426973215-Reviewer-Mas-2.pptx

PROJECT FEASIBILITY STUDY
(PROJECT STUDY OR FEASIBILITY STUDY)
- Refers to the systematic gathering and analysis of data which
aims to find out the viability of the proposed business
undertaking. Generally, it involves:
a. collection of data which are relevant and necessary to all
aspects of the undertaking;
b. evaluation and analysis of the data gathered, and
c.formulation of recommendation.

BENEFITS
- Specific advantages from preparing Project Feasibility Studies
may be delineated, considering the different interested parties that
may be benefited by the study:
a. Proponents/Promoters/Organizers of new projects – it serves as
a basis for ascertaining the practicability / workability of proposed
projects.
b. Creditors – it serves as a basis for the creditors to decide
whether or not to provide financial assistance and to determine the
appropriate terms and conditions of such assistance.
c. Stockholders / Investors – to decide whether to invest in the
project of not.

BENEFITS (continued)
d. Management of existing firms – to ascertain the feasibility of
expansion programs. It also serves as a basis in deciding on the
possibility of taking over existing business, as well as the extent of
the capital outlay required.
e. Government Instrumentalities – to evaluate the project’s social
desirability and to check if the project meets the applicable legal
requirements, as well as to determine the level or extent of
incentives that may be granted.
f. National Economy as a Whole – a project study assists in
minimizing the risk of failure of business ventures. Thus, wastage
of valuable resources is reduced, thereby accelerating economic
growth.

MAJOR ASPECTS OF A PROJECT STUDY
-The major aspects of a typical Project Feasibility Study are briefly
described as follows:
a. Management - the study of management aspect assists in the
selection of business structure, personnel setup, and internal policies
of the enterprise for an effective operation.
b Marketing – This ascertains the future demand for the product. It
involves the study of current and projected supply and demand setup.
c. Technical – The study of technical aspect aims to choose the
process to be used, plant capacity, layout, machinery design,
materials, and other technical facors to attain cost minimization and
profit maximization.

MAJOR ASPECTS OF A PROJECT STUDY (continued)
d. Taxation – This covers the study of tax effects, as
well as legal tax savings measures and other
government incentives applicable to the project.
e. Legal – Various legal aspects are studied to
determine if requirements are met and possible
incentives and protection are availed of.
f. Financial – This quantifies the result of marketing,
technical, management, taxation, and legal phases
and expresses in peso terms the possible
profitability of the project.

MAJOR ASPECTS OF A PROJECT STUDY (continued)
g. Sources of Financing – It provides a study of the
possible sources of financing that can be tapped to
carry out the project.
h. Profitability – It weighs the ratio of capital outlay
in relation to profit that can be obtained.
i. Economic Benefits or Social Desirability – This
involves a study of the project’s contribution to the
nation, considering both the economic and
environmental aspects.

FEASIBILITY STUDY GUIDELINE
(from the University of the Philippines Institute of Small-Scale Industries)
I. Summary of Project
A. Name of firm
B. Location head office / factory
C. Brief description of the project
1. History of business
2. Nature or kind of industry
3. Type of organization
4. Officers of the business and their
qualifications

FEASIBILITY STUDY GUIDELINE (continued)
II. Economic Aspects
A. General Market Description
1. Market Description– a brief description of the market to include
the following:
a. Areas of dispersion
b. Methods of transportation and existing rate of transportation
c. Channels of distribution and general trade practices
2. Demand
a. Consumption for past ten years
b. Major consumers of the product
c. Projected consumption for the next five years

II. Economic Aspects (cont’d.)
A. General Market Description (cont’d.)
3.Supply
a. Supply for past ten years, classified as to source – imported or
locally produced. For imports, specify the form in which goods
are imported, the prices and the brand. For locally produced
goods, the companies producing them, their production
capacities, brands, and market shares shall be specified.
b. Factors affecting trends in past and future supply.
4. Competitive Position
c. Selling price – include a price study indicating the past domestic
and import prices, the high and low prices within the year, and
the effect of seasonality, if any.

