feasibility study

FEASIBILITY ANALYSIS
PROF. CHRISTINE JOYCE B. MENDOZA
20 January 2017
Calapan City
Short Course on Environmental Planning
DCERP & HUMEIN Phils. Inc.

LECTURE OBJECTIVES
By the end of the lecture, participants are
expected to:
 Explain the seven aspects of feasibility study
 Decide on the overall feasibility of project
based on specific criteria
2

• Included in the project preparation stage
• Determine whether the project can and should
be undertaken and if so, how and when
• Costly and naturally requires funding, so a
technical assistance grant is normally sought
• Involves functional areas of analysis which are
closely interrelated
FEASIBILITY STUDIES

PRE-FEASIBILITY STUDIES
• Narrow down the range of possible alternatives
• Ascertain whether on the basis of results obtained,
the allocation of scarce resources for the
preparation of a more detailed FS is warranted
• Establish the work program for further
development of the project

MAJOR STEPS IN THE PRE-FS
1. Rapid
analysis of
demand
2. Identify
alternative
technical
schemes
3. Estimate
Implementation
and operating
costs
4. Quantify
benefits
5. Compare
costs and
benefits
6. Draw next
stage of
development
PRE-FEASIBILITY STUDIES

POSSIBLE DECISIONS
AFTER THE PRE-FS [1]
Reject the
project
Defer conduct
of detailed FS
Proceed to detailed
design and
implementation
Conduct a
detailed FS

POSSIBLE DECISIONS
AFTER THE PRE-FS [2]
Rejection Analysis should conclusively reveal that none of the
possible project alternatives is feasible, even in the
remote future
Deferment Project can be feasible only if implemented in a
relatively distant future
Detailed
design and
implementatio
n
Economic and technical soundness of the project may
turn out to be highly evident during the Pre-FS, thus, No
need to have detailed FS
Need for a FS If results of the Pre-FS indicate: (1) more detailed
information to produce more conclusive results; (2)
alternative schemes of the project are nearly the same
degree of feasibility and/or show marginal feasibility; (3)
new alternative solutions have emerged and has to be
ascertained through detailed FS

Shortcourse on Environmental Planning
CONCEPT STATEMENT
A one-page description of a project, that is
distributed by the proponent to other planners
and stakeholders who are asked to provide
feedback on the potential of the idea
Feedback will provide proponent:
• a sense of the viability of the project idea; and
• suggestions for how the idea can be
strengthened or “tweaked” before proceeding
further

ASPECTS OF
FEASIBILITY STUDY
MARKET
FINANCIAL
ECONOMIC
INSTITUTIONAL
TECHNICAL
ENVIRONMENTAL
SOCIAL

MARKET ASPECT
Aims to determine the extent to which products,
goods, and services to be generated by the project
are needed or demanded by its target beneficiaries
Helps design the appropriate marketing strategies
and plans that will help ensure that a project’s
target beneficiaries / users are reached and will
accept the project outputs at given prices

Extent of marketability of goods/services include:
• Magnitude of existing and projected demand for the
product/service not covered by current or forecast
supply
• Competitiveness of product/service wrt quality and
price
• Effectiveness of marketing program and
organization
Includes definition of market, conduct of current and
projected demand and supply, other major market
considerations and marketing programming and
planning (product, place, promotion and price)
MARKET ASPECT

MEASURES OF
PROJECT WORTH
Net present value (NPV)
Internal rate of return (IRR)
Benefit-cost ration (BCR)
Payback period

DISCOUNTING
A methodology for comparing
benefits/costs occurring in different time
periods in the future at the initial year of
the project
Important elements: discount rate and time
(B0 - C0) + (B1 - C1) + . . . … .+ (Bn - Cn)
DV0
r =
(1+r)0 (1+r)1 (1+r)n

MEASURES OF
PROJECT WORTH
Net present value (NPV) compares cost
and benefit streams discounted to the
present year
(Bi - Ci)
NPV0
r =
(1+r)i
Σ
i = 0
i = n
Where:
1/ (1+r)i = discounting factor
(Bi - Ci) = net benefit or net cost
n = life of project

MEASURES OF
PROJECT WORTH
Net present value (NPV) Decision Rules
1. Accepting/ rejecting project
Do not accept a project unless it generates a
positive NPV when discounted by the
opportunity cost of funds
Example
Project A : PV Costs = P50M ; NPV = - P 0.7M
Project B : PV Costs = P30M ; NPV = +P 1.5M
Project C : PV Costs = P20M ; NPV = - P 0.5M

