Академический Документы
Профессиональный Документы
Культура Документы
Project
Feasjbility
StUdieS
RevisedEdition
How to Prepare
Project
Feasibility
Studies
Revised Edition
2012
Manila, Philippines
ij ~evdopm~t aca~e-t\1
of tl1c philiwi~cs
CONTENTS
Page
References ............................................................................................. 98
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
Development Academy of the Philippines
How to Prepare
Project Feasibility Studies
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, socioeconomic, 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
Introduction 3
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
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?
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
4. Mode offinancing
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?
Project Summary 5
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:
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.
Market Study 9
D. DEMAND-SUPPLY ANALYSIS
It is now essential to combine the findings on the demand
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.
10 How to Prepare Project Feasibility Studies
Introduction
General Business Condition
Competitive Conditions
Market Research Results
Sales and Distributions Plan
Advertising and Sales Promotions
Other Related Aspects (such as product formulation,
packaging, legal clearance, raw material procurement,
etc.)
VIII. Budget Summary
IX. Profitability (net income targets)
Market Study 13
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.
b.
c.
d.
e.
f.
g.
2. Determination of:
a.
b.
c.
d.
e.
A. THE PRODUCT(S)
Technical Study 15
Technical Study 17
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
L. LABOR REQUIREMENTS
Technical Study 19
1\.)
::r::
0
...,~
(!)
'"lj
"'(il
~
],
(!)
(:).
'Tl
fE
"'
g
Piece
Picking
[J)
2"
ro
ro
~
0.
~
~
>-""1
0...
('D
""1
CfJ
0
(J
<
0
""1
Bulk
Storage
Area
""1
,.....,..
......._
>--
(J
(J
('D
~
Case
Picking
s
~
CfJ
~
~
~
~
>--
""1
('D
~
..........
~
,.....,..
('D
;:{?tn
0~
""1
PJ
~~
ro
::t>ro
ro ,~. . .,.
""1
~
Case
Picking
Area
Piece
Picking
Area
Bulk
Storage
Area
~
~
<ol
(")
EB
[J)
(J
2"
('D
0.
'<
1\.)
.....
Receiving Area
Financial Study
rn
rn
----~--------u---- --,
-
DODD
DODD!
--oo-o-o_,
DODD
DODD
DODD
DODD
DODD
,--,-r--r-
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.
3.
4.
5.
6.
7.
23
d. Tax exemptions
e. Price ceilings
f. Relevant presidential decrees or letters of instruction
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.
b.
c.
d.
e.
Selling price
Sales forecasts
Unforeseen costs
Production volume
Product mix
Factual
Justifiable
Realistic
Workable
Financial Study
25
1. List down all available sources of funds for both shortterm and long-term financing. Funding options range
Financial Study 27
29
c. Liquidity of inventories=
h. Asset turnover =
Cost of sales
Average inventory
d. Defensive position=
Cash+ marketable securities+ receivables
Projected operating expenditure/number of days
1.
Sales
Total tangible assets
a. Cash-flow analysis:
1) Source of funds:
a.
b.
c.
d.
2) Uses of funds:
2) Uses of funds:
a.
b.
c.
d.
e.
Fixed costs
Sellmg pnce - vanable cost/umt
~hese fina~cial
tools evaluate
35
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.
JV.PY=
i
t=l
ACE; -/{)
(1 + k)'
Where:
ACFt = the annual after-tax cash flow in time period t
hurdle rate; discount rate; required rate of return
k
of the investor
initial outlay (initial cash outlay necessary to
10
purchase assets to put the business into an
operating manner)
the project's expected life
n
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.
Financial Study 37
/O=f ACE;
t=l
(1+/~'
Where:
fACE;
P./=
t= l
(1 + k)'
./0
Where:
ACF t = the annual after-tax cash flow in time period t
k
the discount rate I required rate of return
10
the initial outlay
n
the project's expected life
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).
