3. CONTENTS
Page
Foreword by Antonio D. Kalaw, Jr. ....................................................... v
Introduction ............................................................................................ 1
Project Summary.................................................................................... 4
Market Study .......................................................................................... 7
Technical Study .................................................................................... 14
Financial Study ..................................................................................... 23
Socio-Economic Study......................................................................... 52
Organization and Management Study.............................................. 54
Environmental Impact Assessment Study ....................................... 57
Detailed Outline of a Project Feasibility Study................................ 63
Pointers in Evaluating a Project Feasibility Study .......................... 65
A Final Note.......................................................................................... 71
Annexes
AnnexA
Market Forecasting: Tools and Techniques .................................... 74
Annex B
BOI Guidelines in the Preparation of Project Feasibility Studies.. 85
Annex C
BOI Feasibility Study Format ............................................................. 89
Annex D
ADB Pre-Feasibility Study Report Format....................................... 95
References ............................................................................................. 98
4. 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 ImpactStudy (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
6. 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, socio-
economic, 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 ofnations
cannotbe over-emphasized.A PFS is anessential 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 ofa 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
1
7. such studies are even more important now in evaluating numerous
options arising from multiple possibilities. The project feasibility
study has proven to be one of the best instruments in meeting past
challenges and should prove its worth in this time ofconstantchange.
In this Manual, projects are discussed in the context of national
development programs, initiated by both government and private
institutions to boost progress in the country's administrative regions
and in various sectors of society. As a consequence, the applicability
of these programs is analyzed and tested both according to region
and sector. Although regional and sectoral studies of development
programs may be general in nature, they pave the way for a more
thorough and specific identification of projects and arrive at different
ideas on how to apply national programs in terms of profitable,
realistic, and workable projects.
Every project goes through what is known as a "project
developmentcycle." As soon as a projectis identified, its applicability
is examined through further research, leading either to a generalized
pre-feasibility study, or directly to an analytic and systematic
presentation offindings in the form of a project feasibility study. It is
then evaluated in terms of its optimality, practicality, potential, and
growth, for presentation to and negotiation with financing sources
or institutions, where the study undergoes further evaluation and
reevaluation.
During the assessment ofa project, recommendations on revisions
to the Project Feasibility Study or the non-feasibility ofthe proposed
undertaking are made.
At this point, the project is going through the "Go" or "No go"
phase. If it is found to be too risky to be feasible, the project is
eventually shelved. Any revisions and reevaluations of the project,
however, may enhance its feasibility during the implementation
stage. As soon as the project is implemented, its outcomes are
appraised against the data presented in the feasibility study.
2 How to Prepare Project Feasibility Studies
During the project appraisal, the implementing group pinpoints
the variances between actual project results and the data provided in
the projectfeasibility study. Taking into account changing conditions
and deviations from the expected outcome, the project is then
improved interms of performance, scheduling, and costs. PERT/CPM
(Program Evaluation and Review Technique/Critical Path Method)
techniques are usually incorporated in project implementation so as
to reduce variances between the projected outcome and the actual
results.
The consequences of the project's reappraisal will also provide
each region and sector with information on specific types of projects.
The data implies an influence on further decisions to be made
on future project studies. Thus, the project development cycle is
completed.
The following Guide to the preparation of Project Feasibility
Studies applies to both industrial and agricultural ventures. While
this Guide focuses on industrial projects, the PFS preparer is free to
make the necessary adjustments to fit the recommended form and
content to agro-based projects as well. The overall guideline is for
the PFS to include comprehensively the major concerns of any PFS:
marketing, production, finance, organization, and socio-economic
viability of an industrial or agricultural project.
Introduction 3
8. 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
Briefly explain the reason for the choice of name.
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
1. Related national program
Is the project in line with any government-initiated or
priority program?
2. Affinity to regional or sectoral studies
Is the project a result of encouraging findings in certain
regions or sectors of the country?
4 How to Prepare Project Feasibility Studies
3. Project potential and proponent
Give a conceptual description of the project's potential
worth and importance and the person or group of people
who will manage it.
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?
2. Project timetable and status
How long will it take for the project to be operational? What
stage is the project presently in?
3. Nature ofthe industry
Briefly describe the industry, its product lines, the demand-
supply situation, history, growth patterns, problems and
potentials, and role in the economy.
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
9. G. MAJOR ASSUMPTIONS USED AND SUMMARY OF
FINDINGS AND CONCLUSION:
1. Marketfeasibility
Discuss the nature of the unsatisfied demand which the
project seeks to meet, its growth and the manner in which it
is to be met. Here, the supply-demand situation is examined,
the target markets analyzed, and the marketing program
formulated.
2. Technical feasibility
Discuss the nature of the product line, the technology
necessary for production, its availability, the proper mix of
production resources, and the optimum production volume.
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 projecton 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. Managementfeasibility
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?
6 How to Prepare Project Feasibility Studies
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:
1. Name ofthe product
2. Features of the product - its physical, chemical, and
agronomic properties
3. Uses of the product - as a finished commodity, as input to
other production activities
4. Major users ofthe product - individuals and/or firms
5. Geographical areas ofdispersion - where product is mostly
found or to distributed, in the case of a new commodity
7
10. 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 ofurbanization, 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 ofa 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.
8 How to Prepare Project Feasibility Studies
The size, the nature, and growth of total demand for the
product must be determined in the following manner:
1. Who and whereis the market? Segment the marketaccording
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 couldbe betterunderstood 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 productbeing considered? Are
there many small firms with no single firm controlling the
market? Or is it an industry ofbig 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
11. D. DEMAND-SUPPLY ANALYSIS
It is now essential to combine the findings on the demand
and supply situation. The analysis may be conducted in the
following manner:
1. Compare the demand and supply trends.
2. Determine the amount of demand unsatisfied, especially in
the projections. If demand appears to be fairly satisfied by
supply, itis useful to consider either orboth of the following:
a. Whether factors affecting the market may disrupt the
equilibrium so as to cause demand to grow faster than
supply.
b. Whether the quantity of the product is such that it may
create additional demand or cause a shift of a portion of
the existing demand in its favor.
3. Determine the share of the market by establishing the
proposed production volume (determined in the technical
study) as against the total market size.
E. PRICE STUDY
In economic theory, price is determined mainly by the demand-
supply situation. An increase in demand with constant supply
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 ifthe 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
Will there be a tremendous, slight or negligible increase or
decrease in demand if prices are lowered or raised?
4. Establish the product's sellingprice, takinginto consideration
all of the above, the market segment targeted, and the
operating costs and expenses (determined in the technical
and financial studies). Likewise, estimate the increases
foreseen in subsequent years.
F. FACTORS AFFECTING THE MARKET
There are certain factors affecting the market that may or may
not be difficult to quantify and/or predict. This section takes
into consideration the following:
1. Demand may be significantly affected by population
growth, income changes, tastes, rural/urban developments,
prices ofsubstitute and complementary products, and such
marketing tools as advertising, promotions, credit policies,
etc.
2. Supply may be influenced by the development of substitute
products, the entry or exit of firms, sources and cost
of production factors, government policies, improved
technology, etc.
3. Prices may be affected by production costs, price controls,
inflation, etc.
G. ANALYSIS OF RESEARCH DATA
Data analysis and interpretation is one of the most critical
phases ofmarket research. It answers such questions as 'What
does this information mean?' and 'Is the information relevant
to establish a marketing plan?'
Following are the different types of Data Analysis.
1. Descriptive Analysis - describes the data gathered using
mean, median, mode, frequency distribution, range, and
standard deviation.
2. Inferential Analysis - tests the validity of the hypothesis
and identifies standard errors.
Market Study 11
12. 3. Difference Analysis - determines if differences exist
between groups of respondents, e.g., evaluate statistical
significance of difference in the means of two groups in a
sample using t-test of differences and analysis ofvariance.
4. Associative Analysis - determines associations or
relationships of variables in the survey using cross
tabulation and correlation.
5. Predictive Analysis - forecasts based on the results of the
survey.
Care should be taken in choosing the right analytical tool in
undertaking the market research for a PFS. Annex I presents a
comprehensive discussion of procedures in market research.