B. Marketing Program
1. Description of present marketing practices of competitors
2. Proposed marketing program of the project describing the selling
organization, the terms of sales, channels of distribution, location of
sales outlets, transportation and warehousing arrangements, and
their corresponding costs
3. Promotion and advertising plans, including costs
4. Packaging
C. Projected Sales
1. Expected annual volume of sales for the next five years considering
the demand, supply, competitive position, and marketing program

D. Contributions to the Philippine Economy
1. Net annual amount of pesos earned or saved, and basis used
2. Labor employed
3. Taxes paid
III. Technological Feasibility
A. Products
1. Description of the product(s) including specifications of their
physical,
mechanical, and chemical
properties
2. Uses of the product(s)

III. Technological Feasibility (cont’d.)
B. Manufacturing Process
1. Description of the process showing detailed flowcharts indicating material and
energy requirements at each step and normal duration of the process.
2. Alternative processes considered and justification for adopting such processes
3. Technological assistance used and contracts, if any
C. Plant Size and Production Schedule
1. Rated annual and daily capacity per shift, operating days per year, indicating
factors used in determining capacity
2. Expected production volume for the next five years considering start-up and

D. Machinery and Equipment
1. Machines and equipment layout indicating the floor plan
2. Specificationsof the machinery and equipment required indicating
rated capacities of each piece
3. List of machineriesand equipment to be bought and origin as to local or
imported
4. Quotationis from suppliers, machinery guarantees,delivery dates, terms of
payments, and other arrangements.
5. Comparative analysis of alternative machinery and equipment in terms of
cost, reliability, performance and spare parts available

E. Plant Location
1. Location map of the plant
2. Desirability of location in terms of distance from the source of raw materials and
market and other factors and a comparative study of different locations, indicating
advantages and disadvantages (if new project)
F. Plant Layout
Description of the plant layout, drawn to scale
G. Building and Facilities
3. Types of building and costs of erection
4. Floor area involved
5. Land improvements, such as roads, drainage, etc., and their respective costs

H. Raw Materials
1. Description and specifications of their physical, mechanical, and
chemical properties
2. Current and prospective costs of raw materials, terms of payment, and
long-term contracts, if any
3. Availability and continuity of supply and current and prospective sources
4. Material balance or material process chart
I. Utilities
Electricity, fuel, water, stea, and supplies indicating the uses, quanity
required,

J. Waste Disposal
1. Description and quantity of waste to be disposed of
2. Description of the waste disposal method
3. Methods used in other plants
4. Cost of waste disposal
5. Clearance from proper authorities or compliance with legal
requirements
K. Production Cost
Detailed breakdown of production costs, indicating the elements of cost per
unit of output.

III. Technological Feasibility
L. Labor Requirements
Detailed breakdown of the direct and indirect labor and supervision
required for the manufacture of the
product(s) indicating compensation, including fringe
benefits.

IV. Financial Feasibility
A. For Existing Projects
1. Audited financial statements (balance sheet, income statement, cash flow statemen
for past three years to reflect the following:
a. Aging of receivables
b. Schedule of fixed assets showing the capital cost, estimated useful life, and
depreciation method used
c. Schedule of liabilities, tax assessments, and other pending claims or litigation
against the applicant, if any
d. Financial trends and ratio analysis
e. Elements of production, selling, administrative, and financial expenses
2.Financial projections for the next five years (balance sheet, income statement, cash flow
statement)

IV. Financial Feasibility
For Existing Projects (cont’d.)
3. Supporting schedules to the financial projections, stating assumptions
used:
a. Collection period of sales
b. Inventory levels
c. Payment period of purchases and expenses
d. Elements of production cost, selling, administrative, and financial
expenses
4.Financial analysis to show the rate of return on investment, return on
equity break-even volume, and price analysis

IV. Financial Feasibility (cont’d.) B.
For New Projects
1. Total project cost (fixed and working capital)
2. Initial capital requirements
3. Pre-operating cash flows relative to the project timetable
4. Financial projections of the five years of operations to include balance sheets,
income statements, cash flows
5. Supporting schedule to the financial projections to include:
a. Collection on sales
b. Inventory levels
c. Payment period for purchases and expenses
d. Elements of production cost, selling, administrative, and financial expenses
6. Financial analysis showing return on investment, return on equity, break-even