IO
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
Financial Study 39
Probability Tree
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
A new project
Rehabilitation I Modernization project
Loss prevention project
Improvement I rehabilitation project
Financial Study
41
Additional Benefit
WP
+
Figure 6: Loss Prevention Project
WOP
Project
Cost
Additional Benefit
PROJECT
BENEFITS I
PROFITS
Year
'-~~~~~~~~~rrrrnnnn~mommWP
+
WOP
2
Project
Cost
Year
Additional Benefit
Foregone Benefit
WP
WOP
2
Project
Cost
Year
Financial Study 43
PROJECT
BENEFITS/
PROFITS
Additional Benefit
Foregone Benefit
WP
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)
Project
Cost
WOP
Financial Study 45
Exhibit 2-2
Casa Fernandina
Cash Flow Statement
for the Year Ended December 31, 2004
Exhibit 2-1
Casa Fernandina Pro-forma Income Statement
for the Year Ended December 31, 2004
Year1
Sales Revenue
Hotel
Coffee Shop
Total Sales Revenue
Cost of Goods Sold
Free Breakfast
Pastries, etc
Total Cost of Goods Sold
Gross Revenue
Operating Expenses
Salaries & Wages
Depreciation
Promotional Materials
Rent Expenses
Utilities
Aircon
Lights
Water
Other Electricity
Phone
Office Supplies
Housing Supplies
Total Operating Expenses
Operating Income
Other Income
Function Room
Rent from
Concessionaire
Year2
1,920,000.00 2,028,000.00
889,560.00
889,560.00
2,809,560.00 2,917,560.00
Year3
Year4
3,030,000.00 3,030,000.00
1,317,501.90 1,317,501.90
4,347,501.90 4,347,501.90
YearS
::.
4,008,000.00
1,768,953.60
5,776,953.60
Receipts
Collections from Customers
Payments
Tosuppf!eCS
To employees
F01 income lax
Total Cash payments
Net Cash Inflow from
()pela!rig Adlvi1ies
Yearo
Net Income
3,471,560.00
4,901,501.90
5,225,501.90
000
6,654,953 60
000
987,037.50
1,568,486.85
150,424.75
2,705,949.10
1,133,300.56
1,615,541.46
144,699.65
2,893,541.67
1,450,293.86
1,ffi,095.60
432,844.72
3,660,234.18
1,405,723.65
1,830,408.47
507,945.89
3,744,078.00
1,851 ,392.35
2,013,449.32
789,964.56
4,654,800.22
657,610.90
578,018.33
1,241,267.72
1,481,423.90
2,000,147.38
(362,960.40)
(5,000.00)
(2,537,690.35)
0
0
0
0
(600,1XM!OO)
(853.850.00)
(326,1XM!OO)
0
0
0
0
0
0
0
0
0
0
(788,006.00)
0
0
0
0
(5,473 500.75)
(5,473,506.75)
657,610.90
578,018.33
1,241,267.72
1,481,423.90
0
2,000,147.38
574,126.38
26,493.25
600,619.63
578,018.33
600,619.63
1,178,637.97
1,240,005.08
1,178,637.97
2,418,643.05
1,400,857.70
2,418,643.05
3,819,500.74
1,998,536.47
3,819,500.74
5,818,037I2
112,752.00
112,752.00
386,717 76
467,283.96
580,035.96
580,035.96
3,767,465.94 3,767,465.94
134,136.00
638,727 55
772,863.55
5,004,090.05
1,568,486.85 1,615,54146
321,472.69
321,472.69
17,600.00
18,128.00
139,392.00
143,573.76
1, 777,095 60 1,830,408.47
321.472.69
321,472.69
19,232.00
18,671 .84
152,317.40
147,880.97
2,013,449.32
321.472.69
19,808.96
156,886.92
260,968.45
32,621.06
244,657.92
24,465.79
52,272.00
40,776.32
78,942.96
322,880.96
40,360.1 2
302,700.90
30,270.09
57,499.20
50,450.15
97,671.49
2,968,826.19 3,058,135.05
3,413,450.80
FmanclngActivilies
Equity
5,500,000.00
1,590,639.25
5.500,1XM!OO
176,000.00
22,000.00
165,000.00
