PROJECT FEASIBILITY

Stage of Feasibility.
As a part of Project Definition phase Feasibility is an
important Activity

This needs to be carried out for the chosen option of
the project prior to the implementation.

Feasibility study is an important Gateway to Cross
and if found feasible, its necessary planning for its
implementation is to be carried out.
Feasibility Study Should Address
As per Guidelines of Planning Commission it should
address the following Issues:
Raw Material Survey
Demand Study
Technical Study
Product Pattern
Process Selection
Plant Capacity Size
Raw Material Requirements/availability
Location Study
Project Capital Cost Estimates & Source of Finance
Profitability and Cash Flow Analysis


Raw Material Survey
Source of Raw Material
Natural Source
Product or By-Product of existing Unit
Imported Raw Material
Retrieval / Transportation of Raw Material
Quality of Raw Material
Guarantee of Availability of Raw Material, even if
the project is delayed
Price Guarantees / Forecast of Availability
Demand Study
Demand Study
Demand Study to Establish
Demand :
Based on Usage
Perspective Consumers
Present Consumption
Future Consumption
Possibility for Export
Supply; Based on
Assessment of existing Capacity
Plants under construction
Current Capacity Utilization
Extent of import
Demand Study Contd.
Distribution : Covering Following Issues
Channels of Distribution
Mode of Transport
Mode of Packing
Cost of Distribution
Government Policies

Prices Covering following issues
Domestic and international Price Trends
Control on Price by Government
Prevailing Duties and taxes.

Source of Information
Published literature may provide most of the inputs on
above. However Independent Surveys may also be
required.
Documents usually referred are:
Plan Documents issued by Planning Commission
Documents and Guideline to industries published
by the Department of Industrial Development,
Ministry of Industries pertaining to Licensed and
Installed Capacities, Present Production, imports and
Exports, Technical Know-how, Design & Fabrication,
Future Trends
Economic Survey- Ministry of Finance
Annual Survey of Industries by Central Statistical
Organization

Source of Information Contd
Export and Import (EXIM) Statistics by Ministry of
Commerce
Monthly Bulletin of reserve Bank of India for
different cost indices for various industrial Products
Survey Reports of;
Industrial Development Bank of India
National Council of Applied Economic Research
Times of India Economic Division
Etc
These documents provide details about
Production
Consumption
Import / Export
Prices

Demand Study Contd
Various Market Research Agencies are also available to
carry out such paid studies which at times is resorted
to for an independent view.
Field surveys are also carried out to confirm the
findings.
Accuracy and Dependability of these Sample Surveys
depends on
Capability of the Surveying agencies
Sample Size
Sample Selection
Demand Study Contd
Long range Forecast over the plant life are essential
Various factors that may influence such forecasts,
Gap between study and execution of the project/plant
Length of the study
Any abnormal change in environment
Technical Study
Technical Study
Establish Product Pattern / Plant Capacity
Demand and Raw material availability data along with
economic size of the unit should suffice the basis to
firm up the plant capacity.
Required Financial resources and the best available
technology are additional important input to firm-up
the project.
Product pattern covering main product and any co-
product /by products for a given technology need to be
studied to establish technical as well as economical
viability.
Viable capacity in tandem with demand / supply /
dynamics of project/ rightly projected trends is a crucial
decision during project feasibility.

Technical Study Contd
Process Selection
Economic evaluation of different available
technologies provided by different licensors is another
key step to establish feasibility of the project during
definition phase.

Technical knowhow is available from R&D institutions
under technology License agreements.

It is in the form of technology package developed by
the Project Engineering Company

Technical Study Contd
Technology Package consists of.
Process Design Data, Description & Specifications
Process Flow Diagram
Equipment List
Equipment Specification Data Sheet
Process Piping & Instrumentation Diagram
Instrument Data Sheet
Utility Summary
Indicative Plot Plan
Utility P & I D
Piping Schedule
Operating Instructions


Technical Study Contd
At the time of Prefeasibility, information available for
the technology is not as detailed as listed above.

However costs controlling inputs from Technology
Licensors is gathered to achieve technology selection.

This is in the form of Technical offers giving enough
details to have at least relative assessment of the
technology as well as project feasibility with in +/-
3o% band.


