How to Develop Project Feasibility Studies

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How to Develop

Project

Feasjbility

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How to Prepare

Project

Feasibility

Studies

Revised Edition

2012 Manila, Philippines

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FOREWORD

The first edition of this Manual was originally prepared for businessmen and would-be entrepreneurs who took part in seminars conducted by the Development Academy of the Philippines under its industry development program in the late '70s. The seminars were intended to assist small and medium-scale investors in the Philippines. While the contents of this book have been derived from universal concepts and applications, care has been taken to include only those which are essential in a feasibility study, particularly, if the study is meant to serve as a basis for a loan. A project feasibility study is, after all, supposed to establish the viability of a project, not dwell on details which are required only after the study is found acceptable.

In view of current developments such as technological breakthroughs, innovative industry practices, as well as new regulatory requirements, the Academy decided to come up with a revised edition of the book. It features new cases, the requirements and procedures for undergoing an Environmental Impact Study (IES) for selected industries, as well as the Asian Development Bank's (ADB) pre-feasibility study report format.

Likewise, this revised edition is designed to serve as a guide for first-timers in project feasibility study (PFS) preparation and as a reference material for students of business and entrepreneurship courses.

Pr ident

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How to Prepare Project Feasibility Studies

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Introduction

A PROJECT FEASIBILITY STUDY or PFS is a thorough and systematic analysis of all factors affecting the chances of success of a proposed undertaking. The PFS is a synthesis of separate studies usually dealing with the marketing, technical, financial, socio-economic, and management aspects of a project.

The data, facts, and other findings presented in a PFS generally become the basis for deciding whether the project is to be pursued, revised or otherwise abandoned. At the same time, feasibility studies pervade the entire life of a project, from the time of conception of a project idea to the time the concept is implemented or becomes operational.

The role of project feasibility studies in the development of nations cannot be over-emphasized. A PFS is an essential medium of progress both as a means to initiate profitable projects for socio-economic enhancement and industry expansion, and as a tool in evaluating actual project results against projected outcomes. As such, a PFS has repercussions on the social, economic, cultural, and business sectors of society.

To be sure, some past undertakings have succeeded without the aid of a study. This, however, cannot be used as a basis for the occasional criticism that project feasibility studies are next to useless; or an argument for the failure of carefully-studied specific projects. In the first place, a project feasibility study is not an antidote for failure or a guarantee of success. Its primary purpose is to enhance the probability of success of a particular undertaking. It follows from the widespread understanding that a carefully planned activity has better chances of success in its implementation than one without a plan.

To those who argue that feasibility studies have lost their usefulness in these times of great uncertainty, let it be said that

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such studies are even more important now in evaluating numerous options arising from multiple possibilities. The project feasibility study has proven to be one of the best instruments in meeting past challenges and should prove its worth in this time of constant change. In this Manual, projects are discussed in the context of national development programs, initiated by both government and private institutions to boost progress in the country's administrative regions and in various sectors of society. As a consequence, the applicability of these programs is analyzed and tested both according to region and sector. Although regional and sectoral studies of development programs may be general in nature, they pave the way for a more thorough and specific identification of projects and arrive at different ideas on how to apply national programs in terms of profitable, realistic, and workable projects.

Every project goes through what is known as a "project development cycle." As soon as a project is identified, its applicability is examined through further research, leading either to a generalized pre-feasibility study, or directly to an analytic and systematic presentation of findings in the form of a project feasibility study. It is then evaluated in terms of its optimality, practicality, potential, and growth, for presentation to and negotiation with financing sources or institutions, where the study undergoes further evaluation and reevaluation.

During the assessment of a project, recommendations on revisions to the Project Feasibility Study or the non-feasibility of the proposed undertaking are made.

At this point, the project is going through the "Go" or "No go" phase. If it is found to be too risky to be feasible, the project is eventually shelved. Any revisions and reevaluations of the project, however, may enhance its feasibility during the implementation stage. As soon as the project is implemented, its outcomes are appraised against the data presented in the feasibility study.

2 How to Prepare Project Feasibility Studies

During the project appraisal, the implementing group pinpoints the variances between actual project results and the data provided in the project feasibility study. Taking into account changing conditions and deviations from the expected outcome, the project is then improved in terms of performance, scheduling, and costs. PERT /CPM (Program Evaluation and Review Technique/Critical Path Method) techniques are usually incorporated in project implementation so as to reduce variances between the projected outcome and the actual results.

The consequences of the project's reappraisal will also provide each region and sector with information on specific types of projects. The data implies an influence on further decisions to be made on future project studies. Thus, the project development cycle is completed.

The following Guide to the preparation of Project Feasibility Studies applies to both industrial and agricultural ventures. While this Guide focuses on industrial projects, the PFS preparer is free to make the necessary adjustments to fit the recommended form and content to agro-based projects as well. The overall guideline is for the PFS to include comprehensively the major concerns of any PFS: marketing, production, finance, organization, and socio-economic viability of an industrial or agricultural project.

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Project Summary

THE FIRST SECTION of a Project Feasibility Study is THE PROJECT SUMMARY. It presents the highlights, descriptive definition, long-range objectives, feasibility criteria, history, and basic conclusions of the project under study. It gives the analyst and the financier a "capsule view" of the whole project.

This portion starts with the name of the firm, the location and size of its head office, plant site, and factory. It then presents a comprehensive description of the business, its operations, and its product lines. Major assumptions used and findings on the market, technical, financial, socio-economic, and management feasibility of the project are discussed. The status and timetable of the project must also be stated.

In outline form, the project summary contains the following:

A. NAME OF THE ENTERPRISE

Briefly explain the reason for the choice of name.

B. LOCATION

Pinpoint the location of the head office and the plant site and give the main reasons for choosing the project sites. The factors which affect the choice of location are the sources of raw materials, labor, and utilities; proximity to the market; nature of available transportation; and the cost of land and buildings. The project must choose a location where maximum efficiency can be attained at the lowest possible cost.

C. DESCRIPTIVE DEFINITION OF THE PROJECT 1. Related national program

Is the project in line with any government-initiated or priority program?

2. Affinity to regional or sectoral studies

Is the project a result of encouraging findings in certain regions or sectors of the country?

3. Project potential and proponent

Give a conceptual description of the project's potential worth and importance and the person or group of people who will manage it.

D. LONG-RANGE OBJECTIVES

What does the project expect to achieve in ten years, in terms of size, capacity, volume, worth, role in its industry, and impact on the economy?

E. FEASIBILITY CRITERIA

What were the most important guidelines used to judge the feasibility of the project? Was it profitability? Did it seriously consider the project's impact on the socio-economic environment?