FINANCIAL STUDY
Steps in Financial Study
Conducting the financial study involves the following steps:
a. Determine the specific financing requirements of the project with respect to
types and ost of the assets to be acquired.
b. Identify the altenative sources of financing, including the terms and
conditions, the effective cost, and the maximum amount of financing from
each source.
c. Ascertain the desirable debt-equity ratio, i.e., the relationship between the
financing that can be obtained from creditors and financing that can be
provided by the stockholders.
d. Establish the project’s financial policy.

FINANCIAL STUDY
Major Parts of the Financing Study
1. Statement of assumptions
2. Projected financial statements
3. Possible sources ofd outside financing
4. Details of various amoaunts contained in the projected financial
statements
5. Analysis of financial projections

FINANCIAL STUDY
Statement of Assumptions
Assumptions – statements about the possible future behaviour of certain
factors affecting a project.
Examples of Assumptions Made in Feasibility Studies
-
-
-
-
-
Sales volume, selling price, and distribution media
Plant locatioin, capacity, and requirements
Taxes
Foreign exchange rate and price level changes
Project timetable

FINANCIAL STUDY
Projected Financial Statements
1. Projected balance sheet
2. Projected income statement
3. Projected cash flow
statement

The projected financial statements are used to evaluate the results of the
financial projections as to the project’s profitability, liquidity, and solvency, as
well as its ability to withstand difficulties. The evaluation is enhanced by
preparing / determining the following, amount others:
A. To measure profitability
1. Common-size projected financial statements
2. Rate of return on investment
1. A. discounted rate of return
2. Accounting rate of return
3. Profitability index
3. Cost-Volume-Profit (CVP) / Break-even analysis
4. Earnings per share
FINANCIAL STUDY

FINANCIAL STUDY
Projected Financial Statements
(cont’d.)
B. To Measure Liquidity
1. Current ratio
2.Acid test ratio
3. Payback period
4.Cash break-even
C. To Measure Financial Leverage
1. Debt-to-equity ratio
2. Equity-to-assets ratio
3. Debt-service break-even point

FINANCIAL STUDY
Possible Sources of Financing
Internal Source of Financing
- Funds obtained within the firm principally through earnings and
depreciation
External Source of Financing
- Funds furnished by owners (equity and creditors (debt)

FINANCIAL STUDY
Classification of Funds
1. Short-term funds – will be needed for one year or
less Possible sources:
- Trade credit
- Commercial banks and other financial institutions
- Advances from customers
- Loans derived from relatives, friends, directors, stockholders, and
officers
2. Intermediate funds – will be needed between one to five years

FINANCIAL STUDY
Classification of Funds (cont’d,)
3. Long-term funds – will be needed for five years or
more Possible soures:
- Issuance of capital stocks
- Issuance of bonds
- Retention of earnings
- Depreciation
- Suppliers/Manufacturers of machiner and equipment
- Long-term loans from banks and other financing
institutions

FINANCIAL STUDY
Classification of Funds (cont’d.)
Factors to consider when obtaining long-term funds:
1. Control
- Common stocks may have voting rights
- Referred stocks are usually non-voting
- Ceditors share no direct participation in the management of the firm, except to the
extent that restrictions are included in loan agreements.
2. Cost
- Flotation costs of stocks and bonds
- Dividend requirements when shares of stocks are issued
- Dividends are not tax deductible
- Interest expense on loans is tax deductible

FINANCIAL STUDY
Classification of
Funds
3. Risk
- Debt financing entails greater risk than equity financing, because
debt obligations have definite maturity dates and interest is a fixed
charge which be paid even when profits decline
mus
t
- Long-term bonds entail less risk than short-term notes because short-
term notes must be renewed periodically and
renewals are subject to the uncertainty of
future interest rates and availability of funds.

