Financial Feasibility

Analysis

Prof. NOEL COBANGBANG, CPA

REB, REA, REC, BB, Author
 • Financial feasibility analysis

– is when you study a project if it is financially viable after taking consideration

its total costs and probable revenues.

• For example, if the cost of developing a new product will incur $100,000 and its
expected increase in revenue will be around $300,000. This entails that the
project is feasible as its revenue is more than its covered costs.

Financial Analysis helps a business

• Business to check where and

• How it will operate,
• Plan about the potential risks,
• Competitors, and
• The Funding needed to get the business operations up and running

FINANCIAL PROJECTIONS INCLUDE:

The P&L should include these major categories:

1.
2.
3.
4.
5.
 6.
7.

1.

1.

FINANCIAL RATIOS

1.
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3.
4.
5.
6.

Price-to-Earnings Ratio (P/E ratio)

• The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company
that measures its current share price relative to its per-share earnings
(EPS). ...
• P/E ratios are used by investors and analysts to determine the relative
value of a company's shares in an apples-to-apples comparison.
FINANCIAL RATIOS

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FINANCIAL ANALYSIS SAMPLE

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• realestatemktg@yahoo.com
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THE ANALYSIS

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COSTS
DESCRIPTION AMOUNT PERCENTAGE

Broker Fees $100,000 55.56%

Marketing fees $40,000 22.22%

Business Expenses $30,000 16.66

Other Costs $10,000 5.56%

Total Costs $180,000 100%

PROFIT AND LOSS STATEMENT

DESCRIPTION YEAR 1 YEAR 2

Sales $10,000,000 $15,000,000

Cost of Sales $2,000,000 $5,000,000
Gross Profit $8,000,000 $10,000,000

Total Expenses $3,000,000 $4,000,000

Net Profit ( Loss) $5,000,000 $6,000,000
 BALANCE SHEET

DESCRIPTION YEAR 1 YEAR 2

Asset 1 $20,000,000 $25,000,000

Other Assets $5,000,000 $7,000,000

Liabilities 1 $15,000,000 $18,000,000

Other Liabilities $5,000,000 $6,000,000

Total Liabilities $3,000,000 $5,000,000

Equity Capital $8,000,000 $10,000,000

Retained Earnings $3,000,000 $3,500,000

Total Shareholders’ Equity $7,000,000 $8,000,000

Total Liabilities and Shareholders’ Equity $15,000,000 $18,000,000

FINANCIAL RATIOS

RATIO AMOUNT 1 AMOUNT 2

4:1 $20,000,000 $5,000,000

0.53:1 $8,000,000 $15,000,000

Profitability

a.

b.

c.

d. = Net Income / Stock equity

e. Net Income / Stock Equity

f. = Net Income-PS Dividend / Net worth-par

value of preferred stocks

g. Profit before interest & Taxes / Total tangible

assets
h. = Sales / Total Tangible Assets

i. Net Income / Total Tangible Assets

Liquidity
a.
Test of Debt Service
a.

Test of Total Debt Coverage

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Funds Flow Analysis

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DESCRIPTION AMOUN PERCENTAGE

Cash, $10,000,00
Beginning

Broker Fees $100,000 55.56%

Marketing fees $40,000 22.22%

Business $30,000 16.66

Expenses
Other Costs $10,000 5.56%
Total Costs $180,000 100%

Net Income $5,000,000

Cash, Ending $14,820,000

Funds Flow Analysis

• b.1. Net Working Capital Formula

1. Net Working Capital = Current Assets – Current Liabilities.

NWC = 20,000,000 – 15,000,000 = 5,000,000

2. NWC = Current Assets (less cash) – Current Liabilities (less debt)

= (20,000,000 – 5,000,000) - (15,000,000 – 5,000,000)

= 5,000,000

3. NWC = Accounts Receivable + Inventory – Accounts Payable.

• = (15,000,000 + 5,000,000) – (15,000,000 – 5,000,000)
= 10,000,000

Test of Operating
Leverage
a. Break-even Volume Analysis
• BEV = Fixed Cost / Selling Price – Variable Costs
• Where:
• Fixed costs are costs that do not change with varying output (e.g.,
salary, rent, building machinery).
• Sales price per unit is the selling price (unit selling price) per unit.
 • Variable cost per unit is the variable costs incurred to create a unit.