Technical Study Contd
With this information sensible assessments can be
made for the following
Indigenous Vs Foreign Know How
Type of Process and stage of development Raw Material
Requirements
Utilities Requirements
Indigenous / Foreign Components
Product Yields and Pattern
Operating and Fixed costs
Economic Analysis
Reliability of the technology and Licensor.



Technical Study Contd
Selection of the Technology could be based on the
Relative consideration of the following issues

Size of investment

Extent / Component of foreign Exchange

Limitation of Power

Disposal of By Products and Effluents.



Technical Study Contd
If the technology is available in open Domain, quite
detailed information can be obtained at prefeasibility
stage.

Other wise initial screening is based on technical
proposal from the technology licensor which is
firmed up at detailed engineering stage.

Detailed engineering is done by Engineering
Contractors and LSTK contract is the approach
normally resorted to by the owner



Last lecture ..
Out Line of feasibility Study
Raw Material Survey
Demand Study
Technical Study
Product Pattern / Plant Capacity
Process Selection / Inputs as Process Package
Continue with the Location Study..



Location Study
Location Study
Proper selection of site is critical to overcome constraints in
Project management specifically time and Cost.

Normally Financial Institutions Inspect and Ensure the
Reasonability and Authenticity of the Site for the Project.

Site Selection at the early stage also provides better
visibility of the Project to get timely finances.

Location Study Contd.
Different Consideration in Site Selection are:
Availability / Soil / Cost / Seismic Data
Approach To the site
Proximity to the Raw Material Source
Proximity to Products market
Availability of required Utilities e.g. Power / Water / Other
Energy Sources
Availability of Skilled Man Power
Social and political Environment
Applicability of Any Tax Incentives
Drainage and Effluent Disposal Facilities
Engineering Support and Maintenance Facilities
Acceptance by Local Bodies

Location Study Contd.
Site Selection / Considerations are as follows:
Sufficiently Large to accommodate Plant / Machinery /
Buildings / Off Site Facilities / Roads / Parking as per
applicable safety Norms and if Possible for Town Ship.
Preferably Govt. owned with due approval for Industry
Development
Should not Require or at least avoid Displacement of
Population
Should be flat at proper elevation, with proper assessment
of Flooding History.
Soil should be hard enough to ensure Load Bearing capacity
of Machinary as well as not in Earth Quake Prone Zone.
Price effective along with above consideration. Please note
Cost component of Land is not very significant in the
investment of the plant.
Location Study Contd.
Approach to Site / Considerations are as follows:
Proximity with Railway Siding / National High is always
advantageous and should be preferred.

Better connectivity with the Equipment & Machinery
sources, Raw Material Source and Product Market to be
evaluated and ensured.

Regional Railway and Road Maps should be reviewed to assess
above aspects.
Location Study Contd.
Transportation/ Considerations are as follows:
Transportation Cost of the Raw material:
If Raw material Volm is more than that of Products , Plant near the
Raw Material Source are preferred. For example
Cement Plants are close to the source of lime stone.
Refineries are mostly at the coast however also in the Mid land if
pipeline connectivity is available for Crude. Mid Land market is an
advantage.

Else proximity to the Product Market could also be feasible.
An associated OPTIMIZATION would be useful

Along with Transportation of Product and Raw material,
transportation of operating Staff should also be given due Care.
To be evaluted wrt the option of Town Ship
Location Study Contd.
WATER/ An Important consideration for Site
selection
For Water Intensive technologies Availability of Water of
Required Quality and Quantity should be ensured
Pumping of water and its treatment have significant operating
cost
Sea Water is rarely useful and if used as cooling water,
requires expensive Metallurgy and high maintenance due to
corrosion.
If Sub Soil Water is envisaged to be used its availability to be
ensured.
Local Water Courses / Lakes could be dependable source, but
calls for clearances from local Bodies.
Hence the required water of right quality and quantity
influences site selection.

Location Study Contd.
Power/ Considerations are
For Power intensive industries a reliable and economic Power
source is critical. Industries like Aluminum, mini steel, calcium
Carbide involving Electrolysis operations fall in this category.
Option of Captive Power could be required as in India there
is power shortage in most of the states. This calls for an
additional investment.
Options of Captive power or Power form the grid with Stand
by power resource, needs to be carefully evaluated to firm-up
the site
Proximity to Power Generation station will ensure least
voltage fluctuations which means less maintenance of
Machinery and may affect the process of site selection.
Location Study Contd.
Regional Development/ Considerations are
Govt offers Tax incentives if the industry is located in
Backward Areas.