FINANCIAL STUDY
SENSITIVITY ANALYSIS
Feasibility Studies involve projected data, developed under specific
assumptions. Uncertainty is therefore an unavoidable element.
Sensitivity analysis can be used to minimize the effect of uncertainty. It is
used to determine the impact of a change in a factor(s) influencing a
projected result.
Example:
How will profit change if the projected sales volume is changed by 5%, 10%,
15% 20%?

FINANCIAL STUDY
Attributes of a Good Feasibility Study
A good feasibility study must be:
1. Comprehensive
The study must have adequate information to meet the needs of the user or
users, areas covered must be clearly defined and well- investigated.
2. Objective
It must present / reflect both the positive and negative implications.
3. Simple
The report should be easy to understand. If technical terminologies are
indispensable, explanations should likewise be included.

FINANCIAL STUDY
Limitations / Constraints in Feasibility Study Preparation
Forecast is the primordial basis of feasibility study and as such, the basic
limitations may exist.
1. Unavailability of required and necessary information.
2. Incompetence or inexperience of the one making the judgment
resulting in erroneous conclusions and ;judgment resulting in
erroneous conclusions and ineffective recommendations.
3. The fact that the suy is based on forecast cannot be denied. Any
significant change in the business environment usually renders
results of forecast not coinciding with actual events

MULTIPLE CHOICE
1. It is a systematic gathering and analysis of data concerning a proposed
project and the formulation of conclusion therefrom for he purpose of
determining whether or not the project is viable, and if so, its degree of
profitability.
a.Budgeting
b.Feasibility
Study
c. Viable Costing
d. Profit
Planning
2. Theseare explicit statements about the possible future behavior of certain
variables affecting a project which serve as the premise for projecting
probable financial results.
a.Conclusion
b. Recommendatio
ns
c.
Assumptions
d. Theories

3. Which of the following is correct?
a. A project feasibility study looks into the viability of proposed undertakings, but
does not concern itself with tax implications.
b. The calculation of reasonable probabilities about the future, based on the analysis
of all the latest relevant information by tested and logically sound statistical and
econometric techniques and applied in terms of an executive’s personal judgment
and knowledge of his business is known as project feasibility study.
c. Depreciation is a systematic and rational allocation of cost of asset spread over a
period ot time. To the financial manager, it is not a source of fund; to the
accountant, however, it is considerd a source of fund in the sense that it does not
require cash outlay and as such, retains the portion of funds generated through
revenue inside the firm.
d. A project feasibility study assists in minimizing the risk of failure of business
MULTIPLE CHOICE

MULTIPLE CHOICE
4. The basic steps in the preparation of a project feasibility study are the
following except
a. Gathering and collection of data through research work which are relevant to
all aspects of the undertaking
b. Recording the data obtained in the books of accounts.
c. Evaluation and analysis of the data obtained.
d. Formulation of conclusions and recommendations.
5. Which of the following best identifies the reason for using probability analysis in
preparing a project feasibility study
a.Project Feasibility
Study
b.Uncertainty
c. Unavailability of relevant
data
d. government incentives

MULTIPLE CHOICE
6. It is a thorough and systematic analysis of all factors to ascertain the viability
of a new business venture or major modification of an existing product line or
product line acquisitions.
a. Project Feasibility
Study
b. Product planning
c. Production
management
d. Market analysis
7. Which of the following best describes the objective of a feasibility study?
a. To determine whether there is economicand functional justificationfor
undertaking a new project or updating existing capabilities
b. To improve a company’s use of its capabilities and resources, the primary purpose of
which is to achieve the objectives of the organization.
c. To work as a measuring device to which subsequent performances are compared
and evaluated
d. To introduce new ideas, concepts, and methods to management.

