PREPARATION OF PROJECT FEASIBILITY REPORT

Purpose

The feasibility analysis is designed to determine whether or not, given the project environment, a
project will be successful (in virtually any interpretation of that word). A feasibility analysis may
be conducted for a project with an emphasis on financial viability, environmental integrity,
cultural acceptability, or political practicability. It is a determination as to the likelihood of
success and a description of how that determination was achieved.

Application

Feasibility analyses are used to present an approach or a series of alternatives and to offer
decision-making guidance based on the climate in which the project will evolve. They often
defend a single or primary approach, incorporating extensive forecasts on the project’s
development, as well as its evolution after implementation. Because a feasibility analysis may
focus on one or many aspects of a project, it may be a very short (one- to two-page) or long
(multivolume) document. In any case, it generally begins with an executive summary and a
description of the project outputs in their as-built condition.

The primary objectives of this report is to inform about the following matters.

1: What the proposed system will achieve.

2: Who will be involved in operating the proposed system in the organization.

3: The benefits that system will give.

4: The organizational changes needs for its successful implementation.

5: The estimated cost of the system.

All these are given in technical and simple language and the beginning of the report as an
executive summary. It is followed by the detail feasibility report which contains the following
items.

 An introduction with in outline of the proposal

 A broad data flow diagram of the existing system.

 A modified data flow diagram.

 All possible alternatives solution.

  Merits and demerits of each solution.

 Any new equipment to be install or any new resources required for proposed system.

 Expected benefits of the proposed system.

 Cost of the system.

 New procedures to be implemented and environment of the persons in operating new

system.

 Any anticipation problem in implementation.

When these steps are followed, it makes the recommendation easier to approve

Content

The sources for content in a feasibility analysis come through extensive research, discussion, and
assessment and may incorporate the use of advanced computer modeling to determine the long-
term impact of a project on the environment around it. Other feasibility analyses may be rooted
only in anecdotal evidence as provided by those who have worked on similar efforts or those
who will ultimately be affected by the project’s outcome.

1. Executive Summary/Project Goal

Overview or description of the impact of the project on its environment and the potential for
success (or failure) based on the analysis. This may also include brief mention of the
alternatives considered and their relative viability.

2. Project Description

Anticipated As-Built Condition This section is a description of the project as envisioned,

including magnitude, location, community impact, and market change.

Anticipated Outputs In this section, both intended and consequential outputs of the project
should be incorporated, without comment as to their relative benefit or detriment to the world
around them.

3. Project Environment

Financial This section describes the financial climate in which the project will be developed and
in which it will be implemented. This may include assessments of the relative magnitude of the
project within the overall organizational budget and the potential drain on available resources.

Physical Environment A feasibility analysis should include a description of the environment

surrounding the project, including the physical locations for development and implementation.
 Societal/Cultural Environment Descriptions of the culture and society in and around the project
community are another aspect to a feasibility analysis. This may include an emphasis on those
social and cultural issues that will be directly affected by project development and
implementation.

4. Similar Efforts

Scenarios The section provides an outline of similar efforts and a synopsis of their effects on the
finances and physical and social environments of their project organizations and communities.

Similarities and Implications Determination of the degree of similarity between the scenarios
outlined in Section 4.1 and the project(s) under scrutiny in the feasibility analysis is discussed in
this section. All significant discrepancies among examples should

5. Sensitivity Analyses

Financial A “what-if” analysis of finances to determine if the project is deemed viable is an

important aspect of a feasibility analysis. An assessment of other organizational areas affected is
included. This analysis may also examine the potential range of financial possibilities if the
project fares extremely well or poorly.

Physical Environment This section involves a “what-if” analysis of the physical environment if
the project is deemed viable. It includes an assessment of physical effects to the organization and
the areas around the project. This analysis may also examine the potential range of physical
manifestations if the project fares extremely well or poorly.

Social/Cultural Environment The section is a “what-if” analysis of the social and cultural
environment if the project is deemed viable. It includes an assessment of the effects to local,
regional, national, and international societies. This analysis may also address the potential range
of social and cultural implications if the project fares extremely well or poorly.

6. Marketing/Public Relations

Market Analysis The market analysis includes an assessment of the potential market for the
project or its outputs, including (but not limited to) the financial buying power of the market,
interest in or demand for the project, and the life span of the market’s potential members.