H. MARKETING PROGRAM
The marketing program should be the end product of a
market study. After defining the market and price targets,
the marketing program comes in as the implementing arm. It
consists of the following procedures:
1. Determine the types of marketing programs prevalent in
the industry and gauge their respective effectiveness.
2. Draw up a marketing plan that identifies and defines
the target market, the selling price, the packaging of the
product, the distribution network, the sales management
mechanism, and the advertising and promotions program.
The important components of the marketing program may
best be summarized by the four Ps: product, price, place,
and promotions. The first two components are essentially
determined in the previous sections of the market study.
Place refers to the way the product is distributed or made
available to the end-user. Promotions is concerned with
making the end-users aware of, and desire, the product.
3. Design the marketing organization which will implement
the plan and determine the costs involved. The organization
12 How to Prepare Project Feasibility Studies
would again depend greatly on the type of product being
marketed. In general, a consumer product would require
a sizable organization that concentrates on distribution
channels and promotions. Non-consumer items would
probably require a distribution network or a small-sized
sales force. In any case, the most ideal organization is one
that allows maximum efficiency at the lowest workforce
level possible.
The sales promotion plan and the channels of distribution
shouldbe appropriate to theproductand the market. Consumer
buying habits inthe particular field should be considered inthe
selection of outlets. Potential distributors mayinclude retailers,
wholesalers, jobbers, industrial leaders, industrial distributors
and manufacturer's agents. A plan for consumer credit and
financing and for sales allowances can be formulated on the
basis of marketing channels selected.
I. PARTS OF A MARKETING PLAN
I. Introduction
II. General Business Condition
Ill. Competitive Conditions
IV. Market Research Results
V. Sales and Distributions Plan
VI. Advertising and Sales Promotions
VII. 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
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. The manufacturing process.
b. The machinery capacity and design.
c. The machinery supplies.
d. The plant location.
e. The plant layout.
f. The building and structures specifications.
g. The raw materials and their sources.
2. Determination of:
a. The quantity and quality of the products to be produced.
b. The labor needed, both skilled and unskilled.
c. The utilities required.
d. The waste disposal method.
e. The transportation necessary.
3. Computation of the total project cost and enumeration of the
major items of capital cost.
4. Detailed listing of the estimated productionand overhead costs
that will be incurred in operating the proposed production
plant.
5. Consideration of any major technological development in
the industry which may affect the commercial or technical
soundness of the project.
The technical study covers the following topics, and where
applicable, costs which will be used in the financial study
should be computed.
14 How to Prepare Project Feasibility Studies
A. THE PRODUCT(S)
This portion describes the product(s) to be manufactured
and sold. The description specifies the product's physical,
mechanical, and chemical properties and identifies its
various uses, both as finished goods and as intermediate
inputs as raw material to another process.
B. MANUFACTURING PROCESS
The selected manufacturing process must be described
simply and clearly, preferablywith the aid offlow charts and
diagrams. The existence of alternative processes and how
they compare with the chosen process must be discussed.
The analysis should further touch on the manufacturing
processes used in existingplants, both domestic and foreign.
Finally, a review of licensing agreements and patents, if
any, would also be helpful.
C. PLANT SIZE AND PRODUCTION SCHEDULE
State the minimum and maximum rated capacities of the
plant. The minimum capacity is that level of production
where the resources are not fully utilized, but are employed
at a minimum economical level. In general, the minimum
economical level is that level of production where the firm's
fixed costs are at least covered by the resulting revenue.
The firm's fixed costs are determined in the financial study.
The maximum capacity is that level of production where all
resources are fully utilized.
From there, the actual capacity utilization, the number of
shifts per day, and the number of operating days per year
are then defined.
Finally, the factors in determining the plant size must be
id~ntified a~d described. The findings in the market study
will be a maJOr input in this section.
Technical Study 15
14. The production schedule describes the projected scale of
operation for the next several years. Will production increase
in time? By how much? The factors that determine these
considerations are the expected growth in market share, the
availability of financing for possible expansion, the access to
more raw materials, and the level ofutilizationofplantcapacity.
D. MACHINERY AND EQUIPMENT
Machinery and equipment required must be identified
and itemized according to type and use. Specifications,
capacities, and costs should be described in detail. Likewise,
the origin of the machinery, whether local or imported, as
well as the manner and cost of transporting and installing
them must be indicated.
The total cost of installed imported machinery and
equipment is computed as follows:
FOB: (In currency of port of origin
Add: Freight and Insurance* (% of FOB)
CIF (Convert CIF cost of Philippine pesos using the
current foreign exchange)
Add: Tariff Rate* (% of CIF)
Add: Import Charges*(% of CIF)
Total Cost
Add: Compensating Tax* (% of Total Cost)
Landed Cost
Add: Installation Cost* (% of Total CIF)
Installed Cost
A balancing ofcapacities must be presented to show that
the machinery and equipment are capable ofproducing the
desired maximum output.
E. PLANT LOCATION
A thorough and comparative analysis of each potential
location should be made to determine the ideal plant site
for the project.
16 How to Prepare Project Feasibility Studies
The evaluation process has to consider the following
factors:
1. The availability ofraw materials and accessibility to their
sources.
2. The availability of cheap or moderately priced utilities
such as power, water, or fuel.
3. The combined cost oftransporting raw materials and fuel
to the plant site.
4. The proximity to distribution outlets.
5. The availability of skilled and unskilled labor.
Maps and charts of the proposed plant location must be
included.
F. PLANTLAYOUT
The plantlayoutshouldbeclearly depicted through diagrams
and descriptions. A good plant layout is characterized by
minimum material handling, effective space utilization,
smooth workflow throughout the plant, safe and conducive
working area for the workers, safety and sanitation facilities,
and flexibility of arrangements.
G. BUILDING AND FACILITIES
The site, type, and costs of the building and land, as
envisioned in the project, should be adequately described.
The construction cost of the building and facilities should
be presented as adapted to the machinery and equipment
that will be used in the project. Land improvements such
as roads, drainage facilities, etc. and their respective costs
should be computed and included as well.
H. RAW MATERIALS AND SUPPLIES
The required raw materials and supplies should be
itemized and the basis for their selection must be presented.
Descriptions and specifications of their physical, mechanical,
and chemical properties must also be given. Current and
Technical Study 17
15. prospective costs of raw materials, the availability and
continuity of supply, and the current as well as prospective
sources should also be discussed. The volume of such
materials required at various phases of operations must
likewise be presented.
I. UTILITIES
This portion indicates the amount, cost, and sources
of electricity, fuel, water and/or other potential energy
sources. These factors must be determined in relation to
the production schedule and capacity utilization defined.
Alternative sources of these utilities and the feasibility of
their use must also be described.
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
How much will it cost to produce one unit of output?
To arrive at this computation, the following must be
determined:a) raw material costs, b) labor cost, c) overhead
cost (fixed costs), d) operating costs (variable costs), and e)
other pertinent costs.
L. LABOR REQUIREMENTS
The various jobs and functions necessary during the
operational stage must be described. For costing purposes,
labor is generally classified into three types - direct,
indirect, and administrative. Here, the number of workers
to be employed for each job classification, the pay scales,
employee development programs, the organizational set-
up, and the aggregate labor costs are described in detail.
18 How to Prepare Project Feasibility Studies
SUGGESTED FORMAT FOR THE TECHNICAL STUDY
I. Description of the Product I Service
II. Manufacturing Process
A. Process Flow Diagram
III. Plant Size (Capacity) and Production Schedule
IV. Machinery and Equipment
V. Plant Location
VI. Plant Layout
VII. Building and Facilities
VIII. Raw Materials and Supplies
IX. Utilities
X. Waste Disposal
XI. Production Cost
A. Direct Materials
B. Direct Labor
C. Manufacturing Overhead
XII. Appendices
A. Plant Layout I Equipment
B. Equipment Listing and Cost
C. Utilities Calculation
D. Plant Facilities Breakdown Cost
E. Projected Cost of Production
Technical Study 19
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22 How to Prepare Project Feasibility Studies
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Financial Study
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 willbe profitable even with existing competition
and in unfavorable economic conditions. Detailed figures showing
the improvementof 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. Total Project Cost
3. Key Forecast Variables
4. Sources of Financing the Project
5. Preparation of Financial Statements
6. Financial Analysis
7. Computation of Net Present Value and Internal Rate of
Return
8. Sensitivity Analysis
9. With or Without a Project Analysis
A. MAJOR ASSUMPTIONS
In the formulation of the financial projections, assumptions
play an important role because they serve as the foundation for
23
18. estimating the future expenditures, expenses, and revenues of
the project as accurately as possible. These assumptions must
be based on well-considered, realistic, and workable facts.