The State Industrial Development Corporations are attracting
industries in socially and economically backward areas
with lucrative packages.

Financial Institutions also support such projects with
relaxed terms of payment.

These options need to be carefully evaluated over the other
site related drawbacks and at times found to over come the
associated short comings.



Location Study Contd.
Effluent Disposal/ Considerations are
Effluent Could be Solid, Liquid and Gasses

Gases can be discharged in the atmosphere if meets emission
norms set by CPCB (Central Pollution Control Board). This
does not pose a major dictate for the site selection.

Problems are more with Solid and liquid Waste disposal.

Proximity to Sea may to some extant ease out the situation
of liquid disposals however for Solid waste disposal site is to be
care fully located with such options possible.

Cost for treatment and their transportation for disposal
have to be carefully taken in to account to firm up the site


Location Study Contd.
Acceptability by Local Bodies/
Along with pollution norms at new Industry has to adhere to
various other clearances by Local Bodies.

Some state governments provide such clearances under single
window approach, However at times it could be a frustrating
experience to get clearance from multiple agencies.

In some states Industrial Areas are marked for specific type of
Industries hence not giving much chance for the owner to
select the site for its location.


Location Study Contd.
So Various Factors for Site Selection are
Technical
Legal
Economic

If Technical and Legal requirements are met, the final site
selection to be based on Economic Considerations.

Associated fixed and recurring costs have to be evaluated with a
NPV model with proper discount flow.

For less reliable inputs available for future/recurring
expenses, due sensitivity analysis can be done to conclude
on the site.


Feasibility study We covered
following
Raw Material Survey
Demand Study
Technical Study
Product Pattern / Plant Capacity
Process Selection / Inputs as Process Package
Location Study
Let us see Financial arrangement.

Financial Arrangements
Financing Arrangements:
Project can kick off only after availability of Required
finances.

Finances required to meet Capital cost to purchase
Plant Machinery, Initial Working Capital,
Preoperative expenses etc.

Though all the funds are not required at Zero Date
but needs to be arranged in advance for a smooth
progress of the project to meet time constraint which
in turn is linked to Cost Constraint.

.

Financing Arrangements (Contd):

Therefore assessment of required funds under
different heads, e.g. Capital, Working Capital and
operating cost is very important at definition Phase.

Required Finances including Debt : Equity Ratio is to
be firmed up to approach any financing Institution.

Financing Arrangements (Contd):
CAPITAL COSTS:
All the cost Incurred in the project prior to its start
commercial Production is treated as Capital Cost.

Therefore capital cost includes:
Assets such as land, Town ship and Buildings
Plant an Machinery, offsite
Initial working Capital and pre-operating Expenses
Design and Engineering Fee
Licensors Fee
All the money will not be required at zero date but
proper planning is necessary to ensure its timely
availability to meet time constraint.




Financing Arrangements (Contd):
CAPITAL COSTS Contd
As per Planning Commission Capital cost covers..
Engineering and Project Management
Lump sum Payment for Technology
Engineering Fee
Management and Supervision during Construction
Enabling works
Construction equipment used
Commissioning Expenditure
Miscellaneous fixed assets
Preliminary and preoperative expenses
Provision for Contingencies
Working Capital




Financing Arrangements (Contd):
Working Capital
Includes:
Maintaining Inventories of
Raw Material
Operating Supplies
Intermediate Products
Finished Products
required to maintain the level of production

This is not Operating Cost as these inventories will be
maintained through out the plant life

Bank can provide loans for part of the working capital for the
start up of he unit against the hypothecation of Raw
material.




Financing Arrangements (Contd):
Working Capital ( Contd )
The borrowed part is termed as Borrowed Working Capital

The Balance Working Capital which financed from long
term sources is treated as Margin Money.

Usually 20-30% of Initial working capital requirement is
provided as Margin Money in estimating project cost.


Financing Arrangements (Contd):
Operating Costs
Includes:
Costs incurred on a Recurring basis which includes
Raw material
Labour
Utilities
Repair and Maintenance
Marketing

And any other incurred year after year when Plant Goes on
Commercial production. Costs like Interest on Loans, annual
Insurance fall in this category.


