Project Feasibility Study - L4

Project Feasibility Study for Engineers
Contents:
1. Feasibility Study Overview
2. Financial Indicators
3. Financial Support Studies
4. Financial Feasibility Studies
5. Economical Study
6. Project Risk Study
7. Cost-Benefit Analysis
8. Schedule Study
9. Technical Study
10. Market Study
11. Case Studies
12. Test Exam
Feasibility Studies - – 2
Example #5
A manager is trying to decide between two projects (A or B):
Item Project (A) Project (B)
Construction investment $ 400,000 $ 400,000
Running cost $ 120,000 / year $ 150,000 / year
Revenue $ 300,000 / year $ 350,000 / year
Life Four years Four years
Salvage value $ 100,000 $ 100,000
Minimum Attractive Rate of Return (MARR) 25%
Based on this information, discuss & select the best alternative.

Feasibility Studies - – 2021 65
Project (A): 100 100

300 180
0 0
120
400 400
Year 0 1 2 3 4
Net Cash Flow (1000) -400 180 180 180 280
Project (B): 100 100

350 200
0 0
150
400 400
Year 0 1 2 3 4
Net Cash Flow (1000) -400 200 200 200 3030
Project (A):
Year 0 1 2 3 4
Net Cash Flow (1000) -400 180 180 180 280
Sensitivity Analysis
Indicators Base
Market Price (+10%) Market Price (-10%)
Payback Period 2.22
IRR % 33.4
Project (B):
Year 0 1 2 3 4
Net Cash Flow (1000) -400 200 200 200 300
Indicators Base
Payback Period 2.0
IRR % 39.49
Project (B) is the best alternative
Example #6
Construction period One year One year
Construction investment $ 400,000 $ 400,000
Running cost after construction $ 120,000 / year $ 150,000 / year
Revenue after construction $ 300,000 / year $ 350,000 / year
Life after construction Four years Four years
Salvage value $ 100,000 $ 100,000

300 180
0 1 0 1
120
400 400
Year 0 1 2 3 4 5
Net Cash Flow (1000) -400 0 180 180 180 280

350 200
0 1 0 1
150
400 400
Year 0 1 2 3 4 5
Net Cash Flow (1000) -400 0 200 200 200 300
Project (A):
Year 0 1 2 3 4 5
Net Cash Flow (1000) -400 0 180 180 180 280
Indicators Base
Payback Period 3.22
IRR % 22.44
Project (B):
Year 0 1 2 3 4 5
Net Cash Flow (1000) -400 0 200 200 200 300
Indicators Base
Payback Period 3.0
IRR % 25.98

Example #7

Construction Period One year One year
Construction $ 300,000 Down payment (t=0) $ 200,000 Down payment (t=0)

investment $ 100,000 Final payment $ 200,000 Final payment
Running cost after $ 120,000 / year $ 150,000 / year

construction
Revenue after $ 300,000 / year $ 350,000 / year

construction
Salvage value $ 100,000 $ 100,000


300 180
0 1 0 1
100 120 100

300 300
Year 0 1 2 3 4 5
Net Cash Flow (1000) -300 -100 180 180 180 280

350 200
0 1 0 1
150
200 200 200 200
Year 0 1 2 3 4 5
Net Cash Flow (1000) -200 -200 200 200 200 300
Project (A):
Year 0 1 2 3 4 5
Net Cash Flow (1000) -300 -100 180 180 180 280
Indicators Base
Payback Period 3.2 2.9 3.7
IRR % 24.25% 30% 18%
Project (B):
Year 0 1 2 3 4 5
Net Cash Flow (1000) -200 -200 200 200 200 300
Indicators Base
Payback Period 3.0 2.7 3.4
IRR % 309.8% 38% 23%
Example #8
Construction Period One year Two years
investment $ 300,000 Final payment 200,000 after one year
100,000 after two years
Running cost after $ 100,000 / year 50,000 first year
construction 100,000 second year
150,000 third year
200,000 forth year
Revenue after $ 250,000 / year 150,000 first year
500,000 third year
400,000 forth year
Salvage value $ 100,000 $ 100,000