Forecasts Predictions regarding sales, returns, and buying trends related to the project and its
outputs are included in the forecasting section. Ideally, the forecast includes the timing of the
market entry and the relative impact of early or late entry into the marketplace.

Competitive Environment The competitive environment section contains information on other

organizations capable of conducting the project and/or producing its deliverables (or their
equivalent). This may also incorporate some assessment of how potentially fickle the market
may be about the project or its deliverables.
 Risk Major risks should be considered in any feasibility analysis. They include those that could
radically alter any or all of the assumptions on which the feasibility assessment is based and the
potential market impact if those risks come to pass.

7. Conclusions and Recommendations

Based on the information from the analysis, this section discusses the conclusions that can be
drawn regarding the viability (or nonviability) of the project, given the environment in which it
will be developed and implemented. This normally includes a go/no-go decision and the
implications of both of those decisions.

Approaches

Some feasibility analyses will include extensive discussions on the project plan for how and
when the project will evolve and the expectations during development. Some will go into
extensive detail about the side effects of the project both during development and
implementation. Because feasibility analyses are developed for everything from new business
methodologies to power plant installations, the range of possibilities in terms of what they may
include is virtually endless. The key to determining if information is appropriate in a feasibility
analysis is to assess whether or not the information provided helps to generate a more accurate
understanding of whether or not the project will succeed in implementation, regardless of the
metric for success.

Considerations

Because projects are undertaken with sponsors and supporters, the feasibility analysis will
promote a particular point of view or perspective in making the go/no-go decision. It is to the
author’s advantage to minimize the politicization of the feasibility analysis, because any skewing
of the data may be seen as rendering the rest of the document and its findings moot.

FEASIBILITY ANALYSIS

In simple terms a project is financially feasible if you can make sufficient money out of the
project to

 pay back the loan (including interest and principal debt) and
 pay profit dividends to shareholders

If the project was financed from savings (that is, no loan was required) then the project must
return more than an alternative investment, for example interest from a fixed deposit savings
account.

To decide whether or not these projects should be accepted or pursued, financial assessment for
the two facilities employs four key methods

(1) Payback period

(2) Net present value (NPV)

(3) Benefit/cost ratio (B/CR)

(4) Internal rate of return (IRR)

INTRODUCTION

An economic analysis of the designed plant is very important to assess the profitability of the
process design. This governs the cost estimation that primarily focuses on the raw materials, the
assigned equipments and the economic parameters and conditions involved in the process. To
decide whether or not these projects should be accepted or pursued, financial assessment for the
two facilities employs four key methods:

(1) Payback period

(2) Net present value (NPV)

(3) Benefit/cost ratio (B/CR)

(4) Internal rate of return (IRR)

This report also determines the break-even outputs, sales and prices including the amount of
sales required for these facilities to earn a certain amount of profit for a period of five years.
Furthermore, financial analysis for the entire plant was also performed to assess the economic
feasibility of the whole plant.

FINANCIAL ASSESSMENT METHODS

Payback Period (PP)

The payback period, defined as expected number of years required to recover the original
investment, was the first formal method used to evaluate the capital budgeting projects. It is
calculated as

PP = capital cost / Annual cost flow

Discounted Cash Flow (DCF)

One of the best ways of determining if a project can make enough money to make it feasible is
Discounted Cash Flow (DCF) analysis. DCF analysis has many tools, the two most useful are;

 Nett Present Value (NPV) and

 Internal Rate of Return (IRR)
Nett Present Value

NPV is equal to the sum of the discounted future cash flows of the project. It is usual that the the
first cash flows are flows of money outwards, that is money is paid out for the purchase of the
plant (these are negative cash flows). Later cash flows are usually positive as project begins to
earn income. The calculation is given in the equation below

NPV = ΣCFi / (1 + r)i    i = 1..N

where

 NPV = Nett Present Value

 CFi = the cash flow in period i
 r = the discount rate
 N = the number of periods

The cash flows are the real cash flows from the project that are a result of the capital
expenditure. Depreciation and loan repayments are added back to net profit to yield cash flow

The discount rate to be used is the weighted average cost of capital for the investor. For
industrial projects normally only the first ten years' cash flows are considered. After the ten years
are up your project can still earn you money, so you need to include a terminal value that
represents the value of the project at the end of the analysis period (as if you were to sell the
project).