Financing Arrangements (Contd):
Operating Costs -Contd

Operating cost is a part of feasibility study but only part of it
expected to financed by Long term sources.

This part is known as Preoperative Expenses and include
expenses prior to commissioning of the unit such as Staff
recruitment, Training, Interest Burden, Commitment
Charges and other Establishment Expenses.
Finance Sources:
Could be internal or External
For Small scale project internal resource could be
enough however for large projects External Financing
is normally mandatory.
Terms of financing and Source Can be listed as:.

Terms of Financing Source Normally
Financed for
Short Term Loan from Commercial Bank,
Trade Credits
Working
Capital
Intermediate Term Term Loans, Lease Financing,
Hire Purchase, Fixed deposits
from Public, Govt. Subsidies
Capital Cost
Long Term Financing Common Stock, Debt Capital Cost
Financial Structure
Financial Structure:
DEBT and EQUITY.
Debt means money organized on Loan associated with
Interest Rate.

Equity means money taken from Share Holders and
other partners and associate with whom profits have to
be shared.

With share holders dividend on the shares, linked to
profit is to be given

Financial Structure:
DEBT Vs. EQUITY.
For the entrepreneur, debt Capital is Cheaper as
compared to Equity.
Interest of Debt is Tax deductable however
dividends on Equity are paid out of net Profit After
Tax.
Debt has fixed liability and can lead to legal action and
bankruptcy in case the owner is defaulter
On the other hand Dividend on Equities are to be paid
depending on profits and are less risky.
However cost of avoiding Risk through Equity is high
and Debt is to Equity Ratio needs careful
consideration.





Financial Structure:
DEBT Vs. EQUITY Contd.
A company with more proportion of Debt is
considered to by High Leveraged.

A high Leveraged company makes larger profit when
product demand is high but at the time of recession it
will also incur high losses.
The Debt Equity Ratio is to be fixed considering
above logic and the type of industry to which it has to
be applied.
For petroleum industry it could be typically 1:1 while
for Cement Industry it is limited to 4:1






Financial Institutions
Financial Institutions
Most of the projects are financed though Debts or Termed
loans.
Several National and International institutions finance and
promote the establishment of a new project.
Driver for Financing Institutions is to find the opportunity to
grow their funds by investing in a profitable venture
Some National Financial Institutions are.
Industrial Development Bank of India (IDBI) Principal
Financial Institution of India. Support the other FIs and supplement
resources to promote Industry.
Industrial Finance Corporation of India (IFCI) provide long
term loans for the promotion of Industry both in Public and Private
sector
Industrial Credit and Investment Corporation of India (ICICI);
FI mainly providing foreign currency loans to industrial concerns in
Private Sector

NATIONAL Financial Institutions
(Contd)
Industrial Reconstruction Corporation of India(IRCI) Mainly
Provides soft loans for revival of an industrial unit already closed or
at the verge of closure
State Financial Corporation (SFC) ; Provide loans to small and
medium scale units in respective states. Loan in foreign currency for
machinery imports is also possible.
Unit Trust of India (UTI) : Mobilize the savings of general Public
and invest n various Industrial Units.
Life Insurance Corporation (LIC) : Provide long term finances to
Industrial Units.
The Export-Import Bank of India (EXIM Bank) : The EXIM bank
provide funds for export promotion for engineering and capital
goods. It provides credit to foreign companies and FIs to import
Indian Capital goods and services.
The State Industrial Development Corporation (SIDC): Provide
loans as well as render assistance in putting the Industrial Unit.
FOREIGN Financial Institutions
World Bank (International Bank for Reconstruction and
Development) WB provides loan for less developed member
countries for building Infrastructure. Schools, Irrigation
Dams, Power Plants, Roads, Water Supply etc. e.g. projects
of relevance to society gets special attention.
International Finance Corporation(IFC) Subsidiary of WB
and provide loans to Private Sector.
International Development Association (IDA)- Also a
Subsidiary of WB and provide soft loans to under developed
Countries.
United Nations Development Program(UNDP) and United
Nations Industrial Development Organization (UNIDO)
Institutions of United Nations and provide funds for Industrial
Development
FOREIGN Financial Institutions Contd
International Monetary Fund (IMF) : Part of UN and
Compliments the efforts of WB to promote economic growth

Asian Development Bank (ADB) Finances infrastructure
and Industrial projects in Asia.