In formulating assumptions, the analyst must consider the
following sources:
1. Existing business practices in the industry may provide
some valuable information and insights on the following:
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. Selling price
b. Sales forecasts
c. Unforeseen costs
d. Production volume
e. Product mix
3. Governmental regulations and incentives directly or
indirectly affecting the project, such as:
a. Import policies
b. Export policies
c. Tax rates
24 How to Prepare Project Feasibility Studies
d. Tax exemptions
e. Price ceilings
f. Relevant presidential decrees or letters of instruction
4. Other pertinent data which can justify the assumptions of
the study, such as industry profiles, pre-feasibility studies,
proceedings of symposiums and conferences, and research
or policy studies of industry associations.
In general, assumptions in the preparation of the financial
study should be kept at a minimum as much as possible and
formulated only when necessary.
The list of assumptions incorporated in the study,
however, should remain intact and consistent throughout
the analysis and must have the following characteristics:
a. Factual
b. Justifiable
c. Realistic
d. Workable
B. TOTAL PROJECT COST
The second step in the preparation of the financial aspect of a
project feasibility study is an estimation of the project's total
cost or initial asset or capital requirements.
Based on the materials, supplies, equipment, physical plant,
and manpower needs of the project specified in the technical
study, the total project cost is composed of current asset levels
and planned fixed asset acquisitions.
1. Fixed Assets - In computing the project's fixed-asset
requirements, the most approximate acquisition cost of the
following accounts should be determined:
a. Land and land improvements
b. Buildings, including electric and water utilities, furniture
and fixtures
c. Equipment, including installation costs
Financial Study 25
19. d. Purchase and installation of machinery
e. Trial-run associated with electric utilities, equipment,
and machinery
Land and land improvements consist of the cost of
land, the corresponding notary's fees associated with
land acquisition, registration expenses, transfer taxes,
and other related costs.
Building cost includes all expenses incurred in
constructing the building and its foundations, wells,
water pipes, electrical connections, gas supply, telephone
system, reservoir and tanks, waste water disposal,
fencing, roads and paths, employee housing, and fire
protection.
In addition to the purchase price of machinery and
equipment, sales taxes, freight charges, insurance and
customs duties (for imported equipment) are also
included in the costs.
Significant and necessary expenditures on foundation
setups, tests and startup operations, installation of
electricity and telephonelines, electrical equipment, office
equipment, furniture and fixtures, employee benefits,
maintenance and cleaning equipment should all be
considered and presented.
2. Current assets - In estimating the project's initial current
asset needs, it is advantageous to divide this section into
inventory investments, inventory-related costs, and cash
credits.
a. Inventory investments include purchases of materials
and supplies, and the corresponding freight charges.
b. Classified under inventory-related costs are such
accounts as direct and indirect labor with related fringe
benefits; heat, light, and power; plant maintenance; and
warehousing expenses related to raw materials, materials
in process, and finished goods.
c. Cash credits include pre-paid expenses, intangible assets,
26 How to Prepare Project Feasibility Studies
operating salaries, wages, and fringe benefits, engineering
costs, operating taxes, office supplies, communication
facilities, office utilities, billing costs, transportation costs,
expenses for advertising, borrowingcosts, and provisions
for unforeseen costs.
Intangible assets include patents, licenses, goodwill,
reproduction rights, and organization and pre-operating
expenses, ifthe latterare amortized for a period extending
to more than one year.
Organization expenses include fee requirements of
the Securities and Exchange Commission, cost of issuing
shares ofstock such as broker's fee, interim interest, initial
advertising, personnel recruitment and training, etc.
Pre-operating expenses include costs of initial
investigations, pre-feasibility studies, research and
technical studies, economic and marketing studies,
financial and profitability studies, design studies, and
engineering consultant fees.
The total Current Asset costs are then multiplied by
the assumed current ratio, which is ideally 2:1, to arrive
at the total cost of Working Capital.
The Total Project Cost is the sum of Total Fixed Assets
and Working Capital.
In general, the computation for project cost estimates
should be as detailed as possible. Five percent of these
itemized projections are usually allocated to unforeseen
costs.
C. SOURCES OF PROJECT FINANCING
In determining the financing scheme for the project, one should
take the following steps:
1. List down all available sources of funds for both short-
term and long-term financing. Funding options range
Financial Study 27
20. from bank credit, insurance term loans, mortgage loans,
leasing arrangements, issuance ofbonds and stocks, private
placements, investment banking arrangements, etc.
2. Select the source(s) for both long-term and short-term
financing according to its maximum profitability.
3. Finalize the amount and terms for each selected source,
together with an indication of the currency, security,
repayment period, interests, and other features. It shouldbe
noted that the security, repayment period, and interest rates
of loans differ from one lending or investing institution to
another. Bonds are also settled prior to stock dividends, and
preferred stocks are issued dividends first before common
stocks.
4. Determine the status of financing from each source by
relating it to actual releases already made, applications
already approved, applications pending, and applications
still to be made.
5. Provide allowances for financing of contingencies and
fluctuations in working capital so that the project's liquidity
and cash solvency are assured during each operating year
of the project's early stages.
6. Identify alternative sources of financing in order of priority,
in case variances from the expected outcome result, due to
external conditions which affect the project.
D. PREPARATION OF FINANCIAL STATEMENTS
Financial statements presentin an orderly and understandable
form the financial condition of a business enterprise, its
operating performance, as well as the status of its liquidity.
Financial statements depict the progress of a firm in
monetary or financial terms.
28 How to Prepare Project Feasibility Studies
There are three types of financial statements needed for the
project feasibility presentation: the Income Statement, the Cash
Flow Statement, and the Balance Sheet.
1. The Income Statement is a summary of the project's total
revenues and total costs for one period or fiscal year, thereby
arriving at the net income or loss for the period. In Exhibit
2-1, a model format for income statement preparation is
presented.
An analysis of each account in the presentation follows:
a. The amount of net sales in pesos is arrived at by
subtracting sales returns, allowances, and discounts
from gross sales. Sales returns represent goods sold
which do not meet customer requirements and thus
have been returned. Allowances refer to goods which
cannot be sold due to spoilage, wrong specifications,
and similar causes. Sales discounts are price reductions
occasionally given in favor of customers.
b. Cost of sales is a function of raw materials used,
direct labor expenses, and factory overhead, less cost
of ending inventory for the period. Factory overhead
includes a) materials and labor expenses indirectly
related with production; b) heat, light, and power
required for manufacturing; c) repair and maintenance
costs associated with productive fixed assets; d) various
supplies needed to produce goods; the depreciation
of productive fixed assets;; and e) insurance expenses
related to the productive operations.
2. The Cash Flow Statement or the "cash budget" is a
presentation of cash receipts and disbursements for a given
operating period or fiscal year. Exhibit 2-2 illustrates a cash
budget model, showing the inflow and outflow of cash
during project operations. It likewise indicates how the
ending cash balance in the Balance Sheet was arrived at.
The cash budget is also used to predict or anticipate when
loans will need to be drawn during an operating period
Financial Study 29
21. to optimize the timing of project financing, and maximize
profitability by efficient cash utilization.
a. Cash receipts are classified into two: cash from project
financing and cash from sales revenues. Cash flows
from financing may take the form of stocks issued,
bond issues, and long-term loans.
b. Cash disbursements include payments for intangible
assets, fixed assets acquisitions and actual operating
expenses. Payments for credit purchases, bank loans
as well as cash purchases of inventories fall under
this category. Cash dividends issued and income tax
payments are also part of cash disbursements.
The beginning cash balance for the period is then
added to the net cash flow to arrive at the ending cash
balance in the Balance Sheet.;
3. The Balance Sheet reflects the assets acquired by the project
and the corresponding liabilities it incurred and the owners'
equity (net worth)_
as of a specific date. Exhibit 2-3 presents
a model balance sheet.
a. The Assets are broken down into the following: current
assets, fixed assets, and intangible assets. Current assets
include cash accounts and other accounts expected to be
converted into cash within one year, such as marketable
securities, receivables, and inventories. Prepaid expenses
and deferred charges are also classified under Current
Assets, except that, for accounting purposes, they will be
adjusted as an expense within one year. An example of
a prepaid expense is insurance premiums good for one
year.
b. Fixed Assets are tangible assets of an enterprise, the
service life of which usually extends to over one year.