MULTIPLE CHOICE
8. Which of the following statements about a project feasibility study is true?
a.The feasibility study is based on available information
and opinions of those involved in the preparation of such study.
b. The feasibility study shows the actual results of operations of a business proposal.
c.The feasibility study is not affected by any significant changein actual business
conditions as compared to the assumptions used when the forecasts were made.
d.A feasibility study is a plan for the conduct of business for a planning period and
includes the budgeted income statement and all its supporting budgets.
9. The attributes of a good feasibility study are as follows, except
a.comprehensive
b. objective
c. simple
d. accurate

MULTIPLE CHOICE
10. Which of the following is not considered a limitation in preparing project
feasibility studies?
a. Unavailability of the required and necessary information.
b. Incompetence or inexperience of the one making the judgment resulting in
erroneous conclusions and ineffective recommendations.
c. Since a feasibility study is based on forecast, any significant change in the
business environment usually renders the results of forecast not coinciding
with actual events.
d. None of the above

MULTIPLE CHOICE
Items 11 to 18 are based on the following information:
A family friend, Mr. Burn Out availed of the early retirement scheme offered by
his employer. He said that he was already tired of the routine of spending eight
full hours in an office doing the same thing for the last twenty years.
Mr Burn Out plans to get into the field of entrepreneurship. He would invest part
of his retirement pay in a business that would deal with the sale of medical
supplies to local clinics and hospitals.
When Mr. Burn Out learned that you are an accountant, he confessed that he is
excited with his planned investment project, but very much afraid because he
cannot afford to fail and lose his hard earned retirement pay.
You advised that a Feasibility Study be prepared for his planned investment
project. The study, you said, would determine the viability of his proposed
business undertaking. It would cover key areas, such as marketing, production
or purchasing, and finance, among others. You emphasized that the financial
aspect is the most critical of them all.

MULTIPLE CHOICE
Mr. Burn Out requested you to prepare a feasibility study for his proposed business. You
immediately started and gathered the following relevant data.
1. Projected sales for the first year of operations is P288,000 spread evenly during the year. All
sales will be on account with average collection period of one month.
2. The cost ratio will be 60% of sales.
3. At the end of the first year, the acid-test ratio will be 1:1, while the current ratio will be 2:1.
4. Once the business is underway, purchases will replace the stock sold each month. The
average payment period for accounts payable arising from purchases of merchandise will
be two (2) months.
5. Mr. Burn Our will open an account with the nearest ank and deposit P260,000 to start the
business.
6. Various fixed assets will be acquired for cash at a total cost of P240,000. These fixed assets
will be depreciated at the rate of 10% per year using the straight-line method.
7. Operating expenses, other than depreciation, is estimated at P70,000 per year. There
will be no accruals and prepayment at year-end.

MULTIPLE CHOICE
11. The projected income before tax is
a. P78,800.
b. P45,200.
c. P21,200.
d. P115,200
12. The projected balance of accounts payable at the end of the first year of
operations is
a. P14,400
b. P28,800
c. P48,000.
d. P24,400
13. The projected balance of accountsreceivableat the end of the first year of
operations is
a. P14,400 c. P48,000

MULTIPLE CHOICE
14. As of the end of the first year of operations the projected total current
assets is
a. P57,600
b. P28,800
c. P14,400
d. P24,000
15. What is the projected cash balance at the end of the first year of
operations?
a. P28,800
b. P4,800
c. P20,000
d. P24,400
16. The projected balance of inventories at the end of the first year of
operations is
a. P57,600
b. P4,800
c. P28,800
d. P24,000

MULTIPLE CHOICE
17. In the first year of operations, Mr. Burn Out’s drawings will
amount to
a. P60,400
b. P41,200
c. P36,400
d. P0
18. The projected balance sheet as of the end of the first year of operations will
show an owner’s equity balance of
a. P260,000
b. P281,200
c. P244,800
d. P223,600

MULTIPLE CHOICE
Items 19 to 30 are based on the following information:
You prepared a feasibility study for your new client. The financial
aspect of the feasibility study shows the projected balance
sheets and income statements for each of the first two years
proposed business operations:

Balance Sheets At The End of Each Year
Year 1 Year 2
Current
Assets:
Cash
Accounts
Receivable
Inventory
Prepaid Expenses
Total current
assets
P196,000 P482,000
330,000 616,000
572,000 720,000
84,000 70,000
Property, plant, and equipment Furniture
and fixtures Accumulated
depreciation
Net book value Total
assets
P1,182,000 P1,888,000
P896,000 P952,000 224,000
430,000
P672,000 P522,000 P1,854,000
P2,410,000