16,500.00
43,200.00
27,500.00
53,240.00
195,520.00
24,440.00
183,300.00
18,330.00
47,520.00
30,550.00
59,144.80
2,550,391.54 2,657,520.71
(147,793.54)
(152,754 71)
250,931.20
31,366.40
235,248.00
23,524.80
47,520.00
39,208.00
75,906.69
798,639.75
709,330.89
314,000.00
314,000.00
314,000.00
578,000.00
578,000.00
240,000.00
240,000.00
240,000.00
300,000.00
300,000.00
Permit Fees
Construction Cost Eslima!e
Other Cons!ruction Materials from
3RuOOown Antique Houses
Antiques &lnteoor ~
Landscaping &Ex!eoor Design
Materials &Equipments
Net Cash OutfMJw from
inves!Nlg adivilies
Net Cash flow before financing
406,206.46
150,424.75
255,781.71
401,245 29
144,699.65
256,545.64
1,352,639 75 1,587,330.89
507,945.89
432,844 72
919,795.03 1,079,385.01
2,468,639.25
789,964.56
1,678,674.69
0
0
0
0
0
0
Cash~from
NETCASH
Beginning Cash
Ending Cash
Measurement
Gross Income
Tax Expense
3,363,560.00
91,368.00
85,536.00
241 ,069 50
321.426.00
406,962.00
412,794.00
2.402,598.00 2,504,766.00
YearS
Year4
Year3
Year2
Year 1
26,493.25
0.00
26,493.25
Value
Decision Criteria
Greater than required by the investor
Php3,054,196
20%
Payback Period
Financial Study 47
Exhibit 3
Step-by-Step Process in Computing
for Internal Rate of Return Using Excel
Exhibit 2-3
Casa Fernandina
Pro-forma Income Statement
for the Year Ended December 31,2004
Year1
Year2
Year3
Year4
YearS
ASSETS
Cash
Inventory on Hand
Total Current Assets
600,619.63 1'178,637.97
3,128.02
3,128.02
603,747.65 1'181 ,765.98
5,473,506.75 5,152,034.06
321,472.69 321,472.69
4,830,561.37 4,509,088.68
321,472.69 321,472.69
4,187,615.99
321,472.69
4,509,088.68 4,187,615.99
6,932,122.38 8,011,507.39
3,866,143.30
9,690,182.08
Accounts Payable
Totalliabilit1es
Equity
Capital
5,500,000 00 5,500,000.00
Begmnmg Reta1ned Eammgs512,327.35
255,781 71
Retained Earnings
255,781 71
256,545.64
End1ng Reta1ned Earnings
255,781 71
512,327.35
Total Equity
5,755,781 71 6,012,327 35
5,500,000.00
1,432,122.38
919,795.03
1,432,122.38
6,932,122.38
5,500,000.00
2,511,507.39
1,079,385.01
2,511,507.39
8,011 ,507 39
5,500,000.00
TOTAL LIABILITIES
& EQUITY
6,932,122.38 8,011,507.39
9,690,182.08
5,755,781.71 6,012,327.35
1,678,674 69
4,190,182.08
9,690,182 08
1. Go to the cell where you want to put the value of Internal Rate of
Return (IRR).
2. Type the following: = IRR(values, guess)
3. Format in Excel
4. The 'guess' is an arbitrary rate.
5. The values should
come from the net
cas h flo w from
operations. Keep in
mind that the first
value should be
equal to the total
project cost and
should be a negative
value.
6. Another way is to
click on the 'fx' and
1=1RR(
J
IfliR;;c;;. IM"u I
look for Financial,
then check IRR on
the list.
7. Press 'Enter' to get the Internal rate of return
c
Year (i
a."n Oper.t!DJS
Exhibit 2-4
Casa Fernandina: Financial Ratios
Operating Profitability
Year 1
Vear2
Vear3
Vear4
0.07
0.06
0.19
0.19
0.25
0.14
0.14
0.31
0.37
0.43
0.49
0.49
0.63
0.54
0.60
0.55
0.60
0.96
1.04
1.49
Inventory Turnover
48
0.04
0.04
0.13
0.13
0.17
77.07
102.76
106.43
88.08
128.70
Vez 2
12tt00
240COO
Year 3
~
... "::Il
YearS
ORIOI
Return on Equity
..