Cash Flow:
100
Item Project (A) 250
Construction One year
Period 0 1
Construction $ 100,000 Down payment (t=0)
investment $ 300,000 Final payment 100 100
Running cost $ 100,000 / year 300

after
construction
Net Cash Flow:
100
Revenue after $ 250,000 / year
150
construction
0 1
Life after Four years

construction 100
Salvage value $ 100,000 300
IRR = 21.7 < 25%
(Rejected)
Net Cash Flow:

Item Project (B) 350
300
Construction Two years 200
Period 100
Construction $ 100,000 Down payment (t=0)
investment 200,000 after one year 0
100,000 after two years
Running cost 50,000 first year 100
100
after 100,000 second year
construction 150,000 third year 200
200,000 forth year
Revenue after 150,000 first year
500,000 third year
400,000 forth year
Life after Four years
construction IRR = 25.25% > 25%
Salvage value $ 100,000 (Accepted)

Example #9

investment $ 100,000 Final payment 300,000 after one year
Running cost after 200,000 first year 50,000 first year
construction 150,000 second year 100,000 second year
100,000 third year 150,000 third year
50,000 forth year 200,000 forth year
Revenue after 400,000 first year 150,000 first year
construction 500,000 second year 300,000 second year
300,000 third year 500,000 third year
150,000 forth year 400,000 forth year
Salvage value $ 100,000 $ 100,000
IRR  A = 32.8% B = 33.0%
Example #10
Construction Period Two years Two years
Construction 10 Down payment (t=0) 50 Down payment (t=0)
investment; M$ 40 after one year 40 after one year
50 after two years 10 after two years
Running cost after 15 first year 15 first year
construction; M$ 20 second year 20 second year
30 third year 30 third year
10 forth year 10 forth year
Revenue after 35 first year 35 first year
construction; M$ 55 second year 55 second year
75 third year 75 third year
50 forth year 50 forth year
Salvage value ; M$ 10 10

Risk Analysis: Tool #1 - Sensitivity analysis
Example #11
Initial Investment; M$ 4 5
Annual Running Cost; M$/year 1 2
Annual Revenue; M$/year 3 5
Salvage Value; M$ 1 1
Life after construction; years 4 4
Loan 15% MARR = 20% Project (A)

PBP = 3 years
Based on this information, discuss the following: NPV(15%) = 1.46
1. Cash Flow Diagram IRR = 25.98%
2. Payback Period
3. Net Present Value (NPV) Project (B)
4. Internal Rate of Return (IRR) PBP = 3 years
5. Which offer should you accept and why? NPV(15%) = 2.94
6. Sensitivity analysis for market price change (±10%) IRR = 32.1%

Example #12

Construction Period - One year
Construction investment $ 400,000 $ 100,000 Down payment
$ 300,000 Final payment
Salvage value $ 100,000 $ 100,000
Loan 15% MARR = 20%
Based on this information, discuss the following:

1. Cash Flow Diagram
2. Payback Period, Net Present Value (NPV) and Internal Rate of Return (IRR)
3. Which offer should you accept and why?
4. Sensitivity analysis for market price change (±10%)
Project (A): 100 Construction Period -
Cash Flow (1000) 200 Construction investment $ 400,000

Running cost after construction $ 80,000 / year
0 1 2 3 4 Revenue after construction $ 200,000 / year
Life after construction Four years
80 Salvage value $ 100,000
400
Year 0 1 2 3 4
Net Cash Flow (1000) - 400 120 120 120 220
100
Project (B): Construction Period One year
250 Construction investment $ 100,000 Down payment

Cash Flow (1000) $ 300,000 Final payment
0 1 2 3 4 5 Running cost after construction $ 100,000 / year

Revenue after construction $ 250,000 / year
Life after construction Four years
100 100
Salvage value $ 100,000
300
Year 0 1 2 3 4 5
Net Cash Flow (1000) - 100 - 300 150 150 150 250
Project (A):
Indicators Base
Payback Period 3y+2m 2 y + 10 m 3y+6m
IRR % 14.97 % 21.28 % 8.47 %
Probability; % 50% 25% 25%
E (IRR) = 21.28 * 0.25 + 14.97 * 0.50 + 8.47 * 0.25 = 14.92 %
Project (B):
Indicators Base
Payback Period 3y+8m 3 y + 3.4 m 4 y + 1.3 m
IRR % 21.7 % 28.16 % 14.91 %
E (IRR) = 28.16 * 0.25 + 21.7 * 0.50 + 14.91 * 0.25 = 21.6 %
Project (B) is the best alternative but IRR 21.6 < MARR 25%
Example #13