MEASURES OF
PROJECT WORTH
2. Budget constraint
Within the limit of a fixed budget, choose
that subset of available projects which
maximizes NPV
Example
Project D : PV Costs = P10M ; NPV = + P 0.6M
Project E : PV Costs = P30M ; NPV = + P4.0M
Project F : PV Costs = P20M ; NPV = + P 1.5M
Project G : PV Costs = P20M ; NPV = + P 2.25M
Budget constraint: P 40 M

MEASURES OF
PROJECT WORTH
3. Mutually exclusive projects
Where there is no budget constraint but a project
must be chosen from mutually exclusive
alternatives, always choose the one that
generates the highest NPV.
Example
Project H : PV CapCosts = P40M ; NPV = + P 7.0M
Project I : PV CapCosts = P20M ; NPV = + P 6.0M

MEASURES OF
PROJECT WORTH
4. Different Project Lives
When comparing mutually exclusive projects of
different lengths of life, choose the one with
highest positive NPV, after adjusting their project
lives to comparable lengths
Adjust the projects to compare them via:
Shorten the life of longer project
Extend life of shorter project

MEASURES OF
PROJECT WORTH
Internal rate of return (IRR)
Discount rate at which the present value of
benefits equals the present value of costs, i.e.,
NPV = 0 and BCR = 1
This is effective annual Return on Investment
(ROI) over the entire life of a project (versus
accounting ROI which is not time-discounted)
It is the measure of the earning power of money
to be invested in a project from the perspective
of owner, investor, borrower or lender.

MEASURES OF
PROJECT WORTH
IRR Decision Rules
1. Accepting/ rejecting project
If IRR > cost of funds, implement the project
Cost of fund or the opportunity cost of capital
Example
Project A : Cost of Fund = 10% ; IRR = 12%
Project B : Cost of Fund = 12% ; IRR = 11%
Project C : Cost of Fund = 12% ; IRR = 12%

MEASURES OF
PROJECT WORTH
IRR Decision Rules
2. Mutually Exclusive Projects
When ranking across several projects, choose
the project with the highest IRR
Example
Project D : Cost of Fund = 10% ; IRR = 12%
Project E : Cost of Fund = 10% ; IRR = 14%
Project F : Cost of Fund = 16% ; IRR = 15%

MEASURES OF
PROJECT WORTH
Benefit-cost ratio (BCR) is the ratio of the
present value of benefits to the present value of
costs
Bi / (1+r)i
BCR =
Ci / (1+r)i
Σ
i = 0
i = n
Σ
i = 0
i = n

MEASURES OF
PROJECT WORTH
Benefit-cost ratio (BCR) Decision Rules
1. Accepting/Rejecting a Project
Accept the project if BCR > 1. Otherwise, reject.
2. Mutually exclusive projects
Between two or more mutually exclusive
projects, select the project with the highest BCR.

MEASURES OF
PROJECT WORTH
Payback period is measured in the number of
years before the discounted cumulative benefits
are sufficient to repay the discounted cumulative
costs. The lesser number of years, the better
Payback period
= Original Investment/Gross Annual Profit
Gross annual profit is the simple average of
gross profits for each year of the project life

MEASURES OF
PROJECT WORTH
Payback period is useful for firms that face many
investment opportunities but have limited
financial resources, thus, they are compelled to
reject projects with long payback periods
Also for assessing profitability of high-risk
projects (i.e. involving changes in technology)

CHOICE OF
DISCOUNT RATES
1. Project’s View: weighted average cost of
capital (WACC)
2. Owner’s View: opportunity cost of equity; may
vary depending on risk. Include market
interest rate (e.g., average lending rate,
average deposit rate, T-Bill rate)
3. Government/Budget’s View: opportunity cost
of funds (e.g., T-Bill rates or interest rates on
mandated deposits in GFIs)
4. Economy’s View: economic opportunity cost
of capital (i.e., 15%)

CHOICE OF
DISCOUNT RATES
Choose the highest rate to ensure project
yield net returns over and above the
returns of the next best alternative

FINANCIAL ASPECT
Used to assess the project’s financial
viability and its ability to meet its
operational costs and debt-service
obligations
Compares financial cost with expected
incomes over the project’s lifetime