Land, building, machinery and equipment are typical
examples of fixed assets.
30 How to Prepare Project Feasibility Studies
c. Other Assets include the organization's pre-operating
expenses andintangibleassets suchas patents, copyrights,
leases, licenses and franchises.Intangible assets, like fixed
assets, have a service life of more than one year.
d. Liabilities are classified into current and long-term
liabilities. Current liabilities are those which are expected
to be paid for within one year.
Typical current liabilities include accounts payable
(for credit purchases of materials and supplies), short
term bank loans, taxes payable, and accrued expenses.
Accrued expenses refer to cost of services rendered but
have not yet been paid such as salaries payable, interest
payable, etc.
Long-term liabilities are expected to be paid over a
period of more than one year. Mortgage bonds payable
and long-term notes payable are typical representatives
of this category.
e. Equities are asset claims due to owners of the firm. If
the firm is a corporation, the Equity is further divided
into Capital Stock, Paid in capital surplus, and Retained
Earnings. If ownership is one individual or several
partners (single proprietorship orpartnership), the Equity
account is simply stated as the name(s) of the proprietor
or partners, followed by,the term "capital" such as "De
la Cruz and Pedro Capital."
E. FINANCIAL ANALYSIS
This aspect of the financial study evaluates the project's
profitability, liquidity, cash solvency, and growth over time.
It should be noted that the functions elaborated below are
meaningful only when compared with other functions of the
same type computed in one year intervals. Charts and other
illustrative 9-eviceE> m(lv be used to present the analysis more
effectively.
Financial Study 31
22. 1. Tests of liquidity - These financial measures are used to
determine a firm's ability to meet short-term obligations,
and to remain solvent during hard times. They include:
a. Current ratio = Current assets
Current liabilities
b. Quick or acid-test ratio= Current assets -inventories
Current liabilities
c. Liquidity of inventories= Cost of sales
Average inventory
d. Defensive position=
Cash+ marketable securities+ receivables
Projected operating expenditure/number of days
2. Tests of debt-service - These ratios are used to test the
project's ability to meet long-term obligations.
a. Debt-to-net worth ratio = Total liabilities
Total equities
b. Total capitalization ratio= Long-term liabilities
Long-term liabilities and equities
3. Tests of profitability - These show the operational
performance and efficiency of the project.
a. Net profit margin= Net income after tax
Sales
b. Operating profit margin= Profit before interest and taxes
Sales
c. Gross profit margin =Gross ~rofit
Sa es
d. Return on financier's investment= Net income
Stock equity
32 How to Prepare Project Feasibility Studies
e. Return on owner's investment= Net income
Stock equity
f. Return on common stock equity =
Net income- preferred stock dividends
Net worth- par value of preferred stock
g. Return on net operating profit=
Profit before interest and taxes
Total tangible assets
h. Asset turnover = Sales
Total tangible assets
1. Return on assets, or earning power= Net income
Total tangible assets
4. Test oftotal debt coverage = Profit before interest and taxes
(Interest+ principal payments)
(1/1 - income tax rate)
5. Funds-flow analysis - This technique is used to determine
the major uses and sources of funds within one year in a
project's life.
a. Cash-flow analysis:
1) Source of funds:
a. Net decrease in an asset other than cash
b. Net increase in a liability
c. Proceeds from the sale of stocks
d. Funds provided by operations
2) Uses of funds:
a. Net increase in an asset other than cash and fixed
assets
b. Gross increase in fixed assets
c. Net decrease in any liability
d. Retirement of stock
e. Cash dividends
Exhibit 2-4 presents a model presentation of cash-flow
analysis.
Financial Study 33
23. b. Working-capital flow analysis.
1) Sources of funds:
a. Net decrease in any asset other than current assets
b. Net increase in long-term liabilities
c. Proceeds from the sale of stock
d. Funds provided by operations
2) Uses of funds:
a. Net increase in other assets
b. Gross increase in fixed assets
c. Net decrease in long-term liabilities
d. Retirement of stock
e. Cash dividends
Exhibit 2-4 presents the financial ratios for the financial
statements in Exhibits 2-1 to 2-3.
6. Tests ofoperating leverage - these indicate how the project
uses its assets for which it pays a fixed cost.
Before these tests are discussed, it is important to
differentiate fixed costs from variable costs.
Generally, fixed costs are expenses incurred by the
company irrespective of its production volume. These
are depreciation charges on machinery, equipment,
buildings, and land improvement; the amortization cost of
prepaid expenses, deferred charges, and intangible assets;
real estate taxes; insurance of fixed assets; general and
administrative salaries, wages and fringe benefits; research
and development; donations, office supplies; administrative
light and power; and borrowing costs.
On the other hand, variable costs increase or decrease
according to changes in production volume. These are the
costs of direct and indirect materials, direct labor, power
requirements of production machinery, maintenance of
factory machinery, supplies for manufacturing, etc.
34 How to Prepare Project Feasibility Studies
a. Break-even volume analysis
BEV = Fixed costs
Sellmg pnce - vanable cost/umt
b. Break-even cash analysis
BEC = Cash fixed costs
Sellmg pnce- cash vanable cost/umt
c. Break-even selling price analysis
BESP =Variable costs+ fixed costs
Omtvolume
=Total cost x Selling price
Sales
d. Break-even sales analysis
BES = BESP x unit volume
Fixed cost
= 1-(Variable cost/net sales)
7. Tests offinancial leverage - These ratios present how a project
employs funds which pay a fixed return.
a. Earnings per share = Net income
Shares
Dividends per share= Net income-preferred stock
dividends-retained earnings
Common share
8. Tests of capital investment .- ~hese fina~cial tools evaluate
the justification for investmg m the proJeCt.
a. Average rate of return= Average net income
Average net mvestment
b. Payback period in years =
Initial"fear cash outflow
c. Capital recovery or cash pay off period (in years) =
Stocks
Annual cash dividends
Financial Study 35
24. 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 paybackperiod. The time period required
by the investor is based on the industry's performance.
b. Net Present Value
The Net Present Value (NPV) criterion is a decision tool
which is most favored in business. There are three reasons
why the NPV is widely used in almost all industries:
• It deals with cash flows and not accounting profits
• It considers the time value of money and allows
comparison of the benefits and costs in a logical
manner
• It uses a hurdle rate that is acceptable to the investor
and would increase the value of the firm if NPV were
positive.
36 How to Prepare Project Feasibility Studies
The Net Present Value can be expressed as follows:
Where:
ACF =
t
k
10
n
JV.PY= i ACE; -/{)
t=l (1 + k)'
the annual after-tax cash flow in time period t
hurdle rate; discount rate; required rate ofreturn
of the investor
initial outlay (initial cash outlay necessary to
purchase assets to put the business into an
operating manner)
the project's expected life
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
25. Steps to compute NPV manually:
1. Determine the after-tax cash flows of the project.
2. Determine the hurdle rate or the discount rate acceptable
to the investor.
3. Multiply the after-tax cash flows with the present value
factor at the given hurdle rate.
4. Get the product for each year and the sum of the present
value of cash flows.
5. The amount of the initial outlay is then deducted from
the sum of the present value of cash flows.
c. Benefit I Cost Analysis (Profitability Index)
The Benefit I Cost Analysis or the Profitability Index (PI)
is a tool for measuring the ratio of the present value of the
future cash flows to its initial cost. Using this tool will allow
the investor to accept the project if the ratio is greater than
or equal to one and reject if the index is zero or less than
one. It can be expressed as:
Where:
ACF =
t
k
10
n
fACE;
P./= t= l (1 + k)'
./0
the annual after-tax cash flow in time period t
the discount rate I required rate of return
the initial outlay
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 ofnet
cash flows) is greater than its denominator (initial outlay).
