3) service equipment
(4) spare parts, wear and tear parts, tools
d. rough estimate of investment cost of equipment (local/foreign)
Civil engineering works
a. Rough layout of civil engineering works, arrangement of buildings, short description of
construction materials to be used:
(1) site preparation and development
(2) buildings and special civil works
(3) outdoor works
b. rough estimate of investment cost of civil engineering works (local/foreign

E. MANAGEMENT
Organization layout
1. production
2. sales
3. administration
4. management

F. MANPOWER
estimated manpower requirements, broken down into labor and staff, and into major categories
of skills (local/foreign)
Estimated annual manpower costs, classified as above, incluing overheads on wages and salaries

F. FINANCIAL ASPECT
a. Total investment cost
1. Rough estimate of working capital requirements
2. Estimated fixed assets
3. Total investment costs, obtained by summing the estimated investment cost items
4. Financial projection
a. projected income statement
b. projected balance sheet statement
c. projected cash flow statement
(1) production cost (summary of estimated production costs, classified by fixed and variable
costs); Estimated expenses/costs
 (a) factory
(b) Administrative

b. Project financing
1. Proposed capital structure and proposed financing (local/foreign);
2. Interest

c. Financial evaluation based on above estimated values;

Pay-off period
Simple rate of return
Break-even point
Internal rate of return

H. SOCIAL DESIRABILITY ASPECT

a. Preliminary tests
1. project exchange rate
2. effective protection
b. Approximate cost-benefit analysis, using estimated weights and shadow-prices (foreign exchange, labor,
capital);
c. Economic industrial diversification
d. Estimate of employment-creation effect
e. Estimate of foreign exchange savings
f. Taxes that will accrue to the government

PFS: FINANCIAL ASPECT

This aspect requires the determination/evaluation of the following:
I. TOTAL INVESTMENT COSTS WHICH INCLUDES:
A. Initial Fixed investments costs
B. Pre-operating expenditures
C. Minimum Net Working Capital Requirement

II. PROJECT FINANCING

A. Determining funds requirement using required financial statements
1. projected statement of comprehensive income
2. projected statement of financial position
3. projected cash flow statement
 B. Determining sources of financial

III. COMMERCIAL PROFITABILITY CRITERIA

A. Net present value

B. Internal rate of return
C. Break-even time or discounted payback period
D. Payback period

Determination of total investment costs

Investment cost are defined as the sum of fixed capital (fixed investments plus pre-production capital cost) and net
working capital, with fixed capital constituting the resources required for constructing and equipping an
investment project, and working capital corresponding to the resources needed to operate the project totally or
partially

INITIAL INVESTMENT COSTS

A. FIXED INVESTMENTS INCLUDE

1. land and site preparation
2. buildings and civil works
3. plant machinery and equipment including auxiliary equipment
4. industrial property rights

B. PRE-OPERATING EXPENDITURES
1. preliminary and capital issue expenditure (registration and formulation of the company including legal
fees, capital issue expenditures, preparation of prospectus, underwriting commissions, brokerages, etc.)
2. expenditures for preparatory studies (consultant fees for preparing the studies and other expenses for
planning the project)
3. pre-production expenditure which include salaries, travel expense, training cost incurred during the pre-
production period.
4. Trial runs, start-up and commissioning expenditures.

C. NET WORKING CAPITAL

Networking capital is defined as current assets minus current liabilities. Current Liabilities consist mainly of
accounts payable.

a. Accounts receivable
The size of accounts receivable is determined by the company’s credit sales policy and ay be
computed using the following formula:
Accounts receivable = (annual sales/ 12 months) x credit terms in months
 b. Inventories
Working capital requirements are considerably affected by the amount of capital immobilized in the
form of inventories. Every attempt should be made to reduce inventories to as low a level as
practicable
1) Production materials.
In computing production-materials inventories, consideration should be given to the sources
and modes of supplies of materials and finished goods. If the materials are locally available,
are in plentiful supply and can be rapidly transported, only limited stocks should be
maintained unless there are special storage problems. If the materials are imported and if
import procedures are dilatory, inventories equivalent to as much as six months consumption
may have to be maintained. Other factors influencing the size of inventories are the reliability
and seasonality of supplies, the number of suppliers, possibilities of substitution and expected
price changes.
2) Spare parts.
Levels of spare-parts inventories depend on the local availability of supplies, import
procedures and maintenance facilities in the area, and on the nature of the plant itself. The
plant is usually provided with an initial set of spare parts.
3) Work in progress
To asses work-in progress requirements, a comprehensive analysis should be performed of
the production process, and of the degree of processing already reached by the different
material inputs during each stage. The requirements are expressed in months (or days) of
production, depending on the nature of the product. In machinery products this can extend to
several months. The vauation is made at the factory costs of work-in progress.
4) Finished goods
The inventory of finished goods depends on a number of factors, such as the nature of the
product and trade usage. The valuation is at factory cost plus administrative overheads.