Accept project if:
NPV >0
FIRR >opportunity cost of capital
For mutually exclusive projects that pass the
aforementioned criteria, choose the project with
the highest NPV, FIRR.
FINANCIAL EVALUATION

Used to assess project desirability in terms of its
net contribution to the economic and social
welfare of the country
Compares economic and social benefits
expected to be generated from the project and
economic and social costs of implementation
and operation
ECONOMIC ASPECT

Financial prices are adjusted to economic prices
to account for market distortions (taxes, tariffs,
subsidies, market power) and externalities that are
not valued in the market
ECONOMIC ASPECT

Externalities are costs or benefits that are felt by
entities other than the agency implementing or
operating the project.
Project effects – positive or negative – go beyond
the limits of the program/project and are usually
not reflected in the financial accounts of the
program/project
Involve a significant economic cost or confer a
significant economic benefit and should be taken
into account in estimating the overall economic
impact of the program/project
ECONOMIC ASPECT

Examples of externalities
Environmental externality: pollution and congestion
Tax and subsidy for non-tradable goods: transfer
prices
Import and export tax for tradable goods: transfer
prices
Foreign exchange externality: market distortions
underlying the demand-and-supply of foreign exchange
Labor externality: divergence between the market
wage rate and the cost of employment
ECONOMIC ASPECT

ECONOMIC ASPECT
Economic benefits Economic costs
• increase in quantity of
output or service
• improvement in quality of
outputs or service
• incremental savings in
resource use
• increase or occurrence
of positive externalities
• decrease or elimination
of negative externalities
• incremental use of
inputs or resources
(either for capital or
operation and
maintenance)
• decrease in positive
externalities
• increase in negative
externalities
Taxes, subsidies, financial
charges, amortization, and
depreciation costs not included

Steps in conducting economic analysis
1. Financial prices are adjusted to economic
prices to account for market distortions (taxes,
tariffs, subsidies, market pIdentify costs and
benefits
2. Quantify/convert cost and benefit to economic
price
3. Determine economic viability
4. Conduct sensitivity analysis
ECONOMIC ASPECT

Accept project if:
ENPV > 0
EIRR > Social Discount Rate
For mutually exclusive projects that pass the
aforementioned criteria, choose the project with
the highest ENPV and EIRR.
ECONOMIC ASPECT

FINANCE vs ECONOMICS
Finance covers decisions
and transactions internal
to an economic unit–
whether household,
project, enterprise, or
agency – regarding the
allocation of resources
over time and the
handling of risk, which
decisions are focused on
the survival, maintenance,
or growth of that particular
unit.
Economics covers
processes and decisions
both internal as well as
external to the economic
unit, including those that
impact on the whole
community, territory or
society

INSTITUTIONAL ASPECT
Involves the assessment of the adequacy of the
proponent’s project implementation capability
considering political, legal, organizational,
managerial, operational and other administrative
constraints which might hinder
implementation/operation process

INSTITUTIONAL ASPECT
Criteria for institutional capability include project’s:
• Political acceptability and legality
• Organizational adequacy to organize and
implement
• Resources availability and adequacy

TECHNICAL ASPECT
Aims to identify and analyze alternative ways of
carrying out the project in terms of its size,
location, basic technical features, resource
requirements, phasing of implementation

TECHNICAL ASPECT
Involves the assessment of the project in terms of:
• Alternative ways of carrying out the project
• Engineering characteristics of alternatives
• Physical resource requirements of alternatives
• Construction and operating plans project design
Value for Money (VfM) as an instrument to
assess technical soundness of the project design
and cost efficiency, among others.

Involves the assessment of potentially
beneficial/harmful impacts of:
• Environmentally critical projects; and
• Projects on environmentally critical areas
ENVIRONMENTAL ASPECT

Environmentally critical projects (ECP) are those
that have significant environmental
consequences. Such adverse impact(s) may be
sensitive, irreversible and diverse. ECPs needs
an EIS document to be submitted to EMB-
Central Office.
Examples: heavy industries like petroleum and petro-
chemical industries, iron and steel mills, etc; forestry,
fishery, infrastructure projects and golf courses