38 How to Prepare Project Feasibility Studies
d. Internal Rate of Return
The Internal Rate of Return (IRR) is the fourth decision
criterion used in determining the viability of a project. This
process of measurement attempts to answer the question:
What rate of return does this projectearn? Given the internal
rate of return of a project based on the computation, the
investor can immediately compare his required rate of
return, which is normally based on the current market
standards, and decide whether it is beneficial to pursue
the project or not. Normally, an investor would accept the
projectonly ifthe internal rate ofreturn is equal to or greater
than his required rate of return.
Mathematically, the internal rate of return is defined as
the value of IRR in the equation below:
Where:
ACF =
t
IO
n
IRR
/O=f ACE;
t=l (1+/~'
the annual after-tax cash flow in time period t
the initial cash outlay
the project's expected life
the project's internal rate of return
The challenge in this equation is to find the rate of return
or the discount rate that will equate the present value of
the project's future net cash flows with the project's initial
cash outlay. Solving for IRR is quite easy using a financial
calculator or spreadsheet. In any case, the IRR can be
computed manually as follows:
1. Assign an arbitrary rate (make an assumption for the
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
26. 4. If the sum of the presentvalues of the future cash flows
is equal to the initial outlay, then the arbitrary rate is
the IRR;
5. Otherwise, the analyst must assign another arbitrary
rate, and then repeat steps 2-4 until equal values are
computed.
Exhibit 3 shows the application of internal rate of return to
the case model: Casa Fernandina.
G. OTHER APPROACHES IN EVALUATING PROJECT RISKS
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
40 How to Prepare Project Feasibility Studies
commonlyused process ofevaluation otherthan the net present
value, internal rate of return, payback period, and benefit/
cost analysis. This analysis requires changing one variable
while holding all other variables constant. The distribution of
possible net present values and internal rates of return that is
generated is then compared with the distribution of possible
returns generated before the change was made. For some, this
analysis is also called the 'What if?' analysis. See Exhibit 4 for
an example ofa Break-even and SensitivityAnalysis as applied
to the financial condition of the case model, Casa Fernandina.
Probability Tree
The probability tree is a graphic illustration of the sequence
of possible outcomes. It presents the decision maker with a
schematic representation of the problem in which all possible
outcomes are accounted for. The computations and results of
the computations are shown directly on the tree, giving a clear
picture of the different scenarios.
H.'WITH OR WITHOUT A PROJECT ANALYSIS
The 'With or Without a Project' analysis (WP and WOP) is used
to compare two scenarios, one in which a project is initiated
with another where no project is undertaken. The technique
can be used for the following:
• A new project
• Rehabilitation I Modernization project
• Loss prevention project
• Improvement I rehabilitation project
In a new project scenario, the investor is not involved in any
business and this is the first time that he or she would be
putting money in a project. Therefore, the investor will receive
an additional benefit, given that the project has been assessed
to be acceptable using the decision criteria. Figure 4 illustrates
this scenario:
Financial Study 41
27. Figure 4: New Project (No Other Activities)
PROJECT
BENEFITS I
PROFITS
+
Project
Cost
2
Additional Benefit
3 4
Year
WP
WOP
5
In a Rehabilitation/Modernization project scenario, an
existing business is doing well except that, to keep up with
competition, it has to undertake some modernization and/or
rehabilitation.
Normally, the business is doing well but with competition
the growth of the business is hampered. This then calls for
some modernization to stay competitive or even ahead of the
competitors. The rehabilitation I modernization project is best
illustrated in Figure 5.
PROJECT
BENEFITS I
PROFITS
Project
Cost
Figure 5: Rehabilitation Project
Additional Benefit
Foregone Benefit l
2 3 4
Year
42 How to Prepare Project Feasibility Studies
WP
WOP
5
In the case of a Loss PreventionProject scenario, a particular
business may be suffering losses over a period of time due to
an economic crisis and other factors. Its owners may consider
looking for projects to prevent further losses and possiblyhelp
recover past losses. See Figure 6.
PROJECT
BENEFITS I
PROFITS
Project
Cost
+
Figure 6: Loss Prevention Project
Additional Benefit
!
'-~~~~~~~~~rrrrnnnn~mommWP
WOP
2 3 4 5
Year
Finally, an Improvement Project scenario exists when a firm that
has been experiencing poor business initiates a project that will help
improve the performance ofthe ailing company, and where foregoing
such a project will mean certain bankruptcy for the business.
Financial Study 43
28. PROJECT
BENEFITS/
PROFITS
Project
Cost
+
Figure 7: Improvement Project
Additional Benefit WP
Foregone Benefit
l
WOP
SUGGESTED FORMAT FOR A FINANCIAL STUDY REPORT
I. Presentation of Major Assumptions
II. Summary of Project Cost
III. Sources of Financing the Project
IV. Financial Statements
V. Financial Analysis
VI. Decision Criterion (Computation of Net Present Value,
Payback Period, Internal rate of Return, Benefit-Cost
Analysis)
VII. Sensitivity Analysis
VIII. Analysis of 'With and Without a Project'
44 How to Prepare Project Feasibility Studies
SAMPLE FINANCIAL STATEMENT
HOTEL CASE: CASA FERNANDINA
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)
2. Cost of Goods Sold and Operating Expenses to increase
every year by 3 to 4 percent based on inflation.
3. Cost of Goods Sold
a. Free Breakfast for guests based on seasonality (annual
occupancy rates)
b. Materials projected at 36 percent on average of sales
revenue of the coffee shop
4. Operating Expenses
a. Salaries and Wages- based on human resource plan
b. Depreciation:
· Building's useful life - 15 years
· Equipment's useful life - 5 years
· Landscaping and interior design - 5 years
c. Promotional materials-based on marketing plan
d. Rent Expense- refers to the rentofthe 2,500 square meter
lot currently being occupied by the antique shop, and
where Casa Fernandina will be erected.
e. Utilities - includes air conditioners, lights, other
electricity, water, and phone charges
5. Other Income- refers to use of function room (50 pax) and
rent from concessionaire
Financial Study 45
29. Exhibit 2-1
Casa Fernandina Pro-forma Income Statement
for the Year Ended December 31, 2004
Year1 Year2 Year3 Year4
Sales Revenue
Hotel 1,920,000.00 2,028,000.00 3,030,000.00 3,030,000.00
Coffee Shop 889,560.00 889,560.00 1,317,501.90 1,317,501.90
Total Sales Revenue 2,809,560.00 2,917,560.00 4,347,501.90 4,347,501.90
Cost of Goods Sold
Free Breakfast 85,536.00 91,368.00 112,752.00 112,752.00
Pastries, etc 241,069 50 321.426.00 467,283.96 386,717 76
Total Cost of Goods Sold 406,962.00 412,794.00 580,035.96 580,035.96
Gross Revenue 2.402,598.00 2,504,766.00 3,767,465.94 3,767,465.94
Operating Expenses
Salaries & Wages 1,568,486.85 1,615,54146 1,777,095 60 1,830,408.47
Depreciation 321,472.69 321,472.69 321,472.69 321.472.69
Promotional Materials 17,600.00 18,128.00 18,671.84 19,232.00
Rent Expenses 139,392.00 143,573.76 147,880.97 152,317.40
Utilities
Aircon 176,000.00 195,520.00 250,931.20 260,968.45
Lights 22,000.00 24,440.00 31,366.40 32,621.06
Water 165,000.00 183,300.00 235,248.00 244,657.92
Other Electricity 16,500.00 18,330.00 23,524.80 24,465.79
Phone 43,200.00 47,520.00 47,520.00 52,272.00
Office Supplies 27,500.00 30,550.00 39,208.00 40,776.32
Housing Supplies 53,240.00 59,144.80 75,906.69 78,942.96
Total Operating Expenses 2,550,391.54 2,657,520.71 2,968,826.19 3,058,135.05
Operating Income (147,793.54) (152,754 71) 798,639.75 709,330.89
Other Income
Function Room 314,000.00 314,000.00 314,000.00 578,000.00
Rent from
Concessionaire 240,000.00 240,000.00 240,000.00 300,000.00
Gross Income 406,206.46 401,245 29 1,352,639 75 1,587,330.89
Tax Expense 150,424.75 144,699.65 432,844 72 507,945.89
Net Income 255,781.71 256,545.64 919,795.03 1,079,385.01
46 How to Prepare Project Feasibility Studies
YearS
4,008,000.00
1,768,953.60
5,776,953.60
134,136.00
638,727 55
772,863.55
5,004,090.05
2,013,449.32
321.472.69
19,808.96
156,886.92
322,880.96
40,360.12
302,700.90
30,270.09
57,499.20
50,450.15
97,671.49
3,413,450.80
1,590,639.25
578,000.00
300,000.00
2,468,639.25
789,964.56
1,678,674.69
::.