.-45((00
Yeor 1
...
Financial Stud y
49
Exhibit 4
Casa Fernandina: Break-even and Sensitivity Analysis
BREAKDOWN OF FIXED AND VARIABLE EXPENSES
HOTEL
Salaries & Wages
VARIABLE
FIXED
126,542.95 108,942.00
Depreciation
Promotional Materials
Rent Expense
108,942.00
26,789.39
25,182.03
25,182.03
1,466.67
1,466.67
1,466.67
11 ,616.00
Utilities
10,454.40
10,454.40
Air-conditioning
8,000.00
5,600.00
3,360.00
2,240.00
1,607.36
72,000.00
95,310.00
COGS
7,374.60
34,438.50
8,906.40
27,550.80
11,133.00
34,438.50
1,161.60
Gross Revenue
50,225
41,810
63,094
67,759
60,867
60,872
Fixed Expense
157,057.45
25,991.45 157,660.09
26,029.91 126,128.08
20,823.93
Break-even Sales
180,118.21
47,400.61 179,915.66
36,613 64 149,197 78
32,605.22
2,400.00
300.00
Water
7,500.00
5,250.00
3,150.00
2,100.00
2,250.00
315.00
210.00
225.00
750.00
525.00
Phone
3,600.00
3,240.00
3,240.00
360.00
Office Supplies
1,250.00
1,125.00
1,125 00
125.00
Housing Supplies
2,420.00
2,420.00
2,420.00
26,029.91
190,935.01
164,905.09
Sales Units
Percentage Change
in Break-even
Beg. Cash
Fixed Expense
Break-even Sales
186,497.23
Sales
Variable Cost
Gross Revenue
Sales Units
Percentage Change
in Break-even
2.59
0.62
2.50
0.38
2.07
0.34
2072%
45.38%
-3.53%
-1016%
-20.00%
-2000%
CASH BUDGET
1
20% Increase
in Fixed Cost
3.13
157,660.09
20% Increase
in COGS
COFFEE
95,310.00
280.00
20% Increase
in Sales
HOTEL
72,000.00
420.00
MONTHLY
COFFEE
76,248.00
700.00
7,245.00
HOTEL
COFFEE
20% Decrease
in Fixed Costs
57,600.00
1,000.00
20% Decrease
in COGS
Sales
Lights
Other Electricity
HOTEL
17,600.95
20% Decrease
in Sales
COFFEE
5
66,828.88
864,570 45 1,662,312 02
Inflow
Outflow
COFFEE
Ending Cash
w/odebt
service
263,475.05
95,310.00
86,400.00 114,372.00
Debt Service
595,518.05
41,326.20
11,133.00 34,438.50
COFFEE HOTEL
53,984
75,267
79,934
Ending
Balance
(332,043.01) (331,279.08)
(96,153.74)
66,828.88
-2385%
3.80%
12.76%
2.96%
-8.62%
Socio-Economic Study
industry on the other hand, the project may r~sult .in. ii.n pr?ved
product quality and/or decreased prices~ e~peCially ~f It IS h1ghly
competitive in quality and pricing upon Its mtroduchon.
Figure 8. Aspects
Social and Economic
Factors Affected
Employment
Socio-Economic
Contributions
Improved
Standard of
Living
Utilization
of Local
Materials
Socio-Economic Study 53
Organization and
Management Study
FORMULATION OF GOALS
Goals or o~jecti~es ~re the desired results of a particular undertaking.
Th~y provide direction for all decisions and form the criterion against
which actual work accomplishments can be measured. Goals can be
formulated for the marketing, technical, and financial aspects of the
feasibility study.
In most ~ases, goa~s and objectives are written with quantifiable
tar~ets. Th1s makes It easy to determine if the goal set has been
achieved or not. An example of a marketing objective is: "To acquire
at ~ea~t 1~% ~arket share." For the technical aspect of a study, an
ObJective IS to mcrease production capacity by 20% in the next two
years.