Non Residents Indians (NRI) NRIs or their owned (at least
60% )companies, partner ship firms, trusts, societies can invest
in Industrial projects in foreign currency.
Appraisal by FIs:
Stringent Appraisal Procedure to over come to seek
Sanction and clearance.

Main thrust in the appraisal is on the cost estimates
and profitability analysis.

Commercial and Technical aspects also receive enough
attention.


Types Cost Estimates
Accuracy of Cost Estimates
Accurate Cost Estimates are essential not only to
organize funds but also to assess the project feasibility.
Accuracy evolves with more information available on
the project as it progresses.
Following are different types of estimates..
Order of Magnitude Estimate (+/- 60%)
Study Estimate (+/- 30%)
Preliminary Estimate (+/- 20%)
Definitive cost Estimate (+/- 10%)
Detailed Estimate (+/- 5%)
Order of Magnitude Estimates
1. Accuracy +/- 60%
2. Mostly deduced form the investment in a similar project
in past. Different Variants are
Capacity Prorated R2 = R1 X C2/C1
Based on Turn Over Ratio R2 = C X V2 X P
C is capital Rato i.e. Plant investment in Rs / Plant Annual Sales
in Rs.
V2 is Annual sales Volm for proposed plant
P Price / Slaes Volm
Based on six tenth Factor R2 = R1 X (C2 / C1)
0.6
Based on Inflation Index
Installed Cost Now = Installed cost Past X Cost Index Now / Cost
Index in Past
Location Index : Based on Plant cost at Other Location
Prorate with Location Index. These indexes based on
Productivity of the countries are available with Project
Management Companies.
Study Estimates
1. Accuracy +/- 30%
2. Based on Preliminary Flow Sheet and Cost
Controlling Size Parameter of the equipments.
3. Equipment Budgetary cost is estimated using past
data bank or correlations
4. Plant cost estimated using This estimate of
Equipment cost and factors for Civil, Electrical,
Piping, Instrumentation, insulation, installation etc.
5. Budgets are sanctioned based on such estimates
which means there could be about 30% in case
project costs over run.
6. If over run is because of some other mistake in the
cost estimate, it would be difficult to manage for the
Entrepreneur.
Preliminary Estimates
1. Accuracy +/- 20%
2. Based on Firm Technology Package ready for
implementation.
3. At this stage budget allocations are frozen and
firm Implementation Schedule is available.
4. Project Zero Date normally corresponds to this
level of information.
5. As project progresses more information is available
mainly from the quotes from different
equipments and services and uncertainty of cost
estimates reduces as shown in the next slide ....
Successive Cost Estimates
Capital Cost Estimate
P
r
o
b
a
b
i
l
i
t
y

D
e
n
s
i
t
y

Estimate A
Estimate B
Estimate C
Estimate D
Increasing
Mean
More missing
prices are
included with
increase in
clarity
Preliminary Estimates Contd
1. Preliminary estimates Based on Firm Technology
Package means based on following additional
information
Final P&IDs
Overall Plot Plan
Preliminary Equipment and Building Lay out
Final equipment Process Specification Data Sheets
Preliminary Pump and motor List
Preliminary Piping MOC
Final Instrumentation List and Specs.
2. Please note at the stage of Feasibility study above
information is not available and this additional
information will enhance the accuracy of estimates
Definitive Cost Estimate
1. Accuracy +/- 10%
2. Based on Inputs from Detail Engineering.
3. Additional Inputs available at this stage are :
Equipment Purchase Specifications, Vendor
Quotes/Award Cost
Schedule of items for works tender/contractor Quotes
Reasonably accurate Material Take offs for steel, piping
and electrical Equipment based on GADs
House GADs
Detailed Cost Estimate
1. Accuracy +/- 5%
2. Based on completion of Detail Engineering, ordering
of equipment and machinery and award of major
field contracts.
3. Additional Inputs available at this stage are :
Ordered Value of Plant equipment and Machinery
Awarded cost of all Major Contracts
Final Material Take Offs
Ninety Percent Construction Drawings.


Cost Estimates Contd
Estimated Cost can not be better than +/- 5%.