F. HIGHLIGHTS OF THE PROJECT

1. History

How did the project come about?

2. Project timetable and status

How long will it take for the project to be operational? What stage is the project presently in?

3. Nature of the industry

Briefly describe the industry, its product lines, the demand-supply situation, history, growth patterns, problems and potentials, and role in the economy.

4. Mode of financing

Briefly discuss the sources of funds, the financing terms, and the reasons for choosing such sources and terms.

5. Investment costs

How much funding is needed to make the project fully operational? How are these funds to be allocated?

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G. MAJOR ASSUMPTIONS USED AND SUMMARY OF FINDINGS AND CONCLUSION:

1. Market feasibility

Discuss the nature of the unsatisfied demand which the project seeks to meet, its growth and the manner in which it is to be met. Here, the supply-demand situation is examined, the target markets analyzed, and the marketing program formulated.

2. Technical feasibility

Discuss the nature of the product line, the technology necessary for production, its availability, the proper mix of production resources, and the optimum production volume. 3. Financial feasibility

Present the overall financial picture in terms of operating cash requirements, profitability, and cash flow.

4. Socio-economic feasibility

What are the effects of the project on society and the regional and national economy as a whole? Is it generally beneficial to the people? Is it in line with any national or regional economic development program?

5. Management feasibility

What is the management structure? Is it appropriate for the managerial needs of the project? What is the salary scale? Is it compatible with industry standards?

Market Study

THE MARKET STUDY is the lifeblood of virtually every project feasibility study. While profitability is generally the focal point of a project study, the question of demand is the most basic issue. Obviously, there can be no discussion of profitability or of the other aspects of the feasibility evaluation if there is no demand for. the product. It is therefore imperative that the market study be gtven the first consideration.

The market study seeks to determine the following:

1. The size, the nature, and growth of total demand for the product;

2. The description and price of the product to be sold; 3. The supply situation and the nature of competition; 4. The different factors affecting the market of the product;

and

5. The appropriate marketing program for the product. A. PRODUCT DESCRIPTION

In describing the product to be marketed, the following are taken into consideration:

1. Name of the product

2. Features of the product - its physical, chemical, and agronomic properties

3. Uses of the product - as a finished commodity, as input to other production activities

4. Major users of the product - individuals and/or firms 5. Geographical areas of dispersion - where product is mostly

found or to distributed, in the case of a new commodity

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B. DEMAND

An analysis of demand is part of the important task of identifying the needs of consumers and determining whether they are willing and have the capacity to pay for the products a business intends to produce. In forecasting demand, one takes into consideration not only production and importation figures of the past but also such other factors as credit availability, income distribution, population growth, price variations, age composition, the degree of urbanization, tastes and preferences, money supply, Gross National Product or GNP, and so on.

Thus, demand analysis involves analyzing macroeconomic variables, i.e., data on the level of the individual firm or at least on the level of an industry grouping (an industry being defined as the conglomeration of all firms producing a more or less homogenous output). An example of "macro" analysis would be to study the Gross National Product (GNP) and its components. If GNP is expected to rise rapidly, businessmen would ordinarily expect good times for their businesses. In selling a product for mass consumption, the prospective investor might give more attention to the growth rate of a GNP component like Personal Consumption Expenditures. Or a producer of equipment would be more interested in the Gross Capital Formation component. An exporter would, of course, be interested in the export figures of goods and services.

On the "micro" level, the demand for a firm's product is a function of many variables such as the price of a product, the price of a substitute product, income, population, etc.

An analysis of income distribution, for example, could give us an idea of what types of products consumers can afford.

Two other important concepts in demand analysis are 1) price elasticity, which measures the response of quantity demanded of a particular product to variations in its price, and 2) income elasticity, which measures the response of quantity demanded of a particular product to variations in income.

The size, the nature, and growth of total demand for the product must be determined in the following manner:

1. Who and where is the market? Segment the market according to type, manner of use, income classification, location, age, etc. The manner of segmenting the market would depend on the type of product being considered. For instance, the market for automobiles could best be segmented by using income as a yardstick. On the other hand, the market for heavy equipment could be better understood by pinpointing industry classification.

2. What is the total domestic demand from the historical point of view?

3. Is there a foreign market? If so, determine the historical demand.

4. Evaluate demand growth patterns in the past and project future demand by applying appropriate projection methods.

C. SUPPLY

The supply situation may be determined as follows:

1. Who and where are the direct competitors? Classify them according to size, product quality, location, performance, and market segment performance. It is important to determine the type of competition existing. Are there only a few big firms producing the product being considered? Are there many small firms with no single firm controlling the market? Or is it an industry of big and small firms? The type of competition in existence would influence the decisions on production capacity and marketing strategies.

2. Determine the historical domestic supply based on local production and importations.

3. If there is a foreign market, determine the historical supply patterns in the targeted countries based on local production and importations.

4. Evaluate supply growth patterns and project future supply by applying appropriate projection methods.

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D. DEMAND-SUPPLY ANALYSIS

It is now essential to combine the findings on the demand

and supply situation. The analysis may be conducted in the

following manner:

1. Compare the demand and supply trends.

2. Determine the amount of demand unsatisfied, especially in the projections. If demand appears to be fairly satisfied by

supply, it is useful to consider either or both of the following:

a. Whether factors affecting the market may disrupt the

equilibrium so as to cause demand to grow faster than

supply.

b. Whether the quantity of the product is such that it may

create additional demand or cause a shift of a portion of the existing demand in its favor.

3. Determine the share of the market by establishing the proposed production volume (determined in the technical

study) as against the total market size.

E. PRICE STUDY

In economic theory, price is determined mainly by the

demand-supply situation. An increase in demand with constant supply

will hike prices. The opposite (i.e., high supply, low demand) would likely result in the lowering of prices. There are,

however, other factors which exert some influence on the price. Without any change in demand or supply, prices may go up if

raw material costs rise; or prices may decline if the government

decides to subsidize production. Prices may also be determined by the simple cost-plus method used by accountants.

Keeping all these in mind, the price study may best be

conducted as follows:

1. Determine the selling prices of all similar and substitute

products.

2. Look into the history of these prices (including the range of

fluctuations) and establish the factors that mostly influence their fluctuations over time.

3. Determine the responsiveness of demand to price changes.

Will there be a tremendous, slight or negligible increase or decrease in demand if prices are lowered or raised?

4. Establish the product's selling price, taking into consideration all of the above, the market segment targeted, and the

operating costs and expenses (determined in the technical

and financial studies). Likewise, estimate the increases foreseen in subsequent years.

