Feasibility Study and Financial Analysis

Presented By
Tanvir Mohammad Hayder Arif
PhD Research Fellow (Financing Entrepreneurs) (CU)
MSc. International Business Management (UK)
BBA and MBA (Finance) (CU)
Associate Professor, Department of Finance,
University of Chittagong
Ex-Assistant Professor, USTC; Ex-Lecturer AUB
Ex-Regional Head, NITOL-TATA Group
Trainer: BIAM, BIM, KPA, CTA
Web: www.greensociety-tanvir.org
Youtube: Green Society Bangladesh
Email: tanvir.arif@cu.ac.bd
Mob. 01715-174403

tanvir.arif@cu.ac.bd 1
 Business Case Analysis & Business Plan

• Assessing situations.
• Sorting out and organizing key information.
• Asking the right questions.
• Defining opportunities and problems
• Identifying and evaluating alternative courses of action.
• Interpreting data.
• Evaluating the results of past strategies.
• Developing and defending new strategies.
• Interacting with other managers.
• Making decisions under conditions of uncertainty.
• Critically evaluating the work of others.
• Responding to criticism.
The use of business cases was developed by faculty members of
the Harvard
Graduate School of Business Administration in the 1920s.
tanvir.arif@cu.ac.bd 2
 USC
University of Southern California
C S E Center for Software Engineering

Many Tools and Techniques

Analysis Techniques
• Budgeting and Forecasting
• Break-even analysis
• Cause and effect analysis
• Cost/benefit analysis
• Value chain analysis
• Investment opportunity analysis (NPV)
• RATIOs
• PESTLE analysis (external Environment)
• Internal Environment (Mission, Vision,
Goals and Objectives, Strategies and
Resources)
• SWOT
• Payback analysis
• Sensitivity analysis (ROA)
• Trend analysis (Regression)
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Preparation
of a Master
Budget
 Qualitative forecasting methods

Grass Roots: deriving future demand by asking the person

closest to the customer.

Market Research: trying to identify customer habits; new

product ideas.

Panel Consensus: deriving future estimations from the synergy

of a panel of experts in the area.

Delphi Method: similar to the panel consensus but with

concealed identities.
 Quantitative forecasting methods

Time Series Analysis: models that predict future demand based

on past history trends. Aim is to find the pattern in the data set
in making forecasts.
Sensitivity Analysis: Decision makers use sensitivity analysis to help
decide what changes in a given situation are most likely to produce a
particular outcome.

Regression Analysis: A statistical method used to determine the impact

of one/more variables on another variable.

Examples: White Board

 Capital Budgeting for Feasibility
Study

• Payback period
• Net present value
Capital Budgeting Techniques—Payback
Period

Number of years it takes to recapture the initial

investment.
Year Cash Flow Cumulative CF
0 $(7,000) $(7,000)
1 2,000 (5,000)
2 1,000 (4,000) } 2<Payback<3
3 5,000 1,000
4 3,000 4,000
Capital Budgeting Techniques—Payback
Period

Year Cash Flow Cumulative CF

0 $(7,000) $(7,000)
1 2,000 (5,000)
2 1,000 (4,000)
3 5,000 1,000
} 2<Payback<3
4 3,000 4,000
 

# of years before  $ investment remaining
 ÷
 ÷  ÷
Payback= full recovery of
 ÷
+  to be recaptured ÷
 ÷  ÷
period 
original investment÷  $ cash flow in ÷
 ÷  ÷
   year of payback ÷
 

= 2 + $4,000
$5,000
= 2.80 years
 Capital Budgeting—Discounted
Payback Period

Payback period computed using the present values of the

future cash flows.
Cumulative

Year Cash Flow PV of CF PV of CF

0 $(7,000) $(7,000.00) $(7,000.00)
1 2,000 1,739.13 (5,260.87)
2 1,000 756.14 (4,504.73)
3 5,000 3,287.58 (1,217.14) } PBdisc= 3.71
4 3,000 1,715.26 498.12
A project is acceptable if PBdisc < project’s life
 Capital Budgeting—Net Present
Value (NPV)

NPV = present value of future cash flows less

the initial investment
  
CF 1 CF 2 CF n
NPV = CF + + +L +
0
(1 + k) 1 (1 + k) 2 (1 + k) n


n CF t
=
 (1 + k) t
t =0

An investment is acceptable if NPV > 0

 Capital Budgeting—NPV

$2,000 $1,000 $5,000 $3,000

NPV = - $7,000 + + + +
(1.15) 1 (1.15) 2 (1.15) 3 (1.15) 4

= - $7,000 + $1,739.13 + $756.14 + $3,287.58 + $1,715.26

= $498.11

NPV = $498.11 > 0, so the project is acceptable

Ratio Analysis
 Ratio Analysis
1. Liquidity – the ability of the firm to pay its way
2. Investment/shareholders – information to enable decisions to be made
on the extent of the risk and the earning potential of a business
investment
3. Gearing – information on the relationship between the exposure of the
business to loans as opposed to share capital
4. Profitability – how effective the firm is at generating profits given sales
and or its capital assets
5. Financial – the rate at which the company sells its stock and the
efficiency with which it uses its assets
 Acid Test

• Also referred to as the ‘Quick ratio’