A project is feasible if the NPV is greater than zero. If you are comparing alternative projects the
project with the highest NPV is the best project.

Internal Rate of Return

IRR is the rate of return that yields a net present value of zero. A project is feasible if the IRR is
greater than the interest rate you can borrow at. If you are comparing alternative projects the
project with the highest IRR is the best project. Do not use IRR to compare mutually exclusive
projects. Mutually exclusive projects those where you can only execute one of the alternatives.
For example if you are planning to build a sugar factory and you have a choice of building a low
efficiency - low capital cost plant or a high efficiency - high capital cost plant, then these two
projects are mutually exclusive, you must choose one of the two, you can't do both.

An example of non-mutually exclusive projects are a sugar factory with an attached refinery or a
sugar factory with an attached ethanol distillery. (It is quite possible to do both (if you have
enough money!)

The main reason you should not use IRR to compare mutually exclusive projects is because the
IRR calculation assumes that excess revenues are reinvested at the IRR rate, which is more often
than not, not true and can provide a misleading decision parameter.
Discount Rate and Inflation

Inflation rates, interest rates and foreign exchange rates are all very closely related to each other;
unfortunately the relationship between them is not fixed or even easily definable. This is because
in a market economy these rates are largely sentiment driven which is a polite way of saying they
are subject to irrational erratic fluctuations

A financial model that includes these rates will be exquisitely sensitive to the differences
between these rates, and even if you are the governor of the reserve bank you will not be able to
predict the differences between these rates to make your model sufficiently robust.

Fortunately, for an investment decision it is not necessary to include inflation in the analysis,
provided that the real discount (or interest) rate is used (ie nominal interest rate minus the
inflation rate) in the NPV calculation. If you are using IRR as your investment criterion the IRR
must be greater than the real interest rate (ie nominal interest rate minus the inflation rate)

Calculation of Cash Flows

Generally the best of method calculating the projected cash flows is by means of a financial
model of your project. Spreadsheet software makes these calculations quite easy. Spreadsheets
models while easy to construct can easily become very complex and internally interlinked
making it very difficult for anyone other than the original author to understand them and modify
them. Even the original author can have difficulty understanding his model some months after it
was constructed.

If a spreadsheet is to be used, it must be planned carefully before its construction, taking care to
make the internal links as logical and as consistent as possible and to liberally use notes and
comments throughout.

Risk
Once you have spent many weeks constructing your model which carefully simulates every
aspect of your project, and have calculated the NPV and IRR for your project, one thing you can
be sure of is that in real life you will not get the NPV and IRR you calculated.

Your analysis period was say ten years, in that ten years all sorts of things will change, prices
will go up and down, exchange rates will fluctuate, the plant's technical performance will change
randomly.

PROFITABILITY ASSESSMENT

1. Total Capital Investment

The capital cost, which is the sum of the fixed-capital and the working capital investment, is the
amount of money needed to supply the required manufacturing and plant facilities.
2. Revenue Implications

Revenue is a crucial part of financial analysis. A company’s performance is measured to the

extent to which its asset inflows (revenues) compare with its asset outflows (expenses).

3. Cost upon Implementation

The total product cost (TPC) is the total amount of all costs of operating the plant, selling the
products, recovering the capital investment and contributing to corporate functions such as
management and research development (Peters et al, 2002).

4. Annual Depreciation

Depreciation is the process of allocating in a systematic and rational manner the cost of a capital
asset over the period of its useful life. It takes into account the decrease in the service potential of
capital assets invested in a business venture, resulting from such causes as physical wear and tear
in ordinary use, as in the case of machinery; deterioration primarily by action of the elements, as
in the case of an aging building or the erosion of farmlands; or obsolescence that is caused by
technological changes and the introduction of new and better machinery and methods of
production (Redmond, 2006).

5. Incremental Cash Flow

In evaluating a project, we focus on those cash flows that occur if and only if we accept the
project. These cash flows, called incremental cash flows, represent the change in the company’s
total cash flow that occurs as a direct result of accepting the project. There are several
components that must be identified when looking at incremental cash flows: the initial outlay,
cash flows from taking on the project, terminal cost or value and the scale and timing of the
project. A positive incremental cash flow is a good indication that an organization should spend
some time and money investing in the project