F. FACTORS AFFECTING THE MARKET

There are certain factors affecting the market that may or may not be difficult to quantify and/or predict. This section takes

into consideration the following:

1. Demand may be significantly affected by population

growth, income changes, tastes, rural/urban developments,

prices of substitute and complementary products, and such

marketing tools as advertising, promotions, credit policies,

etc.

2. Supply may be influenced by the development of substitute products, the entry or exit of firms, sources and cost of production factors, government policies, improved

technology, etc.

3. Prices may be affected by production costs, price controls, inflation, etc.

G. ANALYSIS OF RESEARCH DATA

Data analysis and interpretation is one of the most critical phases of market research. It answers such questions as 'What

does this information mean?' and 'Is the information relevant

to establish a marketing plan?'

Following are the different types of Data Analysis.

1. Descriptive Analysis - describes the data gathered using mean, median, mode, frequency distribution, range, and

standard deviation.

2. Inferential Analysis - tests the validity of the hypothesis

and identifies standard errors.

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3. Difference Analysis - determines if differences exist between groups of respondents, e.g., evaluate statistical significance of difference in the means of two groups in a sample using t-test of differences and analysis of variance. 4. Associative Analysis - determines associations or relationships of variables in the survey using cross tabulation and correlation.

5. Predictive Analysis - forecasts based on the results of the survey.

Care should be taken in choosing the right analytical tool in undertaking the market research for a PFS. Annex I presents a comprehensive discussion of procedures in market research. H. MARKETING PROGRAM

The marketing program should be the end product of a market study. After defining the market and price targets, the marketing program comes in as the implementing arm. It

consists of the following procedures:

1. Determine the types of marketing programs prevalent in the industry and gauge their respective effectiveness. 2. Draw up a marketing plan that identifies and defines

the target market, the selling price, the packaging of the product, the distribution network, the sales management mechanism, and the advertising and promotions program. The important components of the marketing program may best be summarized by the four Ps: product, price, place, and promotions. The first two components are essentially determined in the previous sections of the market study. Place refers to the way the product is distributed or made available to the end-user. Promotions is concerned with making the end-users aware of, and desire, the product. 3. Design the marketing organization which will implement

the plan and determine the costs involved. The organization 12 How to Prepare Project Feasibility Studies

would again depend greatly on the type of product being marketed. In general, a consumer product would require a sizable organization that concentrates on distribution channels and promotions. Non-consumer items would probably require a distribution network or a small-sized sales force. In any case, the most ideal organization is one that allows maximum efficiency at the lowest workforce level possible.

The sales promotion plan and the channels of distribution should be appropriate to the product and the market. Consumer buying habits in the particular field should be considered in the selection of outlets. Potential distributors may include retailers, wholesalers, jobbers, industrial leaders, industrial distributors and manufacturer's agents. A plan for consumer credit and financing and for sales allowances can be formulated on the basis of marketing channels selected.

I. PARTS OF A MARKETING PLAN I. Introduction

II. General Business Condition Ill. Competitive Conditions IV. Market Research Results

V. Sales and Distributions Plan VI. Advertising and Sales Promotions

VII. Other Related Aspects (such as product formulation, packaging, legal clearance, raw material procurement, etc.)

VIII. Budget Summary

IX. Profitability (net income targets)

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Technical Study

AFTER THE MARKET STUDY, the technical aspect of the project is analyzed. The technical study consists of the following:

1. Selection of:

a. The manufacturing process.

b. The machinery capacity and design. c. The machinery supplies.

d. The plant location. e. The plant layout.

f. The building and structures specifications. g. The raw materials and their sources. 2. Determination of:

a. The quantity and quality of the products to be produced. b. The labor needed, both skilled and unskilled.

c. The utilities required. d. The waste disposal method. e. The transportation necessary.

3. Computation of the total project cost and enumeration of the major items of capital cost.

4. Detailed listing of the estimated production and overhead costs that will be incurred in operating the proposed production plant.

5. Consideration of any major technological development in the industry which may affect the commercial or technical soundness of the project.

The technical study covers the following topics, and where applicable, costs which will be used in the financial study should be computed.

A. THE PRODUCT(S)

This portion describes the product(s) to be manufactured and sold. The description specifies the product's physical, mechanical, and chemical properties and identifies its various uses, both as finished goods and as intermediate inputs as raw material to another process.

B. MANUFACTURING PROCESS

The selected manufacturing process must be described simply and clearly, preferably with the aid of flow charts and diagrams. The existence of alternative processes and how they compare with the chosen process must be discussed. The analysis should further touch on the manufacturing processes used in existing plants, both domestic and foreign.

Finally, a review of licensing agreements and patents, if any, would also be helpful.

C. PLANT SIZE AND PRODUCTION SCHEDULE

State the minimum and maximum rated capacities of the plant. The minimum capacity is that level of production where the resources are not fully utilized, but are employed at a minimum economical level. In general, the minimum economical level is that level of production where the firm's fixed costs are at least covered by the resulting revenue. The firm's fixed costs are determined in the financial study. The maximum capacity is that level of production where all resources are fully utilized.

From there, the actual capacity utilization, the number of shifts per day, and the number of operating days per year are then defined.

Finally, the factors in determining the plant size must be id~ntified a~d described. The findings in the market study will be a maJOr input in this section.

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The production schedule describes the projected scale of operation for the next several years. Will production increase in time? By how much? The factors that determine these considerations are the expected growth in market share, the availability of financing for possible expansion, the access to more raw materials, and the level of utilization of plant capacity.

D. MACHINERY AND EQUIPMENT

Machinery and equipment required must be identified and itemized according to type and use. Specifications, capacities, and costs should be described in detail. Likewise, the origin of the machinery, whether local or imported, as well as the manner and cost of transporting and installing them must be indicated.

The total cost of installed imported machinery and equipment is computed as follows:

FOB: (In currency of port of origin Add: Freight and Insurance* (% of FOB)

CIF (Convert CIF cost of Philippine pesos using the current foreign exchange)

Add: Tariff Rate* (% of CIF) Add: Import Charges*(% of CIF) Total Cost

Add: Compensating Tax* (% of Total Cost) Landed Cost

Add: Installation Cost* (% of Total CIF) Installed Cost

A balancing of capacities must be presented to show that the machinery and equipment are capable of producing the desired maximum output.

E. PLANT LOCATION

A thorough and comparative analysis of each potential location should be made to determine the ideal plant site for the project.