CHARACTERISTICS OF WELL-DESIGNED
GOALS AND OBJECTIVES
Single proprietorship
Partnership (general or limited)
Corporation ranging from small to large-scale enterprises
Cooperative organization (consumers, producers, marketing,
or financing)
D. ORGANIZATIONAL CHART
The names of specific individuals for certain key positions are set
forth in this section. The necessary educational background, work
experience and training, and net worth of each position must be
adequately described.
F. PROJECT SCHEDULE
57
III.
1
1
1
EIAREVIEW
DECISION
APPROVE
DENY
59
Fishery Project
LPG Storage
Plastic Recycling
Public Market
Slaughter House
Tourism Project
Cold Chain
Grains Highway
Ro-Ro Terminal
EIS SUBMISSION
DECISION ON EIS
120 Working Days
EIS is RETURNED
to the PROPONENT
Source: www.emb.gov.ph
Detailed Outline of a
Project Feasibility Study
Review Process of an Initial Environment Examination (IEE)2
lEE SUBMISSION
I. Project Summary
A. Name of Enterprise
B. Location
C. Descriptive Definition of the Project
D. Project Objectives
E. Feasibility Criteria
F. Highlights of the Project
. .
G. Major Assumptions and Summary of Fmdmgs
H. Conclusion of the Study
A. Product Description
B. Demand-Supply Analysis
C. 4 P's Study (Price, Place, Promotion, Product)
D. Factors Affecting the Market
E. Survey Results
F. Analysis of Data Gathered
G. Conclusions and Recommendations
III.Technical Study
A. The Product I Service
B. Manufacturing Process
C. Plant Size (Capacity) and Production Schedule
D. Machinery and Equipment
E. Plant Location
F. Plant Layout
G. Building Facilities
H. Raw Materials and Supplies
I. Utilities
63
J. Waste Disposal
K. Production Cost
i. Direct Materials
ii. Direct Labor
iii. Manufacturing Overhead
L. Plant Organization
M.Appendices
i. Plant Layout I Equipment
ii. Equipment flow sheet
iii. Equipment listing and cost
iv. Utilities calculation
v. Plant facilities breakdown of cost
vi. Projected cost of production
IV. Socio-Economic Study (Normally used for government projects)
A. Socio-Economic Benefits in terms of:
i. Employment and Income
ii. Taxes
iii. Supply of commodities
iv. Demand for materials
Pointers in Evaluating a
Project Feasibility Study
IF THE PREPARATION of a project feasibility study is vital to
the success of an undertaking, the evaluation of the study is just as
important. The recommendations contained in the study will be the
basic guidelines in formulating a final decision, and the decision
rests heavily on the evaluation of these recommendations. How
then should one go about evaluating a project study? How can one
prioritize the less relevant items in an exhaustive study or determine
the full implications of a simple but concise project feasibility study?
Following is a brief discussion of the major parts of a project study
which are generally of prime importance in making a "go" or "no
go" decision.
A. MARKET STUDY
65
FINANCIAL STUDY
The financial study requires the preparation of a number of
financial statements and the analysis of several benchmarks
in the form of ratios culled from the financial statemen_ts. As
such the entire study practically boils down to a questiOn of
't bt"l "ty This is so because a profitable income statement
profi a 1 .
fi bT
will generally mean a favorable cash fl?w. S~nce pro ta 1 tty
and liquidity virtually determine the finan~tal health of any
firm, profitability becomes the single most Important fact~r,
not only in showing the viability of _the p_roduct but al~o m
ultimately attracting investments or financmg to the proJect.
Profitability is not the same as_ profit: The distin~tion is
important since the profit figure ts,
Itself, meamngless,
while profitability is a measure of net mcome_ as a per~entage
of sales. It takes other factors into consideration, partlcu_larly
revenue, and therefore gives a better picture of overall busmess
performance.
?Y
!he
69
A Final Note
AFTER GOING THROUGH the major components of a project
study, one must evaluate the study as a whole. Obviously, negative
findings on certain critical issues, such as lack of demand, nonavailability of raw materials, or non-profitability, would definitely
discourage a proponent from pushing through with the project. But
if the project looks good as a whole despite minor uncertainties here
and there, it may still be considered feasible.