In summary, Total investment cost may be calculated by summarizing all investment components such as

a) Initial fixed investment costs (lands, site preparation and development, structures and civil works,
incorporated fixed assets (property rights), plants machinery and equipment)
b) Pre-operating expenses (pre-investment studies, preparatory investigations, management of project
implementation, supervision, coordination, test-run and take-over of civil work, equipment and plant
build-up of administration recruitment and training of staff and labour arrangements for supplies and
for marketing preliminary and capital issue expenditures)
c) Minimum working capital requirement at full capacity (accounts receivable, inventory, cash on hand,
accounts payable
PFS: FINANCIAL ASPECT- PROJEC FINANCING AND EVALUATION

The allocation of financial resources to a project constitutes and obvious and basic prerequisite not
only for any investment decision but also for project formulation and pre-investment analysis. A feasibility
study would serve little purpose if it was not backed by a reasonable assurance that resources were available
for a project if the conclusions of the study proved positive and satisfactory. A preliminary assessment of
project financing possibilities should already have been made in most cases before a feasibility study is
undertaken. This is especially true if a project-opportunity or pre-feasibility study has previously been
performed, as such studies would indicate the order of magnitude of capital outlay required. A feasibility
study should only be made if financing prospects to the extent indicated by such studies can be defined fairly
clearly.

Determining funds Requirement and Profitability

To evaluate the economic viability of the project (i.e. profitability) and its financial requirements, the
following statement may be prepared:

1. Projected statement of comprehensive income

2. Projected statement of financial position
3. Projected cash flow statement

Financial institutions use these projected statements when assessing project proposals. All accounts entered
into the statements must match, as all the statements are interrelated.

A. Projected Statement of Comprehensive Income

The projected financial statement method begins with the forecast of sales. The sales projections are
based on the results of the study of the economic aspect. Then the statements of comprehensive
income from the start-up period to the point where the project is fully operational will be prepared to
estimate the net income or loss the company will generate. This requires assumption about the
a) Operating cost ratio (i.e., cost of sales, selling and administrative expenses to sales)
b) Tax rate
c) Interest charges
d) Dividend pay-out

The statement can also be extended to compute the amount of earnings that can be reinvested in the
business during the projection period.

If projected operating results look poor, the proponents can reformulate its plans for the duration of
the project.

B. Projected statement of financial position

 Based on the sales forecast, the amounts of assets necessary to support this sales level are
determined. Certain assets particularly the current assets (cash, receivables, and inventory) as well as
trade accounts payable and accruals will spontaneously increase with increased sales. If the sales
growth rate is rapid some external capital will be required to support the growth in sales. The
statement of financial position will therefore project both the resources required as well as the
sources of financing that will be availed of to meet the needs of the enterprises.

C. Projected cash flow

It is not sufficient only to find sources of finance; the timing of inflow of funds (from financial
resources and sales revenue) must also be synchronized with the outflow of investment expenditures,
production costs and other expenditures. If this is not done, significant losses of revenue, in terms of
interest (as a result of idle funds) or delays in project implementation (as a result of financial bottle-
necks) may ensue.

III. COMMERCIAL PROFITABILITY CRITERIA

1. Net Present Value Method

- method that screens and ranks investment proposals by determining the difference between
present value of the cash inflows and the cash outflows associated with the investment projects
2. Internal rate of return
- the discount rate that will cause the net present value of the investment project to be equal to zero;
thus the internal yield promised by a project over its useful life.
-
investment ∈the project
- Factor of IRR =
Annual Cash Inflow
3. Break-even Point
- Break Even Point (BEP) – the point at which sales revenue equal production costs and expenses
-
¿ Costs
- BEP(units) =
Unit Selling Price−Unit Variable Costs

4. Payback period
- The length of time that it takes for an investment project to recoup its own initial cost out of the
receipts that it generates
Investment Costs
- Payback Period =
Annual Cash Inflow