Precise cost estimates are possible after project goes in
to commercial Production.

At feasibility study stage at maximum +/- 30%
estimates are available.

The objective is to set a realistic Target, achievable and
worth striving for.

This self deceiving exercise is to be done to set
realistic goals through sensitivity analysis and
organize for the funds with certain margins.




Various Types of Estimates
Progress of Project
%

E
r
r
o
r

Order of
Magnitude
+/- 60%
Study
Estimate
+/- 30%
Preliminary
Estimate
+/- 20%
Definitive
Estimate
+/- 10%
Detailed
Estimate +/- 5%
Successive Cost Estimates
Capital Cost Estimate
P
r
o
b
a
b
i
l
i
t
y

D
e
n
s
i
t
y

Estimate A
Estimate B
Estimate C
Estimate D
Increasing
Mean
More missing
prices are
included with
increase in
clarity
This gap to be
minimized
Feasibility study We covered
following
Raw Material Survey
Demand Study
Technical Study
Product Pattern / Plant Capacity
Process Selection / Inputs as Process Package
Location Study
Financial arrangement
Capital Cost, Working Capital, Operating Cost
Finance Sources
Financial structure - Debt : Equity
Financial Institutions
Different Types of Cost estimates
Let us now discuss Time Estimates Estimates..




Time Estimates
Estimates of Project Implementation
Schedule
At the definition phase , like cost estimates, - schedule
estimates are also approximate but needs to be
carried out to establish at path for the project.
A qualitative difference in Cost Estimates and Schedule
Estimates:
Cost estimates are of higher importance than Time
Estimates
Cost estimates directly linked to Quantum of Work while
Time estimates can be optimized by parallel scheduling
some activities.
Time is a commodity which can be bought with
increased cost
Basis of Time Estimates
The cost estimates is a summing process of the cost of
all the activities.
However Time estimates is the manipulation of
parallel and sequencing of time required by different
activities .
Time of each activity depends on
Quantum of work
Associated Constraints
Available resources
Obviously all the data is not available w.r.t. above
aspects however approaches adopted to have reasonable
estimates of time schedule are as follows.
Basis of Time Estimates- Contd
Time study Approach:
Time for completing the work (T) is estimated using Total
Quantity of work (Q), Productivity Factor (P) (i.e. output
per man day) and normal Size of Crew (n).

These variable are related as : T = Q/n.P

In real life projects none of these data is available at least
at feasibility stage.

This approach is adoptable for repetitive manufacturing
projects involving labor intensive jobs such as Garment
industry.
Basis of Time Estimates- Contd
Previous Project Data.
Data from completed similar previous project, are
reasonably good basis to have Project Time assessment.

Time required for each activity and with proper
networking of the activities, Project schedule can be
assessed.

Such data may require due judgmental corrections in
view of available manpower and facilities at different
locations / countries.
Basis of Time Estimates- Contd
Guess estimating Approach.
Experienced Project Personnel are asked to guess
project / activity duration.
To cover the uncertainty normally three estimates
are made
t
O
= Optimistic Time
t
p
= Pessimistic Time
t
m
=Most likely time

Expected time is estimated as
t
e
= (t
O
+ 4t
m
+ t
p
) / 6
Basis of Time Estimates- Contd
Range Estimate

Based on range estimates from different vendors
at budgetary proposal stage

Approximate and subject to further negotiation
with short listed vendor contractor as the project
progresses.
Basis of Time Estimates- Contd
Range Estimate / Estimates from Vendors and
Contractors

Based on range estimates from different vendors at
budgetary proposal stage

Approximate and subject to further negotiation
with short listed vendor contractor as the project
progresses.
In competitive scenario these estimates could be
quite optimistic.
Time Taken Vs Time required
Objective is to estimate the time required to complete a
job

Estimates as above are approximate and based on
past experience.

In line with Parkinsons Law,
Work expands so as to fill the time available for its
completion
So what is the realistic time at the project
feasibility stage ?
Allocated and Committed Time
There are some activities will require fixed time like
curing of Concrete or duration for incubation.
So duration of each activity is to be with in the limit
of its compressibility.
Allocation should be reasonable.
In practice a reasonable allocation of time is
given to implementing agency and their
commitment is obtained. If it is not realistic
implementing agency will revert with arguments
and Logic.
This may look like robbing X to pay Y but
practically it is most Pragmatic approach
CAT Vs. RAT
At prefeasibility stage a schedule estimate with in
+/- 20% is reasonable enough to accept.