The evaluation process has to consider the following factors:

1. The availability of raw materials and accessibility to their sources.

2. The availability of cheap or moderately priced utilities such as power, water, or fuel.

3. The combined cost of transporting raw materials and fuel to the plant site.

4. The proximity to distribution outlets.

5. The availability of skilled and unskilled labor.

Maps and charts of the proposed plant location must be included.

F. PLANTLAYOUT

The plant layout should be clearly depicted through diagrams and descriptions. A good plant layout is characterized by minimum material handling, effective space utilization, smooth workflow throughout the plant, safe and conducive working area for the workers, safety and sanitation facilities, and flexibility of arrangements.

G. BUILDING AND FACILITIES

The site, type, and costs of the building and land, as envisioned in the project, should be adequately described. The construction cost of the building and facilities should be presented as adapted to the machinery and equipment that will be used in the project. Land improvements such as roads, drainage facilities, etc. and their respective costs should be computed and included as well.

H. RAW MATERIALS AND SUPPLIES

The required raw materials and supplies should be itemized and the basis for their selection must be presented.

Descriptions and specifications of their physical, mechanical, and chemical properties must also be given. Current and

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prospective costs of raw materials, the availability and continuity of supply, and the current as well as prospective sources should also be discussed. The volume of such materials required at various phases of operations must likewise be presented.

I. UTILITIES

This portion indicates the amount, cost, and sources of electricity, fuel, water and/or other potential energy sources. These factors must be determined in relation to the production schedule and capacity utilization defined. Alternative sources of these utilities and the feasibility of their use must also be described.

J.

WASTE DISPOSAL

The quantity of production wastes, the manner of their disposal, and the cost involved is discussed. The analysis may be expanded to consider the possibilities of further utilizing these wastes.

K. PRODUCTION COST

How much will it cost to produce one unit of output? To arrive at this computation, the following must be determined: a) raw material costs, b) labor cost, c) overhead cost (fixed costs), d) operating costs (variable costs), and e) other pertinent costs.

L. LABOR REQUIREMENTS

The various jobs and functions necessary during the operational stage must be described. For costing purposes, labor is generally classified into three types - direct, indirect, and administrative. Here, the number of workers to be employed for each job classification, the pay scales, employee development programs, the organizational set-up, and the aggregate labor costs are described in detail.

SUGGESTED FORMAT FOR THE TECHNICAL STUDY

I. Description of the Product

I

Service II. Manufacturing Process

A. Process Flow Diagram

III. Plant Size (Capacity) and Production Schedule IV. Machinery and Equipment

V. Plant Location VI. Plant Layout

VII. Building and Facilities VIII. Raw Materials and Supplies

IX. Utilities

X. Waste Disposal XI. Production Cost

A. Direct Materials

B. Direct Labor

C. Manufacturing Overhead XII. Appendices

A. Plant Layout

I

Equipment B. Equipment Listing and Cost

C. Utilities Calculation

D. Plant Facilities Breakdown Cost E. Projected Cost of Production

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Financial Study

SINCE ALL PROJECTS are considered viable only when they are expected to be profitable to meet short-term obligations, to be liquid and to remain liquid during adversity, to grow in their ability to finance their operations mostly from capital sources rather than credit applications, and to service their financing charges, the financial aspect is a

very

important part of every project feasibility study.

As such, the Financial Study should show in specific terms whether the project will be profitable even with existing competition and in unfavorable economic conditions. Detailed figures showing the improvement of the project's financial condition over time should be presented.

This is done through the preparation of financial statements and schedules reflecting the expected profits, the modes of financing needed to optimize the project's performance, the manner and period of repaying creditors, and other financial considerations which are vital for the success of the venture.

The financial study of the project may be broken down into the following major sections:

1. Major Assumptions 2. Total Project Cost 3. Key Forecast Variables

4. Sources of Financing the Project 5. Preparation of Financial Statements 6. Financial Analysis

7. Computation of Net Present Value and Internal Rate of Return

8. Sensitivity Analysis

9. With or Without a Project Analysis A. MAJOR ASSUMPTIONS

In the formulation of the financial projections, assumptions play an important role because they serve as the foundation for

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estimating the future expenditures, expenses, and revenues of the project as accurately as possible. These assumptions must be based on well-considered, realistic, and workable facts.

In formulating assumptions, the analyst must consider the following sources:

1. Existing business practices in the industry may provide

some valuable information and insights on the following: a. Credit terms

b. Credit extensions c. Bad debt allocations d. Bad debt write-off

e. Quality related costs

f. Dividend policies

g. Sales returns, allowances, and discounts h. Labor and management compensation i. Overhead accounts

j. Inventory costing

k. Operating accounts

I. Fixed-asset requirements

m.Method of depreciation and amortization n. Intangible-asset pre-requisites

2. Past feasibility studies directly related to the project may reveal other factors not yet considered, specifically those

items involved in the computations of:

a. Selling price b. Sales forecasts c. Unforeseen costs d. Production volume

e. Product mix

3. Governmental regulations and incentives directly or indirectly affecting the project, such as:

a. Import policies b. Export policies c. Tax rates

d. Tax exemptions e. Price ceilings

f. Relevant presidential decrees or letters of instruction 4. Other pertinent data which can justify the assumptions of

the study, such as industry profiles, pre-feasibility studies,

proceedings of symposiums and conferences, and research or policy studies of industry associations.

In general, assumptions in the preparation of the financial

study should be kept at a minimum as much as possible and

formulated only when necessary.

The list of assumptions incorporated in the study, however, should remain intact and consistent throughout the analysis and must have the following characteristics:

a. Factual b. Justifiable c. Realistic d. Workable B. TOTAL PROJECT COST

The second step in the preparation of the financial aspect of a project feasibility study is an estimation of the project's total cost or initial asset or capital requirements.

Based on the materials, supplies, equipment, physical plant, and manpower needs of the project specified in the technical study, the total project cost is composed of current asset levels and planned fixed asset acquisitions.

1. Fixed Assets - In computing the project's fixed-asset requirements, the most approximate acquisition cost of the following accounts should be determined:

a. Land and land improvements

b. Buildings, including electric and water utilities, furniture and fixtures

c. Equipment, including installation costs

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d. Purchase and installation of machinery

e. Trial-run associated with electric utilities, equipment, and machinery

Land and land improvements consist of the cost of land, the corresponding notary's fees associated with land acquisition, registration expenses, transfer taxes, and other related costs.

Building cost includes all expenses incurred in constructing the building and its foundations, wells, water pipes, electrical connections, gas supply, telephone system, reservoir and tanks, waste water disposal, fencing, roads and paths, employee housing, and fire protection.

In addition to the purchase price of machinery and equipment, sales taxes, freight charges, insurance and customs duties (for imported equipment) are also included in the costs.

