FINANCIAL FEASIBILITY

ANALYSIS

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 Financial Analysis
Refers to the assessment of the project’s profitability and
capability to service its obligations

Look at financial statements and the different tools of profitability

Profitability – comparison of costs with benefits

Profitability indicators – assume the concept of time value of

money

Discounting – process of translating future values into their

present worth

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 Cash Flow Statement
Shows the expected annual movements of cash into or out of the
project account.

Cash Inflow (Receipts) are generated by transactions such as:

1) Decreases in noncurrent assets (ex. sale of equipment);

2) Increases in long-term liability (loans, bond-indebtedness);
3) Increase in equity (issuance of capital stock);
4) Noncash expenses which have been deducted from the gross
income for the period and hence, should be added back as
sources of cash (depreciation)

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 Cash Flow Statement
Cash Outflow (Expenditures) may be incurred by transactions
such as:

1) Increase in fixed assets

2) Pre-operating expenses
3) Increase in inventories
4) Loan amortization

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 Cash Flow Statement
Conduct cash-flow analysis even for projects that will not generate
revenues. At the very least, it informs us of the timing of the need
for subsidies.

If the operating deficits cannot be met by subsidies (LGU support)

from the LGU, then the project cannot be undertaken.

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 Sample Cash Flow Statement
Y1 Y2 Y3
Cash Inflow
Revenues P 724,000 P 796,950 P 876,960
Add: Bank Loan 902,496
Proponent’s Contribution 300,832 __________ _________
Total Cash Inflow P 1,927,328 P 796,950 P 876,960
Cash Outflow
Purchase of Equipment P 1,079,105
Operating Expenses 248,447 282,208 322,299
Debt-Servicing:
Interest 157,103 133,699 106,005
Principal 124,151 147,504 175,249
Income Tax ___________ 57,131 79,021
Total Cash Outflow P 1,608,806 P 620,593 P 682,574
Net Cash Inflow P 318,522 P 170,357 P 194,386
Add: Cash Bal. Beginning 318,522 494,879
Total Cash End P 318,522 P 494,879 P 689,2656
 Income Statement
Sometimes referred to as Profit and Loss Statement;

Shows the various items of expected revenues and expenses,

thereby permitting calculation of the project’s net profit on a
periodic basis.

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 Sample Income Statement
Y1 Y2 Y3
Revenues P 724,000 P 796,950 P 876,960
Less: Operating Expenses
Salaries 30,735 33,808 37,192
Fringe Benefits 3,074 3,381 3,719
Fuel Cost 132,439 158,842 190,781
Repairs & Maintenance 53,995 56,653 59,486
Insurance 21,582 21,582 21,582
Oil & Lubricants 6,622 7,942 9,539
Depreciation 126,646 126,646 126,646
Total Operating Expenses 375,093 408,854 448,945
Net Income Before Interest 348,907 388,096 428,015
Less: Interest Expense 157,103 133,750 106,005
Net Income Before Tax 191,804 254,346 322,010
Less: Income Tax 57,131 79,021 102,704
NET INCOME P 134,673 P 175,325 P 219,306
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 Balance Sheet
Indicates the expected financial position of the project at specified
future dates;

Consists of three major accounts (assets, liabilities & equity).

 Assets = Liabilities + Equity

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 Sample Balance Sheet
Y1 Y2 Y3
ASSETS
Cash P 318,522 P 494,879 P 689,265
Land 62,500 62,500 62,500
Building 45,500 41,000 36,500
Equipment 956,959 834,813 712,667
Total Assets P 1,383,481 P 1,433,192 P 1,500,932
LIABILITIES
Current Loan Payable P 147,504 P 175,249 P 208,214
Income Tax Payable 57,131 79,021 102,704
Long-term Liabilities 630,841 455,592 247,378
Total Liabilities P 835,476 P 709,862 P 558,296
CAPITAL
Capital Beginning P 413,332 P 548,005 P 723,330
Add: Net Income 134,673 175,325 219,306
Capital Ending 548,005 723,330 942,636
Total Liabilities & Capital P 1,383,481 P 1,433,192 P 1,500,93210
 Tools of Profitability Analysis
Net Present Value (NPV) – difference between the present values
of project benefits and project costs.

