How to Develop
Project
Feasjbility
StUdieS
RevisedEdition
How to Prepare
Project
Feasibility
Studies
Revised Edition
2012
Manila, Philippines
ij ~evdopm~t aca~e»-t\1
of tl1c philiwi~cs
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
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 Impact Study (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
How to Prepare
Project Feasibility Studies
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, socioeconomic, 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 of nations
cannot be over-emphasized. A PFS is an essential 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 of a 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
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 of constant change.
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
development cycle." As soon as a project is identified, its applicability
is examined through further research, leading either to a generalized
pre-feasibility study, or directly to an analytic and systematic
presentation of findings 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 project appraisal, the implementing group pinpoints
the variances between actual project results and the data provided in
the project feasibility study. Taking into account changing conditions
and deviations from the expected outcome, the project is then
improved in terms 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.
During the assessment of a project, recommendations on revisions
to the Project Feasibility Study or the non-feasibility of the 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
Introduction 3
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.
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?
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
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 of the industry
Briefly describe the industry, its product lines, the demandsupply 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
G. MAJOR ASSUMPTIONS USED AND SUMMARY OF
FINDINGS AND CONCLUSION:
1. Market feasibility
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 project on 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. Management feasibility
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 of the 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 of the product - individuals and/or firms
5. Geographical areas of dispersion - where product is mostly
found or to distributed, in the case of a new commodity
7
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 of urbanization, 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 of a 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 where is the market? Segment the market according
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 could be better understood 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 product being considered? Are
there many small firms with no single firm controlling the
market? Or is it an industry of big 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
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, it is useful to consider either or both 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 demandsupply 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 if the 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 selling price, taking into 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 of substitute 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 of market 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
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 of variance.
4. A ssociative 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.
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
should be appropriate to the product and the market. Consumer
buying habits in the particular field should be considered in the
selection of outlets. Potential distributors may include 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.
II.
Ill.
IV.
V.
VI.
VII.
Introduction
General Business Condition
Competitive Conditions
Market Research Results
Sales and Distributions Plan
Advertising and Sales Promotions
Other Related Aspects (such as product formulation,
packaging, legal clearance, raw material procurement,
etc.)
VIII. Budget Summary
IX. Profitability (net income targets)
3. Design the marketing organization which will implement
the plan and determine the costs involved. The organization
12 How to Prepare Project Feasibility Studies
Market Study 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.
b.
c.
d.
e.
f.
g.
The manufacturing process.
The machinery capacity and design.
The machinery supplies.
The plant location.
The plant layout.
The building and structures specifications.
The raw materials and their sources.
2. Determination of:
a.
b.
c.
d.
e.
The quantity and quality of the products to be produced.
The labor needed, both skilled and unskilled.
The utilities required.
The waste disposal method.
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 production and overhead costs
that will be incurred in operating the proposed production
plant.
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, preferably with the aid of flow 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 existing plants, 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.
5. Consideration of any major technological development in
the industry which may affect the commercial or technical
soundness of the project.
From there, the actual capacity utilization, the number of
shifts per day, and the number of operating days per year
are then defined.
The technical study covers the following topics, and where
applicable, costs which will be used in the financial study
should be computed.
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.
14 How to Prepare Project Feasibility Studies
Technical Study 15
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 of utilization of plant capacity.
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 of capacities must be presented to show that
the machinery and equipment are capable of producing 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 of raw 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 of transporting 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 plant layout should be clearly 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
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.
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.
VIII.
IX.
X.
XI.
Building and Facilities
Raw Materials and Supplies
Utilities
Waste Disposal
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
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 setup, and the aggregate labor costs are described in detail.
18 How to Prepare Project Feasibility Studies
Technical Study 19
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The theoretical warehouse layout shows the left to right process flow, which starts at receiving (inbound)
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or transport time. The less space interval there is, the better the quality and condition of the product.
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----~--------u---- --,
-
DODD
DODD!
--oo-o-o_,
DODD
DODD
DODD
DODD
DODD
,--,-r--r-
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 will be profitable even with existing competition
and in unfavorable economic conditions. Detailed figures showing
the improvement of 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.
3.
4.
5.
6.
7.