Funds Flow Analysis

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• b.1. Net Working Capital Formula

1. Net Working Capital = Current Assets – Current Liabilities.

NWC = 20,000,000 – 15,000,000 = 5,000,000

2. NWC = Current Assets (less cash) – Current Liabilities (less debt)

= (20,000,000 – 5,000,000) - (15,000,000 – 5,000,000)

= 5,000,000

3. NWC = Accounts Receivable + Inventory – Accounts Payable.

• = (15,000,000 + 5,000,000) – (15,000,000 – 5,000,000)
= 10,000,000
Break-even Volume
Analysis
• It is also helpful to note that sales price per unit minus variable cost per unit
is the contribution margin per unit.
• For example, if a book’s selling price is $100 and its variable costs are $5 to
make the book, $95 is the contribution margin per unit and contributes to
offsetting the fixed costs.

Example of Break Even

Analysis
• Colin is the managerial accountant in charge of Company A, which sells
water bottles. He previously determined that the fixed costs of Company A
consist of property taxes, a lease, and executive salaries, which add up to
$100,000.
• The variable cost associated with producing one water bottle is $2 per unit.
The water bottle is sold at a premium price of $12.

• To determine the break even point of Company A’s premium water bottle:

• Break even quantity = $100,000 / ($12 – $2) = 10,000

 • Therefore, given the fixed costs, variable costs, and selling price of the water
bottles, Company A would need to sell 10,000 units of water bottles to break
even.

Graphically Representing
the Break Even Point
The graphical representation of unit sales and dollar sales needed to break even is
referred to as the break even chart or Cost Volume Profit (CVP) graph. Below is the
CVP graph of the example
Explanation:

1. The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-
axis (vertical).

2. The red line represents the total fixed costs of $100,000.

3. The blue line represents revenue per unit sold. For example, selling 10,000 units
would generate 10,000 x $12 = $120,000 in revenue.

4. The yellow line represents total costs (fixed and variable costs). For example, if the
company sells 0 units, then the company would incur $0 in variable costs but $100,000
in fixed costs for total costs of $100,000. If the company sells 10,000 units, the
company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed
costs for total costs of $120,000.

5. The break even point is at 10,000 units. At this point, revenue would be 10,000 x
$12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and
$100,000 in fixed costs.

6. When the number of units exceeds 10,000, the company would be making a profit
on the units sold. Note that the blue revenue line is greater than the yellow total
costs line after 10,000 units are produced. Likewise, if the number of units is below
10,000, the company would be incurring a loss. From 0-9,999 units, the total costs
line is above the revenue line.

Break-even Selling Price

Analysis
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• A key concept in this formula is the fixed cost per unit of sales. ... Then
divided the total fixed cost by the volume of production to calculate the
fixed cost per unit of production.
• Next add the fixed cost per unit to the variable cost per unit to compute a
total cost per unit. This is your breakeven sale price.

Test of Financial Leverage

1.

Test Of Capital Investment

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Test Of Capital
Investment
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• Example:
• For
• i = 7% and
• N = 5 years,
• the capital recovery factor is equal to 0.2439. A $1000 loan at 7% interest
could therefore be paid back with five annual payments of $243.90.
Decision Criteria

2 . Net Present Value =

• With an interest rate of i = 10%, and n = 10 years, the CRF = 0.163. This
means that a loan of $1,000 $ at 10% interest will be paid back with 10
[2]
annual payments of $163.
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• Another reading that can be obtained is that the net present value of 10
annual payments of $163 at 10% discount rate is $1,000.
Decision Criteria
• Benefit/Cost Analysis (Profitability Index)
Internal Rate of Return
• Internal rate of return is a discount rate that is used in project analysis or
capital budgeting that makes the net present value (NPV) of future cash
flows exactly zero.
• How to Calculate Internal Rate of Return
• C = Cash Flow at time t.
• IRR = discount rate/internal rate of return expressed as a decimal.
• t = time period.