Receipts
Collectionsfrom C
ustomers
Payments
T
osuppf!eCS
Toemployees
F
01 income lax
Total Cash payments
NetCash Inflowfrom
()pela!rigAdlvi1ies
Cash~kom In~Activities
WoOOng Capital (2months)
BusilessRegislratiorJ
PermitFees
ConstructionCostEslima!e
OtherCons!ructionMaterialsfrom
3RuOOownAntiqueHouses
Antiques&lnteoor~
Landscaping&Ex!eoorDesign
Materials&Equipments
NetCash OutfMJwfrom
inves!Nlg adivilies
Net Cashflowbeforefinancing
Cash~from
FmanclngActivilies
Equity
Total Cashin~ from
financingactivities
NETCASH
BeginningCash
Ending Cash
Measurement
Payback Period
Net Present Value
Exhibit 2-2
Casa Fernandina
Cash Flow Statement
for the Year Ended December 31, 2004
Yearo Year 1 Year2 Year3
3,363,560.00 3,471,560.00 4
,901
,501.90
987,037.50 1,133,300.56 1,450,293.86
1,568,486.85 1,615,541.46 1,ffi,095.60
150,424.75 144,699.65 432,844.72
2,705,949.10 2,893,541.67 3
,660,234.18
657,610.90 578,018.33 1,241,267.72
(362,960.40) 0 0 0
(5,000.00) 0 0 0
(2,537,690.35) 0 0 0
(600,1XM!OO) 0 0 0
(853.850.00) 0 0 0
(326,1XM!OO) 0 0 0
(788,006.00) 0 0 0
(5,473500.75) 0 0 0
(5,473,506.75) 657,610.90 578,018.33 1
,241,267.72
5
,500,000.00
5.500,1XM!OO
26,493.25 574,126.38 578,018.33 1,240,005.08
0.00 26,493.25 600,619.63 1,178,637.97
26,493.25 600,619.63 1,1
78,637.97 2
,4
18,643.05
Decision Criteria
Greater than required by the investor
Greater than or equal to zero
Internal Rate of Return Greater than or equal to the
prevailing rate of Treasury Bills
Year4 YearS
5,225,501.90 6,654,953 60
000 000
1,405,723.65 1,851,392.35
1,830,408.47 2
,013,449.32
507,945.89 789,964.56
3,744,078.00 4
,654,800.22
1,481,423.90 2
,000,147.38
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1,481,423.90 2,000,147.38
1,400,857.70 1,998,536.47
2,418,643.05 3,819,500.74
3
,819,500.74 5,818,037I2
Value
4 years & 7 months
Php3,054,196
20%
Financial Study 47
30. Exhibit 2-3
Casa Fernandina
Pro-forma Income Statement
for the Year Ended December 31,2004
Year1 Year2 Year3 Year4
ASSETS
Cash 600,619.63 1'178,637.97 2,418,643.05 3,819,500.74
Inventory on Hand 3,128.02 3,128.02 4,390.66 4,390.66
Total CurrentAssets 603,747.65 1'181,765.98 2,423,033.70 3,823,891.40
Property, Plant, & Equipment 5,473,506.75 5,152,034.06 4,830,561.37 4,509,088.68
Less: Depreciation 321,472.69 321,472.69 321,472.69 321,472.69
Total Property, Plant,
& Equipment 5,152,034.06 4,830,561.37 4,509,088.68 4,187,615.99
TOTAL ASSETS 5,755,781.71 6,012,327.35 6,932,122.38 8,011,507.39
LIABILITIES
Accounts Payable
Totalliabilit1es
Equity
Capital 5,500,000 00 5,500,000.00 5,500,000.00 5,500,000.00
Begmnmg Reta1ned Eammgs- 255,781 71 512,327.35 1,432,122.38 2,511,507.39
Retained Earnings 255,781 71 256,545.64 919,795.03 1,079,385.01
End1ng Reta1ned Earnings 255,781 71 512,327.35 1,432,122.38 2,511,507.39
Total Equity 5,755,781 71 6,012,327 35 6,932,122.38 8,011,507 39
TOTAL LIABILITIES
& EQUITY 5,755,781.71 6,012,327.35 6,932,122.38 8,011,507.39
Exhibit 2-4
Casa Fernandina: Financial Ratios
Operating Profitability Year 1 Vear2 Vear3 Vear4
ORIOI 0.07 0.06 0.19 0.19
Operating Profit Margin 0.14 0.14 0.31 0.37
T
otal Asset Turnover 0.49 0.49 0.63 0.54
F1xedAsset Turnover 0.55 0.60 0.96 1.04
Return on Equity 0.04 0.04 0.13 0.13
Inventory Turnover 77.07 102.76 106.43 88.08
48 How to Prepare Project Feasibility Studies
YearS
5,818,037.22
6,001.56
5,824,038.78
4,187,615.99
321,472.69
3,866,143.30
9,690,182.08
5,500,000.00
1,678,674 69
4,190,182.08
9,690,182 08
9,690,182.08
YearS
0.25
0.43
0.60
1.49
0.17
128.70
Exhibit 3
Step-by-Step Process in Computing
for Internal Rate of Return Using Excel
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.
1=1
RR( J
IfliR;;c;;.IM"uI
5. The values should
come from the net
cash 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
look for Financial,
then check IRR on
the list.
7. Press 'Enter' to get the Internal rate of return
c
Year (i Yeor 1 Vez 2 Year 3
a."n Oper.t!DJS .-45((00 12tt00 240COO ~
•• .. ... "::Il
...
Financial Study 49
32. Socio-Economic Study
A PROJECT, to be worthy of financing especially from government
institutions, should be geared towards generating not only revenues
and profits but also social and economic benefits to various
stakeholders. This portion of the study will serve as an aid in
determining the socio-economic contributions of a project.
Figure 8 shows how a project can contribute to improve the
standard ofliving, enhance community development, increase both
foreign exchange savings and reserves, aid in the lowering ofprices,
and increase the demand for local materials.
The socio-economic evaluation ofthe study will, therefore, briefly
explain the impact of the project in terms of the following:
1. Employment and income, resulting in the improvement in the
standards of living of its employees and their families.
2. Taxes since the increased revenues of the local and national
governments can then be used for the development of the
community.
3. Supply of commodities, observing the different possibilities of
influencing prices and foreign exchange balances.
4. Demand for materials by specifying the use of home-grown
materials to allow local producers to sell more goods
By generating employment and income, the project directly
benefits its employees and their families. Indirectly, the local
economy as well as the larger national economy may be benefited.
More income in the hands of the people would mean greater demand
for other goods. This additional demand may, in turn, stimulate the
production of more goods, thereby generating further employment
and income for other members of the community.
The production activity ofthe project favorably affects the supply
situation of the industry in various ways. Where there are few sellers
of a particular product or service, the project's entry reduces the
supply shortage, resulting in lowered prices. In an overcrowded
52 How to Prepare Project Feasibility Studies
l
industry on the other hand, the project may r~sult .in. ii.npr?ved
product quality and/or decreased prices~ e~peCially ~f It IS h1ghly
competitive in quality and pricing upon Its mtroduchon.
At the same time, the production activity creates additional
demand for raw materials and other industrial inputs. This stimulates
the production of more raw materials and supplies, thereby
promoting linkages within the industry.
In generating employment and income and increasing production
activity, the government stands to benefit through more revenues
from taxes.
Figure 8. Aspects
Employment
Social and Economic
Factors Affected
Socio-Economic
Contributions
Improved
Standard of
Living
Foreign
Exchange
Reserves
Utilization
of Local
Materials
Socio-EconomicStudy 53
33. 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
• Expressed in terms of results rather than actions
• Measurable and quantifiable
• Clear time frame
• Challenging and yet attainable
• Written down on paper
• Communicated to all members of the organization.