Significant and necessary expenditures on foundation setups, tests and startup operations, installation of electricity and telephone lines, electrical equipment, office equipment, furniture and fixtures, employee benefits, maintenance and cleaning equipment should all be considered and presented.

2. Current assets - In estimating the project's initial current asset needs, it is advantageous to divide this section into inventory investments, inventory-related costs, and cash credits.

a. Inventory investments include purchases of materials and supplies, and the corresponding freight charges. b. Classified under inventory-related costs are such

accounts as direct and indirect labor with related fringe benefits; heat, light, and power; plant maintenance; and warehousing expenses related to raw materials, materials in process, and finished goods.

c. Cash credits include pre-paid expenses, intangible assets, 26 How to Prepare Project Feasibility Studies

operating salaries, wages, and fringe benefits, engineering costs, operating taxes, office supplies, communication facilities, office utilities, billing costs, transportation costs, expenses for advertising, borrowing costs, and provisions for unforeseen costs.

Intangible assets include patents, licenses, goodwill, reproduction rights, and organization and pre-operating expenses, if the latter are amortized for a period extending to more than one year.

Organization expenses include fee requirements of the Securities and Exchange Commission, cost of issuing shares of stock such as broker's fee, interim interest, initial advertising, personnel recruitment and training, etc.

Pre-operating expenses include costs of initial investigations, pre-feasibility studies, research and technical studies, economic and marketing studies, financial and profitability studies, design studies, and engineering consultant fees.

The total Current Asset costs are then multiplied by the assumed current ratio, which is ideally 2:1, to arrive at the total cost of Working Capital.

The Total Project Cost is the sum of Total Fixed Assets and Working Capital.

In general, the computation for project cost estimates should be as detailed as possible. Five percent of these itemized projections are usually allocated to unforeseen costs.

C. SOURCES OF PROJECT FINANCING

In determining the financing scheme for the project, one should take the following steps:

1. List down all available sources of funds for both short-term and long-short-term financing. Funding options range

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from bank credit, insurance term loans, mortgage loans, leasing arrangements, issuance of bonds and stocks, private placements, investment banking arrangements, etc.

2. Select the source(s) for both long-term and short-term financing according to its maximum profitability.

3. Finalize the amount and terms for each selected source, together with an indication of the currency, security, repayment period, interests, and other features. It should be noted that the security, repayment period, and interest rates of loans differ from one lending or investing institution to another. Bonds are also settled prior to stock dividends, and preferred stocks are issued dividends first before common stocks.

4. Determine the status of financing from each source by relating it to actual releases already made, applications already approved, applications pending, and applications still to be made.

5. Provide allowances for financing of contingencies and fluctuations in working capital so that the project's liquidity and cash solvency are assured during each operating year of the project's early stages.

6. Identify alternative sources of financing in order of priority, in case variances from the expected outcome result, due to external conditions which affect the project.

D. PREPARATION OF FINANCIAL STATEMENTS

Financial statements present in an orderly and understandable form the financial condition of a business enterprise, its operating performance, as well as the status of its liquidity.

Financial statements depict the progress of a firm in monetary or financial terms.

There are three types of financial statements needed for the project feasibility presentation: the Income Statement, the Cash Flow Statement, and the Balance Sheet.

1. The Income Statement is a summary of the project's total revenues and total costs for one period or fiscal year, thereby arriving at the net income or loss for the period. In Exhibit 2-1, a model format for income statement preparation is presented.

An analysis of each account in the presentation follows: a. The amount of net sales in pesos is arrived at by

subtracting sales returns, allowances, and discounts from gross sales. Sales returns represent goods sold which do not meet customer requirements and thus have been returned. Allowances refer to goods which cannot be sold due to spoilage, wrong specifications, and similar causes. Sales discounts are price reductions occasionally given in favor of customers.

b. Cost of sales is a function of raw materials used, direct labor expenses, and factory overhead, less cost of ending inventory for the period. Factory overhead includes a) materials and labor expenses indirectly related with production; b) heat, light, and power required for manufacturing; c) repair and maintenance costs associated with productive fixed assets; d) various supplies needed to produce goods; the depreciation of productive fixed assets;; and e) insurance expenses related to the productive operations.

2. The Cash Flow Statement or the "cash budget" is a presentation of cash receipts and disbursements for a given operating period or fiscal year. Exhibit 2-2 illustrates a cash budget model, showing the inflow and outflow of cash during project operations. It likewise indicates how the ending cash balance in the Balance Sheet was arrived at. The cash budget is also used to predict or anticipate when loans will need to be drawn during an operating period

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to optimize the timing of project financing, and maximize profitability by efficient cash utilization.

a. Cash receipts are classified into two: cash from project financing and cash from sales revenues. Cash flows from financing may take the form of stocks issued, bond issues, and long-term loans.

b. Cash disbursements include payments for intangible assets, fixed assets acquisitions and actual operating expenses. Payments for credit purchases, bank loans as well as cash purchases of inventories fall under this category. Cash dividends issued and income tax payments are also part of cash disbursements.

The beginning cash balance for the period is then added to the net cash flow to arrive at the ending cash balance in the Balance Sheet.;

3. The Balance Sheet reflects the assets acquired by the project and the corresponding liabilities it incurred and the owners' equity (net worth)_as of a specific date. Exhibit 2-3 presents a model balance sheet.

a. The Assets are broken down into the following: current assets, fixed assets, and intangible assets. Current assets include cash accounts and other accounts expected to be converted into cash within one year, such as marketable securities, receivables, and inventories. Prepaid expenses and deferred charges are also classified under Current Assets, except that, for accounting purposes, they will be adjusted as an expense within one year. An example of a prepaid expense is insurance premiums good for one year.

b. Fixed Assets are tangible assets of an enterprise, the service life of which usually extends to over one year. Land, building, machinery and equipment are typical examples of fixed assets.

c. Other Assets include the organization's pre-operating expenses and intangible assets such as patents, copyrights, leases, licenses and franchises. Intangible assets, like fixed assets, have a service life of more than one year.

d. Liabilities are classified into current and long-term liabilities. Current liabilities are those which are expected to be paid for within one year.

Typical current liabilities include accounts payable (for credit purchases of materials and supplies), short term bank loans, taxes payable, and accrued expenses.

Accrued expenses refer to cost of services rendered but have not yet been paid such as salaries payable, interest payable, etc.