Total Project Cost
Key Forecast Variables
Sources of Financing the Project
Preparation of Financial Statements
Financial Analysis
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
22 How to Prepare Project Feasibility Studies
23
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.
d. Tax exemptions
e. Price ceilings
f. Relevant presidential decrees or letters of instruction
In formulating assumptions, the analyst must consider the
following sources:
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.
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.
b.
c.
d.
e.
Selling price
Sales forecasts
Unforeseen costs
Production volume
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
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.
b.
c.
d.
Factual
Justifiable
Realistic
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
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 telephone lines, 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, borrowing costs, and provisions
for unforeseen costs.
Intangible assets include patents, licenses, goodwill,
reproduction rights, and organization and pre-operating
expenses, if the latter are 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 of stock 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 shortterm and long-term financing. Funding options range
Financial Study 27
from bank credit, insurance term loans, mortgage loans,
leasing arrangements, issuance of bonds 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 should be
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 present in 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
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 and intangible assets such as 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 or partnership), 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
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
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
b. Quick or acid-test ratio= Current assets -inventories
Current liabilities
g. Return on net operating profit=
Profit before interest and taxes
Total tangible assets
c. Liquidity of inventories=
h. Asset turnover =
Cost of sales
Average inventory
d. Defensive position=
Cash+ marketable securities+ receivables
Projected operating expenditure/number of days
1.
Sales
Total tangible assets
Return on assets, or earning power=
Net income
Total tangible assets
4. Test of total debt coverage = Profit before interest and taxes
(Interest+ principal payments)
(1/1 - income tax rate)
2. Tests of debt-service - These ratios are used to test the
project's ability to meet long-term obligations.
5. Funds-flow analysis - This technique is used to determine
a. Debt-to-net worth ratio = Total liabilities
Total equities
the major uses and sources of funds within one year in a
project's life.
b. Total capitalization ratio= Long-term liabilities
Long-term liabilities and equities
a. Cash-flow analysis:
1) Source of funds:
3. Tests of profitability - These show the operational
performance and efficiency of the project.
a. Net profit margin= Net income after tax
Sales
a.
b.
c.
d.
Net decrease in an asset other than cash
Net increase in a liability
Proceeds from the sale of stocks
Funds provided by operations
2) Uses of funds:
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
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
b. Working-capital flow analysis.
1) Sources of funds:
a.
b.
c.
d.
Net decrease in any asset other than current assets
Net increase in long-term liabilities
Proceeds from the sale of stock
Funds provided by operations
2) Uses of funds:
a.
b.
c.
d.
e.
Net increase in other assets
Gross increase in fixed assets
Net decrease in long-term liabilities
Retirement of stock
Cash dividends
Exhibit 2-4 presents the financial ratios for the financial
statements in Exhibits 2-1 to 2-3.
6. Tests of operating 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
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 payback period. 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:
JV.PY=
i
t=l
ACE; -/{)
(1 + k)'
Where:
ACFt = the annual after-tax cash flow in time period t
hurdle rate; discount rate; required rate of return
k
of the investor
initial outlay (initial cash outlay necessary to
10
purchase assets to put the business into an
operating manner)
the project's expected life
n
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
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:
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 project earn? 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
project only if the internal rate of return 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:
/O=f ACE;
t=l
(1+/~'
Where:
fACE;
P./=
t= l
(1 + k)'
./0
Where:
ACF t = the annual after-tax cash flow in time period t
k
the discount rate I required rate of return
10
the initial outlay
n
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 of net
cash flows) is greater than its denominator (initial outlay).
38 How to Prepare Project Feasibility Studies
ACFt = the annual after-tax cash flow in time period t
the initial cash outlay
n
the project's expected life
IRR
the project's internal rate of return
IO
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
4. If the sum of the present values 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.
commonly used process of evaluation other than 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 of a Break-even and Sensitivity Analysis as applied
to the financial condition of the case model, Casa Fernandina.
G. OTHER APPROACHES IN EVALUATING PROJECT RISKS
Probability Tree
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
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
Figure 4: New Project (No Other Activities)
PROJECT
BENEFITS I
PROFITS
Additional Benefit
WP
In the case of a Loss Prevention Project 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 possibly help
recover past losses. See Figure 6.
+
Figure 6: Loss Prevention Project
WOP
2
3
Project
Cost
4
5
Additional Benefit
PROJECT
BENEFITS I
PROFITS
Year
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.