Once the objectiv~s and the ways and means of attaining
~hem have b~en established, the next step is to prepare an overall
Implementation plan. This is discussed in the organization and
management study, as follows:
1. Basic considerations in forming the organization
2. Form of ownership
54 How to Prepare Project Feasibility Studies
3. Organizational chart I Management of the Project
4. Officers and Key Personnel I Labor Requirement
5. Project schedule
A. BASIC CONSIDERATIONS
First, the purpose of the project must be restated. Then,
by consolidating the inputs from the marketing, technical
and financial studies that are relevant to organization and
management, the project's organizational chart may now be
designed. For example, the marketing organization proposed
in the marketing study will now be included in the master plan,
along with the production staff described in the technical study.
B. FORMS OF OWNERSHIP
The four forms of ownership are:
1. Single proprietorship
2. Partnership (general or limited)
3. Corporation ranging from small to large-scale enterprises
4. Cooperative organization (consumers, producers, marketing,
or financing)
D. ORGANIZATIONAL CHART
In an organization chart, all personnel - from the management to
the rank-and-file-employees - are presented in a diagram which
shows their relationships and the flow of authority.
E. OFFICERS AND KEY PERSONNEL
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.
Organization and Management Study 55
34. F. PROJECT SCHEDULE
The different activities involved in the preparatory stage of the
project are presented in the Gantt Chart, stating the duration of
each activity and/or the PERT Network to establish the sequence
to be followed for the different activities.
With a computer-based Project Management software, an analyst
can prepare the schedule and the associated PERT/CPM. He/she can
play around with the project schedule using the "Whatif?" scenario,
assuming unforeseen delays, untimely delivery of resources, or
inability to raise funds when needed. The analyst can also track the
progress of activities taking note of slippages that need immediate
attention by management.
56 How to Prepare Project Feasibility Studies
Environmental Impact Study
A. WHAT IS ENVIRONMENTAL IMPACT ASSESSMENT {EIA)?
Environmental Impact Analysis is a study that tries to determine
the relationship between a proposed project and the affected
surrounding environment. It attempts to address the possible
environmental damage that may arise from the development
initiatives of the business and the government sector. The
objective ofenvironmental management is to achieve the greatest
benefit with the use of natural resources without sacrificing
their potential to meet future needs. Projects that are favorable
to the development of the country but may be destructive to the
environment may be suspended.
B. WHAT TYPES OF PROJECTS REQUIRE AN EIA?
Projects that require EIA include the following:
1. Environmentally Critical Project (ECP) - these are projects
that may have negative environmental impact.
2. Project to be located in an Environmentally CriticalArea (ECA) -
these are places that are ecologically, socially, or geologically
sensitive.
C. ENVIRONMENTAL IMPACT STATEMENT (EIS) SYSTEM
EIS is a document that contains the considerations, findings
and recommendations of an EIA for projects that are large and
known by experience to create major stresses or pose risks to the
environment and the immediate community of people.It provides
an EnvironmentalManagement Plan, which contains the measures
to prevent or reduce damage and alleviate the foreseen negative
effects of the project on the natural environment or on the lives
of the people around it.
57
35. D. MAJOR SECTIONS OF THE EIS
I. Project Description - project information, location, rationale,
alternatives and phases of implementation
II. Baseline Environmental Conditions - land, air, water, and
people
IlL Impact Assessment and Mitigation - identification, prediction
and evaluation ofimpact; an analysis offuture environmental
conditions with and without the project
IV. Environmental Management Plan (EMP) - measures for
mitigation and enhancement; environmental monitoring;
information, education and communication; institutional
arrangements and costs to implement the plan. Proper
implementation of the EMP should guarantee that the project
will operate in an "environment friendly" manner
V. Proposalfor an Environmental Monitoring Fund
VI. Attachments orAnnexes - list of EIS documents; Accountability
Statements of EIS; Process documentation reports; Maps and
photos of project site and impact areas.
E. MAIN COMPONENTS OF AN EIA PROCESS
I. Screening and Scoping - a procedure that allows the
Environmental Management Board, the DENR Officer, and
all stakeholders to meet and agree on what issues the project
needs to closely examine once the proponent conducts the EIA.
Scoping is an important procedure, which allows the
proponent to listen to the stakeholders, particularly those
affected by or concerned with the project, to cover relevant
issues and set the parameters of the study.
II. Baseline Study - the data gathering phase of the EIS.
58 How to Prepare Project Feasibility Studies
III. Socio-economic and Public Participation - A comprehensive
study of the population, its income, labor, market, social
services and cultural practices, which will be used to predict
and assess the impact of the project.
Public Participation refers to the cooperation and
coordination among the stakeholders.
IV. Assessing the Environmental Impact
a. Identification of the project location, activities, and the
alternatives available
b. Actual Assessment
i. Predictive Phase - assessment of the magnitude of the
impact that may result from the project.
ii. Evaluative Phase - consideration of the relative
importance of the resources that may be affected by the
project.
COMPONENTS OF ENVIRONMENTAL IMPACT ANALYSIS PROCESS
.------. IMPACTASSESSMENT
1
1-------. EIA DOCUMENT PREPARATION
1
EIAREVIEW
1
DECISION
APPROVE DENY
1
'------- MITIGATION AND MONITORING
Environmental Impact Assessment Study 59
36. F. ENVIRONMENTAL COMPLIANCE CERTIFICATE (ECC)
An ECC is issued by the Secretary of the Department of
Environment and Natural Resources (DENR) or the Director of
the Environmental Management Bureau (EMB) after a thorough
and open review of the project studies and plans.
The ECC is given to the project proponent who submits to an
Initial Environmental Examination (lEE). The lEE contains the
project description, its impact, and measures to preventnegative
impact on the environment and the communities that will be
affected by the project.
lEE is the basic step for projects located in environmentally
critical areas. The lEE Checklist report is to be accomplished before
undertaking a project. It consists of a series of questions that deals
with issues and concerns about the project and its environment.
lEE Checklist is available for the projects under the following
categories:
Batching Plant Project Fishery Project
Composting Facility Project Community-Based Forest Resources Utilization
Gasoline Station Project Selected Housing, Land Dev't and Other Building
Selected Irrigation Project Land Transportation Terminal
LPG Storage Marble Slab processing Plant Project
Mini-Hydro Power plants Piggery farm project
Plastic Recycling Poultry Farm Project
Power Barge Plant Public Market
Rice Mill Project Selected Roads and Bridges Projects
Sand and Gravel Project Collection, Transport, Treatment and Disposal of
Sewage
Slaughter House Small Scale Lime Extraction Project
Tourism Project Telecommunication Antennas, Mobile Phone Cell
Sites and Similar Facilities
Cold Chain Private Land Timber Utilization Project
Grains Highway Power Transmission Lines and Substation
Ro-Ro Terminal Rehabilitation or Expansion of Port Facility
Small Water Impounding Philippine Economic Zone Authority
Source: www.emb.gov.ph
60 How to Prepare Project Feasibility Studies
Review Process of an Environmental Impact Statement (EIS)
( EIS SUBMISSION J
EIA REVIEW by EIA REVIEW COMMITTEE
at EMS CENTRAL OFFICE
Substantive Review
Public Hearing
Site Inspection
EIA REVIEW COMMITTEE REPORT
and RECOMMENDATION to the EMB DIRECTOR
DECISION ON EIS
120 Working Days
( ECC GRANTED or DENIED J [ EIS is RETURNED
to the PROPONENT J
Environmental Impact Assessment Study 61
37. Review Process of an Initial Environment Examination (IEE)2
lEE SUBMISSION
EIA REVIEW by EMB REGIONAL OFFICE
15 DAYS to initiate Substantive Review
15 DAYS maximum for Substantive Review
EMB REGIONAL OFFICE EIA DIVISION
REPORT AND RECOMMENDATION
15 DAYS
DECISION ON lEE REPORT
60 Working Days
DECISION ON lEE CHECKLIST
30 Working Days
62 How to Prepare Project Feasibility Studies
Detailed Outline of a
Project Feasibility Study
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
II. Market 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
38. 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-EconomicStudy (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
V. Organization and Management Study
A. Formulation of Goals and Objectives
B. Basic Considerations
C. Form of Ownership
D. Organizational Chart
E. Officers and Key Personnel
F. Project Schedule
VI. Environmental Impact Analysis
VII. Recommendation
64 How to Prepare Project Feasibility Studies
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 abrief discussion ofthe major parts of a project study
which are generally of prime importance in making a "go" or "no
go" decision.