This is where qualitative insights come in. Since the project study
is essentially a systematic approach that relies heav~y o~ qu~ntitative
information, it cannot always fully capture the 1mphcahons of a
situation where much qualitative analysis is required. The project
study employs qualitative insights to temper its qu~titative ~dings.
But this may, at times, be inadequate since the prOJeCt study 1s made
from an objective perspective.
The project evaluator injects a certain amount of subjectivity in
evaluating the project's recommendations. S/He adds "gut feel"
to the qualitative perception and supplies what the project study
writer may have left out or could not systematically compr~hen~.
Such insights become critical especially when some uncertamty IS
concluded from quantitative findings.
Suppose a project seeks to go into the large-scale p~odu~tion of
an item that has not been much in demand. From the histoncal and
quantitative viewpoints, the study would project an uninspiring
demand growth pattern in the future. This would not justify the
project's viability. If, however, the product in mind is heavily
dependent on people's tastes which are expected to change for one
reason or another, resulting in a sharp rise in the product's demand,
the feasibility of the project cannot be totally ruled out.
A Final Note
71
Annexes
ANNEXA
too small to push the study for further research and development, or
the results may be so attractive that despite the crude estimate, ' gut
feel' for a project's potential success may be justified.
Market Tests
Substitute Method
The .Substi~te.M~thod requires the researcher to find a product or
service that IS Similar to or a possible competitor of the new business.
J?at.a about that product or service can be used to determine the upper
hmit ~n potential sales. Research and exploratory surveys can also
help ~nd out the potentials of the product/ service in the market.
Once mformation is made available, potential upper limits can be
ascertained and figures can be scaled down by market realities, such
as customer preferences at various price levels.
Needs Analysis
Surveys are the only way to find out if there is a need for the new
produ~t or ser:ice. The survey to be conducted can give preliminary
m~uts If there IS a market for the product or service. Survey data will
be mterpreted. to come up with a sales forecast. Informal surveys and
careful analysis may show that the highest attainable sales volume is
74 How to Prepare Project Feasibility Studies
Annexes 75
Economic Indicators
Economic indicators describe the situation prevailing during a given
time period. Researchers can get inputs from these indicator~ to _what
are the factors affecting sales or demand for the product/serviCe m the
market. Such indicators can be accessed from government agencies
and from various private organizations like trade associations.
Some commonly used economic indicators are as follows:
Gross national income
Personal income and expenditure
Consumer prices
Employment rate
Automobile registrations
No. of women in
in the workforce
YEAR
Tuition Fee
(per unit)*
Number of
Enrollees*
1998
250
20,000
1999
300
40,000
2000
300
41,000
No. of people
eating outside
their homes*
1998
120,000
40,000
1999
160,000
80,000
2000
140,000
60,000
2001
350
50,000
2001
180,000
120,000
2002
375
50,000
2003
450
47,000
140,000
enrollees
120,000
100,000
80,000
60,000
/~
60,000
40,000
.....
30,000
40,000
.... ~
50,000
20,000
20,000
10,000
50,000
100,000
150,000
200,000
0
0
400
500
Series1
- L inear (Series1)
300
No. of enrollees
200
100
Series1
- L inear (Series1)
Summary of Output
Regression Statistics
Multiple R
0.755125305
R Square
0.570214226
Adjusted R Square
0.462767783
Standard Error
8288.189961
Observations
Annexes 79
AN OVA
Of
Regression
Residual
Total
ss
MS
Significance
F
0.082603638
Coefficients
Standard Error
t Stat
P-value
320.6751055
18121.76433
0.017695579
0.986729182
X Variable 1 121.5189873
52.74983917
2.303684509
0.082603638
Lower95%
Upper95%
Lower95.0%
Upper95.0%
-49993.40877
50634.75898
-49993.40877 50634.75898
X Variable 1 -24.93804541
267.9760201
-24.93804541
Intercept
Intercept
267.9760201
Residual Output
Observation
Predicted Y
Residuals
30700.42194
-10700.42194
36776.37131
3223.628692
36776.37131
4223.628692
42852.32068
7147.679325
45890.29536
4109.704641
55004.21941
-8004.219409
NOTE: To. derive the summary of output the researcher should use
the an.alysis tool pac~ .in Excel and use regression analysis to derive
the Y-mtercept coefficient and the r-squared.