Projects on environmentally critical areas (ECA)
may have adverse environmental impacts that
are less sensitive, major or diverse as the ECP
impacts. Remedial measures can be more easily
designed. ECA projects need to submit Initial
Environmental Examination (IEE) to EMB
Regional Offices
Examples: areas declared by law as national parks, watershed
reserves, wildlife preserves, aesthetic potential tourist spots, areas
with unique historic, archaeological or scientific interest, areas
frequented by natural calamities, areas traditionally occupied by
ICCs, prime agricultural lands, water bodies/mangrove areas, coral
reefs

SOCIAL ANALYSIS
Involves the assessment of project benefits and
costs beyond those which are financial such as:
• Income distribution effects
• Employment linkages
• Health and nutrition impact, and
• Links to other quality of life indicators

SOCIAL ANALYSIS
Social dimensions are included to:
• Assist in the design of socially responsive
projects
• Facilitate more effective project implementation
• Identify some of project’s potential risks
• Enable a more equitable distribution of project
benefits
• Build upon the desirable socio-cultural
characteristics of communities

Among the social dimensions considered in the
analysis are:
• Affected groups
• Demands/Needs of the affected groups
• Gender issues involved
• Potential adverse impacts
SOCIAL ANALYSIS

Projects can be classified as:
• Projects with direct positive social impact
(poverty alleviation)
• Projects with direct positive social impact but
which require active participation of target
beneficiaries
• Projects with direct/indirect negative social
impacts which require
mitigation/compensation
SOCIAL ANALYSIS

SOCIAL IMPACT ANALYSIS
• Determines a project’s impact on stakeholders
• Attempts to identify project beneficiaries and losers
• Helps show if a project would create a positive or
negative social impact
• Attempts to improve project design

SOCIAL IMPACT ANALYSIS
SIA can be conducted in three levels
1.Formulation of development strategies and
policies
2.Identification and selection of programs and
projects
3.Preparation, and implementation of policy,
program, and project

CORE GENDER AND
DEVELOPMENT ELEMENTS
1. Participation of women and men in the
identification of the development problem
2. Collection and use of sex-disaggregated data in
the analysis of the development problem
3. Conduct of gender analysis to identify the gender
issues that the proposed project must address
4. Goals, objectives, outcomes, and outputs that
include GAD statements that will address the
gender issues in no. 3
5. Activities that respond to the identified gender
issues, including constraints to women’s
participation

CORE GENDER AND
DEVELOPMENT ELEMENTS
6. Of gender analysis of the planned project to
anticipate gender-related issues arising from
the implementation of the designed project
7. Monitoring indicators and targets which include
the reduction of gender gaps or improvement of
women’s participation
8. Project monitoring and evaluation system that
includes a sex-disaggregated database
9. Resources and budgets for the activities in no.
5
10.Planned coordination with NCRFW or the
agency’s GAD plans.

SENSITIVITY ANALYSIS
An investigation of what happens to NPV when
only one variable is changed e.g., sales,
variable costs, fixed costs.
A form of ‘What If’ Analysis and attempts to deal
with uncertainty
Useful in pinpointing those variables that
deserve the most attention

It can involve varying discount rates, physical
inputs or outputs, or values of benefits or costs.
This will result in a variety of answers rather
than one single answer
It gives the decision-maker a range of answers

Variables that are sources of risks include those
that represent
• A large share of cash receipts
(benefits/inflows) or cash disbursements
(costs/outflows)
• Highly inaccurate basis/assumptions
• A wide range of possible values

General steps are as follows
Step 1 Conduct base case analysis
Step 2 While holding other values constant,
let the base case of a variable change
by a certain percentage
Step 3 Compute project indicators

Example: What would be the effect on the
project’s NPV and IRR of the following changes
in variables?
10% increase in investment cost?
15% annual increase in O&M cost?
3% increase in discount rate?
Simultaneous 20% increase in investment cost and
20% decrease in revenues?

BREAKEVEN ANALYSIS
Answers the questions
- What value of a parameter/variable will make
an outcome equal to a certain value?
- At what tariff rate will the NPV equal to zero?
- What decrease in investment cost will make
the IRR equal to the opportunity cost of
funds?

References:
Alan Cadavos (2007). Project Development and Management
NEDA (1984). Project Development Manual.
NEDA (2010). Harmonized Gender and Development Guidelines for Project
Development, Implementation, Monitoring, and Evaluation
NEDA (2014). Project Development Training
NEDA, CIDA, UNDP (2005) ICC Project Appraisal. Reference Manual on
Project Development and Evaluation

THANK YOU!

feasibility study

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