+ 10% Annually + 15% Annually
Salvage value $ 100,000 $ 100,000
Loan Interest Rate 15% MARR = 25%

a) Cash Flow Diagram
b) Payback Period & Internal Rate of Return (IRR)
c) Sensitivity analysis for revenue change (±10%)
e) Which offer should you accept and why?
Project (A):
100,000
Cash Flow: 330,625 380,219
287,500
250,000
0 1 2 3 4 5
100,000 110,000
350,000 121,000 133,100
209,625 347,119
Net Cash Flow: 177,500
150,000
0 1 2 3 4 5
350,000
• Payback Period = 4 (3.11) years
• IRR = 28.55 % > MARR 25%
Project (B):
100,000
Cash Flow: 403,200 483,840
336,500
280,000
0 1 2 3 4 5
200,000 120,000 138,000

300,000 158,700 182,505
244,500 401,335
Net Cash Flow: 198,500
160,000
0 1 2 3 4 5
200,000
300,000
• Payback Period = 4 (3.58) years
• IRR = 22.91 % < 25%
Project (A):
Indicators Base
Payback Period 4 (3.11) 3 (2.87) 4 (3.43)
IRR % 28.55% 33.73% 22.95%
Project (B):
Indicators Base
Payback Period 4 (3.58) 4 (3.28) 4 (3.99)
IRR % 22.91% 28.52% 16.86%
Project (A) is the best alternative, IRR 28.55 > MARR 25%

Example #14


Salvage value $ 100,000 $ 100,000
MARR = 25% Assume; $=16 LE

Loan Description: Loan 5,000,000 LE, over 3 years, interest rate = 15% annually
a) Cash Flow Diagram b) Payback Period & Internal Rate of Return (IRR)
d) Which offer should you accept and why?
Loan Analysis
Loan 5,000,000 LE ($ 312,500), over 3 years, interest rate = 15%
A A A
1 2 3
- 312,500 P = { F / (1 + i)n }
A = Annual Payment = PMT? NPV =0
0 = - 312,500 + A / (1.15)1 + A / (1.15)2 + A / (1.15)3
A = PMT( i , n , P ) = 136,868 $/year

Project (A): 100,000
330,625 380,219
287,500
Cash Flow: 250,000
0 1 2 3 4 5
100,000 110,000
350,000 121,000 133,100
Net Cash Flow 209,625 347,119
177,500
Without Loan: 150,000
0 1 2 3 4 5
350,000
312,500
136,868 Annual
Loan
Net Cash Flow 209,625 347,119
40,632
With Loan: 13,132
0 1 2 3 4 5
37,500 136,867 Payback = 4 years IRR = 41.55 %
Project (B): 100,000

403,200 483,840
336,500
Cash Flow: 280,000
0 1 2 3 4 5
200,000 120,000 138,000

300,000 158,700 182,505
Net Cash Flow 244,500 401,335

198,500
Without Loan: 160,000
0 1 2 3 4 5
300,000 200,000
312,500
136,868 Annual
Loan
Net Cash Flow 244,500 401,335
61,132
With Loan: 23,132
12,500 1 2 3 4 5
0
336,868 Payback = 4 years IRR = 28.08 %
Example #14
Salvage value $ 100,000 $ 100,000
MARR: 25% Currency Rate: 16 LE/$

Loan Description: Loan 5,000,000 LE, over 3 years, interest rate = 15% annually,
and the first payment at the end of year #2.
a) Cash Flow Diagram b) Payback Period & Internal Rate of Return (IRR)
d) Which offer should you accept and why?
Example #15 A manager is trying to decide between two projects (A or B):
Item Location (A) Location (B)