Long-term liabilities are expected to be paid over a period of more than one year. Mortgage bonds payable and long-term notes payable are typical representatives of this category.

e. Equities are asset claims due to owners of the firm. If

the firm is a corporation, the Equity is further divided into Capital Stock, Paid in capital surplus, and Retained Earnings. If ownership is one individual or several partners (single proprietorship or partnership), the Equity account is simply stated as the name(s) of the proprietor or partners, followed by, the term "capital" such as "De la Cruz and Pedro Capital."

E. FINANCIAL ANALYSIS

This aspect of the financial study evaluates the project's profitability, liquidity, cash solvency, and growth over time.

It should be noted that the functions elaborated below are meaningful only when compared with other functions of the same type computed in one year intervals. Charts and other illustrative 9-eviceE> m(lv be used to present the analysis more effectively.

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1. Tests of liquidity - These financial measures are used to determine a firm's ability to meet short-term obligations, and to remain solvent during hard times. They include: a. Current ratio = Current assets

Current liabilities

b. Quick or acid-test ratio= Current assets -inventories Current liabilities c. Liquidity of inventories= Cost of sales

Average inventory d. Defensive position=

Cash+ marketable securities+ receivables Projected operating expenditure/number of days 2. Tests of debt-service - These ratios are used to test the

project's ability to meet long-term obligations. a. Debt-to-net worth ratio = Total liabilities

Total equities

b. Total capitalization ratio= Long-term liabilities Long-term liabilities and equities 3. Tests of profitability - These show the operational

performance and efficiency of the project. a. Net profit margin= Net income after tax

Sales

b. Operating profit margin= Profit before interest and taxes Sales

c. Gross profit margin =Gross ~rofit Sa es

d. Return on financier's investment= Net income Stock equity

e. Return on owner's investment= Net income Stock equity f. Return on common stock equity =

Net income- preferred stock dividends Net worth- par value of preferred stock g. Return on net operating profit=

Profit before interest and taxes Total tangible assets h. Asset turnover = Sales

Total tangible assets

1. Return on assets, or earning power= Net income Total tangible assets

4. Test of total debt coverage = Profit before interest and taxes (Interest+ principal payments)

(1/1 - income tax rate) 5. Funds-flow analysis - This technique is used to determine

the major uses and sources of funds within one year in a project's life.

a. Cash-flow analysis: 1) Source of funds:

a. Net decrease in an asset other than cash b. Net increase in a liability

c. Proceeds from the sale of stocks d. Funds provided by operations 2) Uses of funds:

a. Net increase in an asset other than cash and fixed assets

b. Gross increase in fixed assets c. Net decrease in any liability d. Retirement of stock

e. Cash dividends

Exhibit 2-4 presents a model presentation of cash-flow analysis.

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b. Working-capital flow analysis. 1) Sources of funds:

a. Net decrease in any asset other than current assets b. Net increase in long-term liabilities

c. Proceeds from the sale of stock d. Funds provided by operations 2) Uses of funds:

a. Net increase in other assets b. Gross increase in fixed assets c. Net decrease in long-term liabilities

d. Retirement of stock e. Cash dividends

Exhibit 2-4 presents the financial ratios for the financial statements in Exhibits 2-1 to 2-3.

6. Tests of operating leverage - these indicate how the project uses its assets for which it pays a fixed cost.

Before these tests are discussed, it is important to differentiate fixed costs from variable costs.

Generally, fixed costs are expenses incurred by the company irrespective of its production volume. These are depreciation charges on machinery, equipment, buildings, and land improvement; the amortization cost of prepaid expenses, deferred charges, and intangible assets; real estate taxes; insurance of fixed assets; general and administrative salaries, wages and fringe benefits; research and development; donations, office supplies; administrative light and power; and borrowing costs.

On the other hand, variable costs increase or decrease according to changes in production volume. These are the costs of direct and indirect materials, direct labor, power requirements of production machinery, maintenance of factory machinery, supplies for manufacturing, etc.

a. Break-even volume analysis BEV = Fixed costs

Sellmg pnce - vanable cost/umt b. Break-even cash analysis

BEC = Cash fixed costs

Sellmg pnce- cash vanable cost/umt c. Break-even selling price analysis

BESP =Variable costs+ fixed costs Omtvolume

=Total cost x Selling price Sales

d. Break-even sales analysis BES = BESP x unit volume

Fixed cost

= 1-(Variable cost/net sales)

7. Tests of financial leverage - These ratios present how a project

employs funds which pay a fixed return.

a. Earnings per share = Net income Shares

Dividends per share= Net income-preferred stock dividends-retained earnings

Common share

8. Tests of capital investment .- ~hese fina~cial tools evaluate

the justification for investmg m the proJeCt.

a. Average rate of return= Average net income Average net mvestment b. Payback period in years =

Initial"fear cash outflow

c. Capital recovery or cash pay off period (in years)= Stocks

Annual cash dividends

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F. DECISION CRITERIA

After reviewing all three financial statements, the Income statement, the Cash Flow Statement, and the Balance Sheet, the prospective investor must now decide if the project is feasible or not. If the project's Cash Flow Statement shows positive cash flows, this is a good indicator that the project is acceptable.

However, the smart investors would want to compute a project's Payback Period, Net Present Value, Internal Rate of Return, and Cost-Benefit Analysis before they finally decide to go on with the project or not.

a. Payback Period

The Payback Period is a capital-budgeting decision criterion that is defined as the number of years required to recover the initial cash investment. It generally measures how quickly the project will return one's investments. The investor will go ahead with the project IF it will return investment on or before the required payback period. The time period required by the investor is based on the industry's performance.

b. Net Present Value

The Net Present Value (NPV) criterion is a decision tool which is most favored in business. There are three reasons why the NPV is widely used in almost all industries:

• It deals with cash flows and not accounting profits • It considers the time value of money and allows

comparison of the benefits and costs in a logical manner

• It uses a hurdle rate that is acceptable to the investor and would increase the value of the firm if NPV were positive.

The Net Present Value can be expressed as follows:

Where: ACF = t k 10 n

JV.PY=

i

ACE; -/{)

t=l

(1

+

k)'

the annual after-tax cash flow in time period t hurdle rate; discount rate; required rate of return of the investor

initial outlay (initial cash outlay necessary to purchase assets to put the business into an operating manner)

the project's expected life

Initial Outlay includes the after-tax cash flows such as: • Cost of purchase of the asset plus the shipping/

transportation and installation expenses

• Working capital requirements (normally equal to one or two months of cash outflow from operations which includes additional inventory, cash on hand, and overhead expenses)

• In a decision to replace an old asset, the after-tax cash flows associated with the sale of the old asset

The project's net present value is an indicator of the net value (the difference of the summation of the present value of the cash flows and the initial outlay) of an investment proposal in terms of today' s peso. Whenever the NPV is greater than or equal to zero, the project should be accepted;

and rejected, if the NPV is negative.