• (Current assets – stock) : liabilities
• 1:1 seen as ideal
• The omission of stock gives an indication of the cash the firm has in
relation to its liabilities (what it owes)
• A ratio of 3:1 therefore would suggest the firm has 3 times as much
cash as it owes – very healthy!
• A ratio of 0.5:1 would suggest the firm has twice as many liabilities as
it has cash to pay for those liabilities. This might put the firm under
pressure but is not in itself the end of the world!
 Current Ratio
• Looks at the ratio between Current Assets and Current Liabilities
• Current Ratio = Current Assets : Current Liabilities
• Ideal level? – 1.5 : 1
• A ratio of 5 : 1 would imply the firm has $5 of assets to cover every $1
in liabilities
• A ratio of 0.75 : 1 would suggest the firm has only 75p in assets
available to cover every $1 it owes
• Too high – Might suggest that too much of its assets are tied up in
unproductive activities – too much stock, for example?
• Too low - risk of not being able to pay your way
 Investment/Shareholders
• Earnings per share – profit after tax / number of shares
• Price earnings ratio – market price / earnings per share – the
higher the better generally. Comparison with other firms
helps to identify value placed on the market of the business.
• Dividend yield – ordinary share dividend / market price x 100
– higher the better. Relates the return on the investment to
the share price.
 Gearing

• Gearing Ratio = Long term loans / Capital

employed x 100
• The higher the ratio the more the business is
exposed to interest rate fluctuations and to
having to pay back interest and loans before
being able to re-invest earnings
 Profitability
• Profitability measures look at how much profit the
firm generates from sales or from its capital assets
• Different measures of profit – gross and net
– Gross profit – effectively total revenue (turnover) –
variable costs (cost of sales)
– Net Profit – effectively total revenue (turnover) – variable
costs and fixed costs (overheads)
 Profitability
• Gross Profit Margin = Gross profit / turnover x 100
• The higher the better
• Enables the firm to assess the impact of its sales and
how much it cost to generate (produce) those sales
• A gross profit margin of 45% means that for every $1
of sales, the firm makes 45p in gross profit
 Profitability
• Net Profit Margin = Net Profit / Turnover x 100
• Net profit takes into account the fixed costs involved in
production – the overheads
• Keeping control over fixed costs is important – could be
easy to overlook for example the amount of waste - paper,
stationery, lighting, heating, water, etc.
– e.g. – leaving a photocopier on overnight uses enough electricity to make
5,300 A4 copies. (1,934,500 per year)
– 1 ream = 500 copies. 1 ream = $5.00 (on average)
– Total cost therefore = $19,345 per year – or 1 person’s salary
Return on Capital Employed (ROCE) = Profit / capital employed x 100
 Profitability

• The higher the better

• Shows how effective the firm is in using its
capital to generate profit
• A ROCE of 25% means that it uses every $1 of
capital to generate 25p in profit
• Partly a measure of efficiency in organisation
and use of capital
 Asset Turnover

• Asset Turnover = Sales turnover / assets employed

• Using assets to generate profit
• Asset turnover x net profit margin = ROCE
• Return on investment (ROI)
• (EAT/Sales)x(Sales/Total Assets) or (EAT/Assets)
 Stock Turnover

• Stock turnover = Cost of goods sold / stock expressed as times per

year
• The rate at which a company’s stock is turned over
• A high stock turnover might mean increased efficiency?
– But: dependent on the type of business – supermarkets might
have high stock turnover ratios whereas a shop selling high value
musical instruments might have low stock turnover ratio
– Low stock turnover could mean poor customer satisfaction if
people are not buying the goods (Marks and Spencer?)
 Debtor Days

• Debtor Days = Debtors / sales turnover x 365

• Shorter the better
• Gives a measure of how long it takes the business to
recover debts
• Can be skewed by the degree of credit facility a firm offers
Breakeven Analysis Defined

• Breakeven analysis examines the short run

relationship between changes in volume and
changes in total sales revenue, expenses and
net profit. Also known as C-V-P analysis (Cost
Volume Profit Analysis).
• How many units must be sold to breakeven?
• How many units must be sold to achieve a
target profit?
 Key Terminology: Breakeven
Analysis
• Break even point-the point at which a company makes
neither a profit or a loss.
• Contribution per unit-the sales price minus the variable
cost per unit. It measures the contribution made by each
item of output to the fixed costs and profit of the
organisation.
• Margin of safety-a measure in which the budgeted
volume of sales is compared with the volume of sales
required to break even
• Marginal Cost – cost of producing one extra unit of
output
 Breakeven Formula

Fixed Costs
*Contribution per unit
*Contribution per unit = Selling Price per unit – Variable Cost per unit

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 Example 1

Using the following data, calculate the

breakeven point and margin of safety in units:
Selling Price = $50
Variable Cost = $40
Fixed Cost = $70,000
Budgeted Sales = 7,500 units
 Example 1: Solution
• Contribution = $50 - $40 = $10 per unit
• Breakeven point = $70,000/$10 = 7,000 units
• Margin of safety = 7500 – 7000 = 500 units
 Example 2

Using the following data, calculate the level of

sales required to generate a profit of $10,000:
• Selling Price = $35
• Variable Cost = $20
• Fixed Costs = $50,000
 Example 2: Solution

• Contribution = $35 – $20 = $15

• Level of sales required to generate profit of
$10,000:
$50,000 + $10,000
$15
4000 units
Thanks

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