In this Band their could be Committed Activity
Targets (CAT) and Reserved Activity Targets
(RAT)

RAT is confidential to the owner while planning
with implementing agency is for CAT.

Of course in the end CAT always try to eat
RAT.
Feasibility study We covered
following
Raw Material Survey
Demand Study
Technical Study
Product Pattern / Plant Capacity
Process Selection / Inputs as Process Package
Location Study
Financial arrangement
Capital Cost, Working Capital, Operating Cost
Finance Sources
Financial structure - Debt : Equity
Financial Institutions
Types of Cost Estimates..
Time estimates CAT & RAT
Profitability Analysis




Project Profitability
Project Profitability
Estimates at the project feasibility stage are
approximate and needs to be continuously updated
as the project Progresses.

However, there is no question in progressing on a
project unless it is viable at the zero date of Project
feasibility (during Definition Phase).

Further analysis is such that it ensures that with in the
band of uncertainty, the project remains profitable.
Necessary sensitivity analysis is carried out to ensure
this aspect.
Methods for economic Viability
Following methods are used for Economic Viability

Pay Back Period (PBP)

Return On Investment (ROI)

Net Present Value (NPV)

Internal Rate of Return (IRR)

Benefit Cost Ratio (BCR)
Pay Back Period
Annual Income computed as gross earning less
operating costs excluding Depreciation
This is the time Required to recover the original
Investment.
If not uniform Annual Income it is the number of
years over which income accumulated will be
equal to the original Investment.
Low PBP, more profitable project.
Indicates how fast money sunk in the project can be
recovered
Pay Back Period (Contd)
More relevant for the borrowed investment and for
companies requiring cash f low.

PBP is not the right indicator of profitability as the
purpose of any investment is just not to recover the
investment but to have sustained profitability.

For long plant life projects, inference based on PBP
could be misleading.


Return on Investment
If Cap inv = Rs 150 Lakhs
Project Life 10 Years
Salvage Value at the end of 10 years = 0
Estimated profit Rs 15 Laks for first 5 years and 7.5
Laks for Balance


Return on Investment (Contd)
ROI > Borrowing Rate for the project to be viable

This method better than PBP as it considers the
project life.

Mostly applicable for the projects of short Life period.

For long Project it has limitations as it does not
consider any time value of the money.


Net Present Value
Methods discussed so far do not consider Time Value of Money.
This means all future amounts to be discounted by at least
intrest value to determine their Present Value (PV).



S= Cash Flow at t year
r= discount rate
Net present Value:
The Net Present value of a Project is the Sum of the present Values
of all the cash flows Positive as well negative That are
expected to Occur over the life of the Project.




St = Cash flow at the end of Year t
n = Life of the project
r = discount rate, I = Investment

Assumes all investment
in first year only, not
always true.
Better definition
Internal Rate of Return (IRR)
This method is based on discount rate hence considers
time value of Money.

Internal Rate of Return (IRR) is the discount rate at
which NPV is Zero.

Project with higher IRR are more profitable

IRR should be more that prevailing money rate in order
the project to be viable.
Iterative method is required to estimate IRR
Benefit Cost Ratio

A modified form of NPV
NPV normalized with Investment



BCR > 1 Profitable Project
Higher BCR, more profitability
Functions In Excel
NPV : NPV function calculates that present value for
each of the series of cash flows and adds them
together to get the net present value.
The function is
=NPV ((Discount Rate), Cash Flow Range)

Functions In Excel
IRR : You can think of it as a special case of NPV,
where the rate of return that is calculated is the
interest rate corresponding to a 0 (zero) net present
value.
=IRR(values Range,Initial Gauss of IRR)

Estimated NPV should give zero at this discount rate

EXAMPLE

To Summarize
Prefeasibility Study in definition phase should address
Profitability along with above discussed aspects e.g.
Raw Material
Demand
Technology
Site Selection
Required Budget
Estimated Schedule
Profitability
Accuracy of Estimates improves as project progresses,
however at the Stage of Feasibility accuracy of about
30% is reasonable.
For Profitability Mostly NPV is used as it takes care of
time value of the money.