A. MARKET STUDY
The market study answers two basic questions: Is there a
demand for the product? If so, can the marketing program
effectively meet this demand?
Inthe process of determining demand, the corollary issues of
market size, location, segmentation, characteristics, and growth
as well as the supply situation are tackled. The conclusion -
whether or not there exists substantial demand, or can the
demand be fully met by supply? - is at the heart of the whole
project study. If demand does not exist nor cannot be created,
there is no point in pushing through with the project.
However, if the findings on the demand are favorable,
the next question is how to address such a demand. Here,
the marketing program comes into focus. The selling price,
product quality and packaging, channels of distribution,
and promotions are taken into consideration. The marketing
65
39. program is then evaluated against the backdrop of general
marketing practices within the industry to assess its chances
of meeting its objectives.
Ultimately, the answers to the two basic questions posed
earlier greatly affect the feasibility of the project. A negative
response to either question means that the project has no
potential for success.
B. TECHNICAL STUDY
There are three basic issues to be considered in the technical
section. These are product quality, resource availability and
accessibility, and optimal use of resources to produce the
highest possible quality at the lowest possible cost.
Product quality should allow the product to compete
favorably with existing market leaders. The product should
likewise be appropriate and suitable for its intended use(s).
One should ask the question: What characteristics distinguish
this product from the others in the same category?
Resource availability and accessibility are nextinimportance.
Itis oflittle use to aspire for a product with superior qualities if
the raw materials needed are always short in supply or cannot
be readily transported from their points of origin. Resources
also mean labor, equipment, machinery, utilities, technology,
and all other items that are directly necessary for production.
Are they all available in sufficient quantities and at reasonable
costs?
The focal point of the technical study is to determine the
most efficient way of allocating resources to produce the
desired product with competitive quality at the lowest possible
cost. The product and its characteristics have been defined.
The resources necessary for production have been identified.
66 How to Prepare Project Feasibility Studies
It isnow a question of efficient and effective use of resources.
If this can be reasonably attained, then the technical aspect of
the study is deemed feasible. It may also be concluded at this
stage that the productof a spe~i~c quality an~ :With a confirmed
demand in substantial quantities can be effictently produced.
C. 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
fi't bt"l1
"ty This is so because a profitable income statement
pro a . 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, ?Y 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 ofoverallbusmess
performance.
If, for instance, Firm A generates a profit of P~ million as
against Firm B's P100,000, it would appear that Fum A has a
better financial picture. If Firm A, however, had a revenue of
P10 million while Firm B earned a revenue o~ PSOO,OO_O, the,n
Firm A's 10% return on sales pales in companson to Ftrm B s
20%. In this case, Firm B is said to be more profitable.
In evaluating the profitability of a project, it is imp?rtant to
consider the industry's profitability situation. I~ ~ mdust?'
where 10% profitability is the historical trend, mmmg for 20 Yo
may be tantamount to asking for the moon. On the other hand,
Pointers in Evaluating a Project Feasibility Study 67
40. a projected profitability of 10% in an industry where 20% is
generally attainable leaves much to be desired.
P~ofitability must also be viewed from a long-term or
medm_m-term perspective. Losses in the first few years of
operat10~ do not necessarily suggest an unprofitable venture.
If a contmually profitable operation is projected after, say,
three years, the project may still be considered viable. Hence
profitability in the long-run is the more relevant gauge. '
Finally, the question of financing comes into focus. If the
pr.o~ect is ~eemed profitable, are there enough sources for the
m1tial capital requirements? Are the financing arrangements
and terms reasonable and viable? In general, financing would
not be a troublesome issue if the other aspects of the project
study (e.g., market, technical, etc.) yield favorable conclusions.
An undert~king ~h!ch can efficiently and profitablyproduce a
pro.duct :-vith sufficient demand will certainly not be wanting
m financmg.
D. SOCIO-ECONOMIC STUDY
The evalu~t~on of this portion of the project study is a matter
of ~e:ermi~mg whether society and the economy derive net
positive gams from the project.
. It is not, however, a simple exercise. For instance, a plant
m a remote community may provide the local residents with
better i~come-earning opportunities. But, if in the process,
the environ_ment is seriously polluted, the community may be
better off ~Ithout the plant and the improved income earning
opporturuties.' !heextent of pollution and the value judgments
of the auth?nties and the community will strongly influence
the evaluatiOn of the project's socio-economic desirability.
The economic aspect is relatively easier to evaluate. If
~he project intends to produce an essential item that is not
m abundant supply, the positive effects on the economy as
68 How to Prepare Project Feasibility Studies
a whole can hardly be doubted. The issue becomes ticklish
in a situation where the product intended for production is
completely non-essential, e.g., fancy items, or those already
in excess supply.
The project proponents may be regarded as nothing more
than profit-seeking individuals with little or n.o concer~ f~r
socio-economic uplift. This may be the case even 1f the proJect IS
entirely harmless from the socio-economic viewp?int, bu.t ~oes
not contribute to the promotion of socio-economic conditions.
At this point, it is worthwhile to distinguishbetween priva:e
sector projects and government projects. The former w1ll
generally consider profitability as the primary criterion. ~he
latter will place socio-economic desirability above anythmg
else.
Thus, while government projects at times ignore profitability
for as long as socio-economic desirability is achieved, pri:a~e
entities in general do not feel inclined to do the same. This IS
a vital consideration in evaluating different types of projects.
E. ORGANIZATION AND MANAGEMENT STUDY
Two major questions may be posed in evaluating organization
and management aspects of a project study:
• Is the organizational setup optimally effective?
• Are the recommended key officials the best qualified
under the circumstances?
Optimum effectiveness refers to the ability of t~e
organizational setup to carry out its function~ smoot~ly wh:le
having the lowest number of personnel possible. This.1r:'?~Ies
a clear and precise identification of duties and responsibihhes,
flow of authority, and staffing level requirements. Thus, an
organization that can perform in the most effective manner
with the fewest personnel possible shall be considered most
appropriate for the project.
Pointers in Evaluating a Project Feasibility Study 69
41. Keeping this criterion in mind, the qualifications of
individuals recommended for key positions must also be
examined. Is a particular manager suited for the demands of
the position? Iss/he the best available? Does s/he have the right
background, training and experience for the job?
O~ganization and management factors are normally
considered toward the end of the project study. But it is by no
means the least important.
~e organizat~onal framework is the link between planning
and Implementation. Itwill determine the successful realization
of the project goals and objectives. Every step, therefore, must
be carefully takenin deciding on the positions to be created, the
relations~ips of positions, the number of personnel to employ,
and the kmd of staff to put in place. The plan is only as good
as the implementers.
70 How to Prepare Project Feasibility Studies
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, non-
availability 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 temperits 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
42. In this example, scientific and purely qualitative analyses
may seem to contradict each other. On the contrary, they are
complementary. The scientific approach assures the project
proponent of a minimum level of demand. The qualitative analysis
seeks to determine if this particular level of demand can potentially
be realized after considering certain external factors that are difficult
to relate systematically to the scientific approach. This is readily
evident in the case of people's tastes. Evaluating them is primarily
a qualitative concern.
This should dispel the popular notion that the project study is
sometimes a useless endeavor since "gut feel" is at times a better
yardstick for making decisions. The project study need not be
regarded as contradictory to or oblivious of "gut feel." It need not
be the sole basis for making decisions. A project study is, in essence
a scientific and systematic approach to decision-making. It is really
a guide, not an imposition.
Certainly, the recommendations of a project study can be further
upheld or reversed by qualitative insights or "gut feel." A lot,
therefore, will depend on the project evaluator's balanced sense of
perspective.
As a last and final note, the foregoing guide to the preparation
of Project Feasibility Studies applies to both industrial and
agricultural ventures. The overall guideline is for the PFS to
include comprehensively the major concerns of any PFS: marketing,
production, finance, organization and socio-economic viability of
an industrial or agricultural project. The PFS writer is free to adjust
the form and content of the Project Feasibility Study guide to fit the
requirements of an agro-based project as well.
72 How to Prepare Project Feasibility Studies
Annexes