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Steps to compute NPV manually:

1. Determine the after-tax cash flows of the project.

2. Determine the hurdle rate or the discount rate acceptable

to the investor.

3. Multiply the after-tax cash flows with the present value factor at the given hurdle rate.

4. Get the product for each year and the sum of the present

value of cash flows.

5. The amount of the initial outlay is then deducted from the sum of the present value of cash flows.

c. Benefit

I Cost Analysis (Profitability Index)

The Benefit I Cost Analysis or the Profitability Index (PI) is a tool for measuring the ratio of the present value of the

future cash flows to its initial cost. Using this tool will allow

the investor to accept the project if the ratio is greater than

or equal to one and reject if the index is zero or less than one. It can be expressed as:

Where: ACF = t k 10 n

fACE;

P./=

t=l

(1

+

k)

'

./0

the annual after-tax cash flow in time period t the discount rate

I required

rate of return the initial outlay

In most cases, when net present value results in an accept decision, net cash flow is greater than its initial cash outlay. This would also be the decision given by the benefit/cost analysis, as the value of the numerator (present value of net cash flows) is greater than its denominator (initial outlay).

d. Internal Rate of Return

The Internal Rate of Return (IRR) is the fourth decision criterion used in determining the viability of a project. This process of measurement attempts to answer the question: What rate of return does this project earn? Given the internal rate of return of a project based on the computation, the

investor can immediately compare his required rate of return, which is normally based on the current market standards, and decide whether it is beneficial to pursue the project or not. Normally, an investor would accept the project only if the internal rate of return is equal to or greater than his required rate of return.

Mathematically, the internal rate of return is defined as the value of IRR in the equation below:

Where: ACF = t IO n IRR

/O=f

ACE;

t=l

(1+/~'

the annual after-tax cash flow in time period t the initial cash outlay

the project's internal rate of return

The challenge in this equation is to find the rate of return or the discount rate that will equate the present value of the project's future net cash flows with the project's initial cash outlay. Solving for IRR is quite easy using a financial calculator or spreadsheet. In any case, the IRR can be computed manually as follows:

1. Assign an arbitrary rate (make an assumption for the

discount rate)

2. Use the arbitrary rate to discount the after-tax cash flows of the project to present value

3. Get the sum of all the present values of the future cash flows

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4. If the sum of the present values of the future cash flows is equal to the initial outlay, then the arbitrary rate is the IRR;

5. Otherwise, the analyst must assign another arbitrary rate, and then repeat steps 2-4 until equal values are

computed.

Exhibit 3 shows the application of internal rate of return to the case model: Casa Fernandina.

G. OTHER APPROACHES IN EVALUATING PROJECT RISKS

Simulation

Simulation is the process of evaluating the performance of the project in different scenarios. This is sometimes called 'scenario analysis', which identifies the range of possible outcomes under the worst, best, and most likely case. In simulation, one randomly selects and combines all the values from the different factors that affect the NPV and IRR of the project such as the following:

• Market size • Selling price • Fixed costs

• Market growth rate • Investment required

• Residual value of investment • Share of market

• Operating costs • Useful life of facilities

Sensitivity Analysis

Sensitivity analysis is similar to simulation in determining how the distribution of possible net present values and internal rates of return for a particular project is affected by a change in one particular variable from the factors listed above. It is the most

commonly used process of evaluation other than the net present

value, internal rate of return, payback period, and benefit/ cost analysis. This analysis requires changing one variable

while holding all other variables constant. The distribution of

possible net present values and internal rates of return that is generated is then compared with the distribution of possible

returns generated before the change was made. For some, this analysis is also called the 'What if?' analysis. See Exhibit 4 for an example of a Break-even and Sensitivity Analysis as applied

to the financial condition of the case model, Casa Fernandina.

Probability Tree

The probability tree is a graphic illustration of the sequence of possible outcomes. It presents the decision maker with a schematic representation of the problem in which all possible outcomes are accounted for. The computations and results of

the computations are shown directly on the tree, giving a clear picture of the different scenarios.

H. 'WITH OR WITHOUT A PROJECT ANALYSIS

The 'With or Without a Project' analysis (WP and WOP) is used

to

compare two scenarios, one in which a project is initiated

with another where no project is undertaken. The technique

can be used for the following:

• A new project

• Rehabilitation

I

Modernization project • Loss prevention project

• Improvement I rehabilitation project

In a new project scenario, the investor is not involved in any

business and this is the first time that he or she would be putting money in a project. Therefore, the investor will receive an additional benefit, given that the project has been assessed

to be acceptable using the decision criteria. Figure 4 illustrates this scenario:

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Figure 4: New Project (No Other Activities) PROJECT BENEFITS I PROFITS

+

Project Cost 2 Additional Benefit 3 4 Year WP WOP

5

In a Rehabilitation/Modernization project scenario, an existing business is doing well except that, to keep up with competition, it has to undertake some modernization and/or rehabilitation.

Normally, the business is doing well but with competition the growth of the business is hampered. This then calls for some modernization to stay competitive or even ahead of the competitors. The rehabilitation

I

modernization project is best illustrated in Figure 5. PROJECT BENEFITS I PROFITS Project Cost

Figure 5: Rehabilitation Project Additional Benefit

Foregone Benefit

l

2 3 4

Year

WP

WOP

5

In the case of a Loss Prevention Project scenario, a particular business may be suffering losses over a period of time due to an economic crisis and other factors. Its owners may consider looking for projects to prevent further losses and possibly help recover past losses. See Figure 6.

PROJECT BENEFITS I PROFITS Project Cost

+

Figure 6: Loss Prevention Project Additional Benefit

!

'-~~~~~~~~~rrrrnnnn~mommWP WOP 2 3 4 5 Year

Finally, an Improvement Project scenario exists when a firm that has been experiencing poor business initiates a project that will help improve the performance of the ailing company, and where foregoing such a project will mean certain bankruptcy for the business.