 NPV = summation of present value of total benefits – summation

of present value of total costs

 Decision Rule : Accept projects with NPV greater than or equal to

zero; reject if otherwise

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 Tools of Profitability Analysis
Period Yr1 Yr2 Yr3
Initial Investment P 1,203,328
Revenues 724,000 796,950 876,960
Operating Expenses 248,447 282,208 322,299
Interest Expense 157,103 133,699 106,005
Income Tax ----- 57,131 79,021
Annual Net Flow -P 884,878 P 323,912 P 369,635

Assumption: Financial Discount Rate – 15%

NPV = -P884,878 (.8696) + P323,912 (.7561) + P369,635 (.6575)

= -P769,490 + P244,910 + P243,035
= -P281,545

 Decision : Reject the project

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 Sample Discount Table
Table A. Present Value of P1.00

n 12% 13% 14% 15% 16% 17%

1 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547

2 0.7972 0.7831 0.7695 0.7561 0.7432 0.7305

3 0.7118 0.6931 0.6750 0.6575 0.6407 0.6244

4 0.6355 0.6133 0.5921 0.5718 0.5523 0.5337

5 0.5674 0.5428 0.5194 0.4972 0.4761 0.4561

6 0.5066 0.4803 0.4556 0.4323 0.4104 0.3898

7 0.4523 0.4251 0.3996 0.3759 0.3538 0.3332

8 0.4039 0.3762 0.6506 0.3269 0.3050 0.2848

9 0.3606 0.3329 0.3075 0.2843 0.2630 0.2434

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 Tools of Profitability Analysis
Benefit - Cost Ratio (B/C) – ratio of the present value of benefits to
the present value of costs

 B/C = summation of present value of benefits

summation of present value of costs

 Decision Rule : Accept projects with B/C greater than or equal to

1; reject if otherwise

 In the case of competing projects, select the project with the

highest B/C

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 Tools of Profitability Analysis
Period Yr1 Yr2 Yr3
Initial Investment P 1,203,328
Revenues 724,000 796,950 876,960
Operating Expenses 248,447 282,208 322,299
Interest Expense 157,103 133,699 106,005
Income Tax ----- 57,131 79,021
Annual Net Flow -P 884,878 P 323,912 P 369,635

PV Costs = P1,203,328 (.8696) + P248,447 (.8696) + P157,103 (.8696) + P282,208 (.7561) + P133,699 (.7561)
+ P57,131 (.7561) + P322,299 (.6575) + P106,005 (.6575) + P79,021 (.6575) = P2,090,310.3

PV of Benefits = P724,000 (.8696) + P796,950 (.7561) + P876,960 (.6575)

= P1,808,765.6

B/C = P1,808,765.6 / P2,090,310.3

= 0.86

Decision : Reject the project 15

 Tools of Profitability Analysis
Internal Rate of Return – discount rate which equates the present
values of the project’s costs & benefits, so that
NPV = 0 and B/C = 1

1. Choose a discount rate at which NPV is positive. If the NPV turns

out to be negative, choose a lower discount rate until it becomes
positive;

2. Choose another higher discount rate at which NPV is negative. If

the NPV is still positive, choose a higher discount rate until NPV
becomes negative;

3. Interpolate for the discount rate at which NPV equals zero. This
is the IRR.

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 Tools of Profitability Analysis

t0 t1 t2 t3 t4 NPV at
15%
NPV at
18%
Annual -10,000 2,000 3,000 4,300 6,000 + 269 - 437
Net
Benefit

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 Tools of Profitability Analysis
ra where NPV > 0; r b where NPV < 0; r * where NPV = 0

rb–r* = NPV b_____

r b–ra NPV b – NPV a

Decision Rule : Accept the project if IRR> or = to relevant discount rate;

18 – r * = -437___
18 – 15 -437 – 269

r * = 16.1%

* Accept the project

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 Computing for IRR
Microsoft Excel

Main Menu Insert Sub-menu Function

Function category (left side) “Financial” right side of box “IRR”

Dialog box (indicate data range) another item of information

(guess) enter

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 Project Costs & Financial Sustainability Analysis

The Modified Internal rate of Return (MIRR) resolves two of the

problems associated with the IRR.
1st, IRR assumes that interim positive cash flows are
reinvested at the same rate of return as that of the project that
generated them.

• This is usually an unrealistic scenario and a more likely

situation is that the funds will be reinvested at a rate closer
to the firm's cost of capital.

2nd, more than one IRR can be found for projects with
alternating positive and negative cash flows, which leads to
confusion and ambiguity. MIRR finds only one value.
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 Project Costs & Financial Sustainability Analysis

Payback Period – length of time required to recover the initial

investment

Payback Period = Initial Investment______

Average Annual Gross Profit

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 Project Costs & Financial Sustainability Analysis

Year Revenues Operating Interest Income Tax Net Profit

Expenses Expense

1 724,000 248,447 157,103 ------ 318,450

2 796,950 282,208 133,699 57,131 323,912
3 876,960 322,299 106,005 79,021 369,635

Assumption : Initial Investment – P1,203,328

Average Annual Net Profit for 3 years = P337,332.33

Payback Period = P1,203,328/P337,332.33 = 3 years & 6 months

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Thank You

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