Life After Construction; years 3 3
Loan Interest Rate % 15%
Loan Value; M$ 6
Loan Life; years 3
First Payment of Loan End of year #1
1. Cash Flow Diagram & Net Cash Flow
2. Payback Period & Internal Rate of Return (IRR)
3. Sensitivity analysis for (market price increase10% annually) &
(running cost increase 12% annually).
Loan Analysis: P = { F / (1 + i)n }
6 = { A / (1.15)1 } + { A / (1.15)2 } + { A / (1.15)3 }
Annual Payment = A = 2.627862
Project (A): 7
1 6
8 3.372138
0 1 2 3 4
+ 0 1 2 3
= 0 1 2 3 4
2 2.627861 2.627862
10 4
Payback Period = 3 years IRR = 29.68%
Project (B): 8
1 6
10 4.372138
0 1 2 3 4
+ 0 1 2 3
= 0 1 2 3 4
3 2.627861 2.627862
12 6
Payback Period = 3 years IRR = 26.16%
Project (A):
Year 0 1 2 3 4
Net Cash Flow -4 -2.627862 3.372138 3.372138 7
Indicators Base
Market Price (+10%) Running Cost (+12%)
Payback Period 3
IRR % 29.68
Project (B):
Year 0 1 2 3 4
Net Cash Flow -6 -2.627862 4.372138 4.372138 8
Indicators Base
Market Price (+10%) Running Cost (+12%)
Payback Period 3
IRR % 26.16
Project (A) is the best alternative
Item Location (A) Location (B)

Loan Interest Rate % 15%
Loan Value; M$ 6
Loan Life; years 3
First Payment of Loan End of year #2

Loan Interest Rate % 12% 14%
Loan Value; M$ 3 4
Loan Life; years 3 4
First Payment of Loan End of year #1 End of year #1
Risk Analysis: Tool #2 - Scenario analysis
Example #17
Scenario Analysis
Item
Worst Base Best
Probability; % (by default) 25% 50% 25%
Initial Investment; M$ 5.1 5 4
Annual Running Cost; M$/year 4.1 4 3
Annual Revenue; M$/year 4.9 5 6
Salvage Value; M$ 1.9 2 3
Project Life; years 4 4 4

2. Payback Period
3. Internal Rate of Return (IRR)
Risk Analysis
Scenario Analysis
Item
Worst Base Best
Initial Investment; M$ 5.1 5 4
Annual Running Cost; M$/year 4.1 4 3
Annual Revenue; M$/year 4.9 5 6
Salvage Value; M$ 1.9 2 3
Payback Period (years) 4 4 1.33

Internal Rate of Return (IRR) 0 6.4 72.7
Estimation:
E (Payback Period) = 4 * 0.25 + 4 * 0.50 + 1.33 * 0.25= 3.33 years
E (IRR) = 0 * 0.25 + 6.4 * 0.50 + 72.7 * 0.25 = 21.4 %

Risk Analysis: Tool #2 - Scenario analysis
Example #18
Scenario Analysis
Item
Worst Base Best
Probability; % (by default) 25% 50% 25%
Initial Investment; M$ 6 5 4
Annual Running Cost; M$/year 5 4 3
Annual Revenue; M$/year 4 5 6
Salvage Value; M$ 1 2 3

2. Payback Period
3. Internal Rate of Return (IRR)
Risk Analysis
Scenario Analysis
Item
Worst Base Best
Initial Investment; M$ 6 5 4
Annual Running Cost; M$/year 5 4 3
Annual Revenue; M$/year 4 5 6
Salvage Value; M$ 1 2 3
Payback Period (years) N/A 4 2

Internal Rate of Return (IRR) N/A 6.4 72.7
Infeasible
Estimation:
E (Payback Period) =
E (IRR) =

Risk Analysis: Tool #3- Breakeven analysis
Breakeven Analysis “Sensitivity Analysis of Quantity”
Total costs = fixed costs + variable costs

Total Fixed Costs
QBE =
Price  Var. Cost per unit
Profit =0
Revenue = Total Cost

Example #19
A manager is trying to decide between two machines (A or B):
A B
Initial cost, $ 10,000 15,000
Life, years 5 5
Salvage value, $ 1,000 2,000
Annual maintenance, $ 1,000 1,200
Variable cost; $/unit 1 0.80
Annual Sales Quantity, unit 8,000 8,000
Unit Price, $/unit 1.5 1.5
Based on this information, select the best machine.
Payback Period IRR Breakeven Quantity

Machine A 3.6 years 17.22 % 28,000
Machine B 3.4 years 16.97 % 27,143
Best Machine B A B
Example #20
Alternative A has an initial cost of $10,000 and a salvage value of

$1000 after 5 years. Alternative A also has a variable cost of $1/unit
of product produced and an annual maintenance of $1000.
Alternative B has an initial cost of $15,000 and a salvage value of