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PROJECT BENEFITS/ PROFITS Project Cost

+

Figure 7: Improvement Project

Additional Benefit WP

Foregone Benefit

l

WOP

SUGGESTED FORMAT FOR A FINANCIAL STUDY REPORT I. Presentation of Major Assumptions

II. Summary of Project Cost III. Sources of Financing the Project IV. Financial Statements

V. Financial Analysis

VI. Decision Criterion (Computation of Net Present Value, Payback Period, Internal rate of Return, Benefit-Cost Analysis)

VII. Sensitivity Analysis

VIII. Analysis of 'With and Without a Project'

SAMPLE FINANCIAL STATEMENT HOTEL CASE: CASA FERNANDINA

A. Key Assumptions:

1. Sales Forecast:

a. Hotel- based on seasonality (annual hotel occupancy rates) illustrated in the marketing plan. Room rates increase every two years by 10 percent.

b. Coffee Shop- based on seasonality and seating capacity (15 pax)

2. Cost of Goods Sold and Operating Expenses to increase every year by 3 to 4 percent based on inflation.

3. Cost of Goods Sold

a. Free Breakfast for guests based on seasonality (annual occupancy rates)

b. Materials projected at 36 percent on average of sales revenue of the coffee shop

4. Operating Expenses

a. Salaries and Wages- based on human resource plan b. Depreciation:

· Building's useful life - 15 years · Equipment's useful life - 5 years

· Landscaping and interior design - 5 years c. Promotional materials- based on marketing plan d. Rent Expense- refers to the rent of the 2,500 square meter

lot currently being occupied by the antique shop, and where Casa Fernandina will be erected.

e. Utilities - includes air conditioners, lights, other electricity, water, and phone charges

5. Other Income- refers to use of function room (50 pax) and rent from concessionaire

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Exhibit 2-1

Casa Fernandina Pro-forma Income Statement for the Year Ended December 31, 2004

Year1 Year2 Year3 Year4

Sales Revenue

Hotel 1,920,000.00 2,028,000.00 3,030,000.00 3,030,000.00 Coffee Shop 889,560.00 889,560.00 1,317,501.90 1,317,501.90 Total Sales Revenue 2,809,560.00 2,917,560.00 4,347,501.90 4,347,501.90

Cost of Goods Sold

Free Breakfast 85,536.00 91,368.00 112,752.00 112,752.00 Pastries, etc 241,069 50 321.426.00 467,283.96 386,717 76

Total Cost of Goods Sold 406,962.00 412,794.00 580,035.96 580,035.96 Gross Revenue 2.402,598.00 2,504,766.00 3,767,465.94 3,767,465.94

Operating Expenses

Salaries & Wages 1,568,486.85 1,615,54146 1, 777,095 60 1,830,408.47 Depreciation 321,472.69 321,472.69 321,472.69 321.472.69 Promotional Materials 17,600.00 18,128.00 18,671.84 19,232.00 Rent Expenses 139,392.00 143,573.76 147,880.97 152,317.40 Utilities Air con 176,000.00 195,520.00 250,931.20 260,968.45 Lights 22,000.00 24,440.00 31,366.40 32,621.06 Water 165,000.00 183,300.00 235,248.00 244,657.92 Other Electricity 16,500.00 18,330.00 23,524.80 24,465.79 Phone 43,200.00 47,520.00 47,520.00 52,272.00 Office Supplies 27,500.00 30,550.00 39,208.00 40,776.32 Housing Supplies 53,240.00 59,144.80 75,906.69 78,942.96 Total Operating Expenses 2,550,391.54 2,657,520.71 2,968,826.19 3,058,135.05 Operating Income (147,793.54) (152,754 71) 798,639.75 709,330.89 Other Income Function Room 314,000.00 314,000.00 314,000.00 578,000.00 Rent from Concessionaire 240,000.00 240,000.00 240,000.00 300,000.00 Gross Income 406,206.46 401,245 29 1,352,639 75 1,587,330.89 Tax Expense 150,424.75 144,699.65 432,844 72 507,945.89 Net Income 255,781.71 256,545.64 919,795.03 1,079,385.01

YearS 4,008,000.00 1,768,953.60 5,776,953.60 134,136.00 638,727 55 772,863.55 5,004,090.05 2,013,449.32 321.472.69 19,808.96 156,886.92 322,880.96 40,360.12 302,700.90 30,270.09 57,499.20 50,450.15 97,671.49 3,413,450.80 1,590,639.25 578,000.00 300,000.00 2,468,639.25 789,964.56 1,678,674.69

: : .

Receipts

Collections from Customers Payments

To suppf!eCS To employees

F 01 income lax Total Cash payments Net Cash Inflow from

()pela!rig Adlvi1ies

Cash ~kom In~ Activities

WoOOng Capital (2 months) Busiless RegislratiorJ

Permit Fees Construction Cost Eslima!e Other Cons!ruction Materials from

3 RuOOown Antique Houses

Antiques & lnteoor ~ Landscaping & Ex!eoor Design Materials & Equipments Net Cash OutfMJw from

inves!Nlg adivilies Net Cash flow before financing

Cash~from

FmanclngActivilies

Equity

Total Cash in~ from financing activities NETCASH Beginning Cash Ending Cash Measurement Payback Period

Net Present Value

Exhibit 2-2

Casa Fernandina Cash Flow Statement

for the Year Ended December 31, 2004 Yearo Year 1 Year2 Year3

3,363,560.00 3,471,560.00 4,901,501.90 987,037.50 1,133,300.56 1,450,293.86 1,568,486.85 1,615,541.46 1,ffi,095.60 150,424.75 144,699.65 432,844.72 2,705,949.10 2,893,541.67 3,660,234.18 657,610.90 578,018.33 1,241,267.72 (362,960.40) 0 0 0 (5,000.00) 0 0 0 (2,537,690.35) 0 0 0 (600,1XM!OO) 0 0 0 (853.850.00) 0 0 0 (326,1XM!OO) 0 0 0 (788,006.00) 0 0 0 (5,473 500.75) 0 0 0 (5,473,506.75) 657,610.90 578,018.33 1,241,267.72 5,500,000.00 5.500,1XM!OO 26,493.25 574,126.38 578,018.33 1,240,005.08 0.00 26,493.25 600,619.63 1,178,637.97 26,493.25 600,619.63 1,178,637.97 2,418,643.05 Decision Criteria

Greater than required by the investor Greater than or equal to zero Internal Rate of Return Greater than or equal to the

prevailing rate of Treasury Bills

Year4 YearS 5,225,501.90 6,654,953 60 000 000 1,405,723.65 1,851 ,392.35 1,830,408.47 2,013,449.32 507,945.89 789,964.56 3,744,078.00 4,654,800.22 1,481,423.90 2,000,147.38 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,481,423.90 2,000,147.38 1,400,857.70 1,998,536.47 2,418,643.05 3,819,500.74 3,819,500.74 5,818,037 I2 Value 4 years & 7 months Php3,054,196 20%

How to Develop Project Feasibility Studies

How to Develop

Project

Feasjbility

Project

Feasibility

Studies

Revised Edition

CONTENTS

FOREWORD

Introduction

Project Summary

Market Study

Technical Study

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