In the su~mary of output, Y-intercept is 320.68 and the slope is
121.52 (X.Vanable ~).Once theY-intercept and the slope are known,
the equation ~f the lme can be determined from the general expression
for the equation of any line:
Y::;a+ bX
Where:
a= Y-intercept
b =slope
Number of
Enrollees*
(Y}
250
300
300
350
375
450
1: 2 025 L
62,500
90,000
90,000
122,500
140,625
202 ,500
5,000,000
12,000,000
12,300,000
17,500,000
18,750,000
21,150,000
20,000
40,000
41,000
50,000
50,000
47,000
248.ooo
X2
XY
.L:
86.7oo.ooo
.L:
708,125
*Hypothetical value
Annexes
81
...
Substituting the preceding total and with n=6 in the two equations
above:
248,000 = 6a + 2,025b
86,700,000 = 2,025a + 708,125b
Properties of the least-square line:
1. The sum of the deviations will always be equal to zero.
2. The sum of the deviations squared is a minimum; i.e., if the line
had been drawn in any other position, the total of the squares
of the resultant deviations would have been greater.
n_Lnr-{_Lx*_LY}
r= ~n_L2-(LxJ lnLY -(LY)2
The coefficient of correlation is 1 whenever the two variables are
correlated perfectly. The weaker the relationship between the two
variables, the greater will be the squared vertical deviations of the
actual points from the line of best fit. This will increase the size of
the fraction and reduce the value of the coefficient of correlation. The
minimum value it can assume is 0, which would indicate a complete
absence of any relationship between the variables. The following
represents a generally accepted rule of thumb:
Table 3: r-value and its interpretation
R-value
Interpretation
0.90- 1.0
Very high correlation
f--:--:------1-0.70- 0.90
High correlation
1-------+-0.40- 0 .70
Moderate correlation
1-:--:-:-----+-0.20 - 0.40
low correlation
f--:--:------1-0.000.20
Slight correlation
L
__ _
_ _--L__
Application to Forecasting
A company may find that a relationship exi~t~ be~ween th~ sales of
some or all of its products and some economtc mdtcator. ~1s me~s
that the resultant least square line would suggest a relatively high
degree of correlation. A company should try_ to fir:d an indicator
which coincides with its sales but whose magmtude IS forecasted by
an organization that can be trusted upon. Once the indicator_is f?und,
the firm can express the relationship of its sales and the mdtcator
either graphically or in the form of an equation.
Limitations of economic indicators as a forecasting tool:
1. The need for finding an appropriate indicator.
2. The relevant indicator is normally an annual index whereas
the company may want to forecast on a month-to-month basis.
3. It does not lead itself to the forecast of new products because
no past data exists on which a correlation analysis can be ~ased.
4. It is expected to yield fairly accurate forecasts for a penod of
approximately one to two years. .
.
.
. .
5. Indicator proves that a past relationship existed and It 1s not
necessarily true that this relationship will continue in the future.
Time-Series Analysis
Not all past economic or sales behavior can be neatly exten_ded
with a straight line. Much economic activity is charactenzed
by ups and downs. Time-series analysis technique can cope
with such variation.
Makes use of hard data, projecting past experience into the
future on the assumption that the future will be somewhat like
the past.
In this approach, the company analyzes ~ts past pe~formance
to determine if there is a trend. The trend IS then proJected into
the future and the resultant indicated values are used as the
basis for a forecast.
Annexes 83
ANNEX B
Annexes
85
and suppliers' credits, and their respective uses. Also indicate (if
possible):
I. Amount and terms of financing from each source selected
Annexes 87
E.7below)
2. Profit and loss (or income statement)
3. Cash flow statement
4. Balance sheet statement
The formats for these statements are as per attachments A, B, C
and D.
C.
ANNEX C
1. Name of firm
2. Location
a. Head office
b. Plant site
3. Brief description of the product
. .
4. Highlights of major assumptions such as o:-arke~ proJeCtions, share
and prices, investment costs, method of financmg, e~c.