$2,000 after 7 years. Alternative B also has a variable cost of
$0.80/unit of product produced and an annual maintenance cost of
$1200.
Feasibility Studies - 2021 103
A B
Initial cost, $ 10,000 15,000
Life, years 5 7

• Alt. 1: Machine A:
– Capital Cost =10,000 –1,000= 9,000 A
B
– Maintenance Cost =1,000*5 = 5,000
– Total Fixed Cost = 14,000
– Total Variable cost = 1 * Q BEP
– Total Cost = 14,000 + 1 * Q
• Alt. 2: Machine B:
– Capital Cost =15,000 –2,000= 13,000
– Total Variable cost = 0.8 * Q Q
– Total Cost = 21,400 + 0.8 * Q
At BEQ: <Q Q >Q

TC(A) = TC(B) A A,B B
F(A) + Q . v(A) = F(B) + Q . v(B)
Q = units
• Alt. 1: Machine A:
– Capital Cost =10,000 –1,000= 9,000 A
B
– Total Variable cost = 1 * Q BEP
– Total Cost = 14,000 + 1 * Q
• Alt. 2: Machine B:
– Capital Cost =15,000 –2,000= 13,000
– Total Variable cost = 0.8 * Q 37000
– Total Cost = 21,400 + 0.8 * Q
At BEQ: <37000 37000 >37000

TC(A) = TC(B) A A,B B
14,000 + 1 * Q = 21,400 + 0.8 * Q
0.2 Q = 7,400
Q = 37,000 units
Example #23
A B
Initial cost, $ 10,000 15,000
Life, years 5 5

A B
NPV(12%)

Project Feasibility Study - L4

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Project Feasibility Study for Engineers

Construction investment $ 400,000 $ 400,000

Running cost $ 120,000 / year $ 150,000 / year

Revenue $ 300,000 / year $ 350,000 / year

Life Four years Four years

Salvage value $ 100,000 $ 100,000

Minimum Attractive Rate of Return (MARR) 25%

Based on this information, discuss & select the best alternative.

Project (A): 100 100

Project (B): 100 100

Item Project (A) Project (B)

Construction period One year One year

Construction investment $ 400,000 $ 400,000

Running cost after construction $ 120,000 / year $ 150,000 / year

Revenue after construction $ 300,000 / year $ 350,000 / year

Life after construction Four years Four years

Salvage value $ 100,000 $ 100,000

Minimum Attractive Rate of Return (MARR) 25%

Based on this information, discuss & select the best alternative.

Feasibility Studies - – 2021 68

Project (B): 100 100

Project (B) is the best alternative

Item Project (A) Project (B)

Construction $ 300,000 Down payment (t=0) $ 200,000 Down payment (t=0)

Running cost after $ 120,000 / year $ 150,000 / year

Revenue after $ 300,000 / year $ 350,000 / year

Life after construction Four years Four years

Salvage value $ 100,000 $ 100,000

Minimum Attractive Rate of Return (MARR) 25%

Based on this information, discuss & select the best alternative.

Project (A): 100 100

100 120 100

Project (B): 100 100

Based on this information, discuss & select the best alternative.

Running cost $ 100,000 / year 300

Life after Four years

Net Cash Flow:

Feasibility Studies - – 2021 76

Item Project (A) Project (B)

Based on this information, discuss & select the best alternative.

Feasibility Studies - – 2021 78

Loan 15% MARR = 20% Project (A)

Risk Analysis: Tool #1 - Sensitivity analysis

Item Project (A) Project (B)

Based on this information, discuss the following:

Cash Flow (1000) 200 Construction investment $ 400,000

250 Construction investment $ 100,000 Down payment

0 1 2 3 4 5 Running cost after construction $ 100,000 / year

Item Project (A) Project (B)

Construction investment $ 350,000 $ 300,000 Down payment

Salvage value $ 100,000 $ 100,000

Loan Interest Rate 15% MARR = 25%

200,000 120,000 138,000

Feasibility Studies - – 2021 86

Item Project (A) Project (B)

Construction investment $ 350,000 $ 300,000 Down payment

Salvage value $ 100,000 $ 100,000

MARR = 25% Assume; $=16 LE

A = Annual Payment = PMT? NPV =0

0 = - 312,500 + A / (1.15)1 + A / (1.15)2 + A / (1.15)3

A = PMT( i , n , P ) = 136,868 $/year

Project (B): 100,000