Balance Sheets At The End of Each Year
Year 1 Year
2
Current Liabilities
Accounts Payable
Income Tax
Payable Notes
Payable Accrued
Expenses
Total current
liabilities
P168,000
P310,00
0
27,000 47,000
160,00
0
64,00
0
300,000
82,000
P419,00
0
P739,00
0
Long-Term Notes Payable at
10%
P100,00
0
P200,00
0
Stockholders’
Equity: Paid-in-
Capital
Retained
P1,200,00
0
P1,200,00
0
135,000 271,000
P1,335,000

Income Statements For Each Year
Year 1 Year 2
Sales
Cost of goods
sold Gross Profit
Operating
expenses
P3,432,000
2,288,00
0
P1,144,000
P4,576,000
3,120,00
0
P1,456,000
P624,000
P728,00
0
Depreciation
expenses
224,00
0
848,000 206,000
934,000
Earnings before
taxes
P296,000 P522,000
Interest expense 26,000 50,000
Earnings before
taxes
270,000 472,000
Income Tax 135,000 236,000
Net Income P135,000 P236,000

MULTIPLE CHOICE
19. Where does the company plan to get its money to start the business and
how much would be obtained from such source?
a.From creditors, P100,000
b. From stockholders,
P1,200,000
c. From stockholders and operations
P1,335,000
d. From stockholders and creditors
P1,460,000
20. The projected current ratios for each
year are
Year
1
a. 2.82
b. 0.35
c. 2.28
d. 0.64
Year
2
2.55
0.39
2.01
0.78

MULTIPLE CHOICE
21. For the years 1 and 2, the net cash flows expected to be provided (used)
by operating activities are
Year 1
a.
P368,00
0
b.
(P368,00
0)
c. P359,000
d. P618,000
Year 2
P202,000
(P202,00
0)
P442,000
P636,000
22. For the years 1 and 2, the net cash flows expected to be provided (used) in
investing activities are
Year 1
a.
(P896,00
0)
Year 2
(P952,00
0)
(P522,00

MULTIPLE CHOICE
23. Does the proposed business expect to pay dividends to its stockholders in
Year 2? How much, if any, does it expect to pay?
a No
b. Yes,
P100,000
c. Yes, P136,000
d. Yes,
P556,000
24. For the years 1 and 2, the net cash flows expected to be provided (used) in
financing activities are
Year 1
a.
P260,00
0
b.
P1,460,00
0
Year 2
P240,00
0
P240,000
P140,000
P1,340,00
0

MULTIPLE CHOICE
25.Can the proposed business expect improvement in operations by
the endof the second year, considering the ratio of net profit to sales?
a.No, because the net profit percentage is expected to decrease by 5.16% in
year 2.
b. Yes, because the net profit percentage is expected to increase to 5.16%
in year 2.
c.Yes, because sales will go up by 3.33%
d. Yes, because total assets is expected to increase by about 30%.
26.Using a 360-day year, what is the expected average age of accounts receivable
in year 2? (Use the ending balance of the accounts receivable in your
calculations.)
a. 48.45%
b. 48.45
days
c. 7.43 times
d. 37.22
days

MULTIPLE CHOICE
27. How many days cost of sales are expected to be in the inventory at the end
of year 1? (Use a 360-day year.)
a. 4
times
b. 73
days
c. 90%
d. 90
days
28. What are the returns on total assets for both years? (Use the ending balance
of total assets.)
Year 1 Year 2
a. 7.28% 9.79%
b. 9.79% 7.28%
c. 10.11% 16.04
%
d. 16.04% 10.11
%

MULTIPLE CHOICE
29. What are the expected returns on stockholders’ equity for both years (Use
the ending Stockholders’ Equity balance.)
Year 1 Year 2
a. 16.04% 10.11
%
b. 10.11% 16.04
%
c. 7.28% 9.79%
d. 9.79% 7.28%
30. Based on the projected financial statements, can we say that the proponents
of the project have considered taking advantage of financial leverage?
a.Yes, for Year 1
only
b. yes, for Year 2
c. Yes, for both
years.
d. No.

426973215-Reviewer-Mas-2.pptx

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