5. Summary of findings and conclusions on the followmg:
a. Market feasibility
b. Technical feasibility
c. Financial feasibility
B. GENERAL INFORMATION
1. Management of the project
.
.
.
a. Management during the operatmg penod \type of busme~s
organization, organizational ch~rt and fun~twns of ~ach umt,
management personnel specifymg the duties and ti~e to be
devoted to the project, qualifications, and compensatwn! ..
b. Labor (skills required of each job, recruitment ~~~ tr)ammg
programs, compensation, fringe benefits: and. facthhes .
c. Professional firms or consultants to be hued, If any.
d. Status of timetable of the project.
e. Other information, for example, on pending litigations,
information regarding intangibles, etc.
Annexes 89
C. ECONOMIC ASPECTS
1. Market study
a. Export demand
1) Consumption in targeted importing countries for the past
10 years. Also state the major consumer industries or sectors
of the products.
2) Projected consumption in targeted importing countries
for the next 10 years. Indicate methods used and factors
considered in preparing the projections.
b. Domestic demand (whenever applicable)
1) Consumption for the past 10 years. Also state the major
consumer industries or sectors of the products.
2) Projected consumptions for the next 10 years. Indicate
methods used and factors considered in preparing the
projection.
c. Export supply
1) Supply in the targeted importing countries for the last 10
years, broken down as to source, whether imported or
locally produced. For imports, specifications should be
made on the form in which the goods are imported, the
country of origin, and the brands.
For locally produced goods, the companies producing
them, their production capabilities, and brands used shall
be specified.
2) Project supply in the targeted importing countries for the
next 10 years.
3) Factors affecting trends in past and future supply in the
targeted importing countries.
d. Domestic supply (whenever applicable)
1) Supply in the targeted importing countries for the last 10
years, broken down as to source, whether imported or
locally-produced.
2) Projected supply for the next 10 years.
3) Factors affecting trends in past and future supply in the
targeted importing countries.
Annexes 91
D. TECHNICAL FEASIBILITY
1. Product(s)
6. Plant layout
.
a. Description of the plant layout and the layout chart
b. Effect of layout on materials flow and treatment of matenals
handling and storage.
c. Provision for expansion.
7. Structure
a. Building and costs of erection
b . Other structures and their respective costs.
c. Land improvements such as roads, drainage facilities, etc., and
their respective costs.
8. Raw materials
a. Description and specifications of their physical, mechanical,
and chemical properties.
.
b. Alternative raw materials considered and the factors used m
selecting the raw materials.
c. Material balance.
d. Availability, continuity of supply, and current prospective
sources.
e. Current and prospective cost of raw materials and terms of
any long-term contracts.
9. Utilities
Electricity, fuel, water, steam, and supplies specifying the uses,
quantity required, balance of utilities, availability, sources and
alternative sources and costs.
10. Waste disposal
a.
b.
c.
d.
e.
Annexes
93
E. FINANCIAL FEASIBILITY
ANNEX D
.
.
a. Description and prospects for the sector in which the proJect w1ll
operate
.
b. Opportunities, constraints and issues related to the p~oJect sectbor
c. Sustainable development objectives likely to be contnbuted to y
the project
.
d . Government policies and strategies relevant to the proJeCt sector
e. Extent to which applicable policies are enforced
f. Overlap of government and ADB objectives
Annexes 95
XVII.
References
Annexes 97
REFERENCES
Mayer, Raymond R. Production Management (2nd Edition). Tokyo: McGrawHill Book Company, 1968.
McCarthy, E. Jerome. Basic Marketing: A Managerial Approach (Sth Edition).
Illinois: Richard D. Irwin, Inc., 1975
Parel, Cristina, et. AI. Introduction to Statistical Methods (With Application).
Manila: Macaraig Publishing Company, Inc., 1966.
WEBSITES
http:/;www.su rveysystem .com
http://home.ubalt.com
http:/;www.smallbusinessresources.com
http://www. va-interactive.com
http:/jobelia.jde.aca.mmu.ac.uk
http://www.emb.com
http://www.gdrc.org
References 99
Joanne Q. Nuque
Project Manager
Shirley T. Cubilla
Project Assistant