!
'-~~~~~~~~~rrrrnnnn~mommWP
+
WOP
2
Project
Cost
3
4
5
Year
Figure 5: Rehabilitation Project
PROJECT
BENEFITS I
PROFITS
Additional Benefit
l
Foregone Benefit
WP
Finally, an Improvement Project scenario exists when a firm that
has been experiencing poor business initiates a project that will help
improve the performance of the ailing company, and where foregoing
such a project will mean certain bankruptcy for the business.
WOP
2
Project
Cost
42 How to Prepare Project Feasibility Studies
3
4
5
Year
Financial Study 43
Figure 7: Improvement Project
PROJECT
BENEFITS/
PROFITS
Additional Benefit
Foregone Benefit
WP
l
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)
+
Project
Cost
WOP
SUGGESTED FORMAT FOR A FINANCIAL STUDY REPORT
I.
II.
III.
IV.
V.
VI.
SAMPLE FINANCIAL STATEMENT
HOTEL CASE: CASA FERNANDINA
Presentation of Major Assumptions
Summary of Project Cost
Sources of Financing the Project
Financial Statements
Financial Analysis
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'
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 rent of the 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
44 How to Prepare Project Feasibility Studies
Financial Study 45
Exhibit 2-2
Casa Fernandina
Cash Flow Statement
for the Year Ended December 31, 2004
Exhibit 2-1
Casa Fernandina Pro-forma Income Statement
for the Year Ended December 31, 2004
Year1
Sales Revenue
Hotel
Coffee Shop
Total Sales Revenue
Cost of Goods Sold
Free Breakfast
Pastries, etc
Total Cost of Goods Sold
Gross Revenue
Operating Expenses
Salaries & Wages
Depreciation
Promotional Materials
Rent Expenses
Utilities
Aircon
Lights
Water
Other Electricity
Phone
Office Supplies
Housing Supplies
Total Operating Expenses
Operating Income
Other Income
Function Room
Rent from
Concessionaire
Year2
1,920,000.00 2,028,000.00
889,560.00
889,560.00
2,809,560.00 2,917,560.00
Year3
Year4
3,030,000.00 3,030,000.00
1,317,501.90 1,317,501.90
4,347,501.90 4,347,501.90
YearS
::.
4,008,000.00
1,768,953.60
5,776,953.60
Receipts
Collections from Customers
Payments
Tosuppf!eCS
To employees
F01 income lax
Total Cash payments
Net Cash Inflow from
()pela!rig Adlvi1ies
Yearo
Net Income
3,471,560.00
4,901,501.90
5,225,501.90
000
6,654,953 60
000
987,037.50
1,568,486.85
150,424.75
2,705,949.10
1,133,300.56
1,615,541.46
144,699.65
2,893,541.67
1,450,293.86
1,ffi,095.60
432,844.72
3,660,234.18
1,405,723.65
1,830,408.47
507,945.89
3,744,078.00
1,851 ,392.35
2,013,449.32
789,964.56
4,654,800.22
657,610.90
578,018.33
1,241,267.72
1,481,423.90
2,000,147.38
(362,960.40)
0
0
0
0
0
(5,000.00)
(2,537,690.35)
0
0
0
0
0
0
0
0
0
(600,1XM!OO)
(853.850.00)
(326,1XM!OO)
0
0
0
0
0
0
0
0
0
0
(788,006.00)
0
0
0
0
(5,473 500.75)
(5,473,506.75)
0
0
0
0
657,610.90
578,018.33
1,241,267.72
1,481,423.90
0
2,000,147.38
574,126.38
26,493.25
600,619.63
578,018.33
600,619.63
1,178,637.97
1,240,005.08
1,178,637.97
2,418,643.05
1,400,857.70
2,418,643.05
3,819,500.74
1,998,536.47
3,819,500.74
5,818,037I2
112,752.00
112,752.00
386,717 76
467,283.96
580,035.96
580,035.96
3,767,465.94 3,767,465.94
134,136.00
638,727 55
772,863.55
5,004,090.05
1,568,486.85 1,615,54146
321,472.69
321,472.69
17,600.00
18,128.00
139,392.00
143,573.76
1, 777,095 60 1,830,408.47
321.472.69
321,472.69
19,232.00
18,671 .84
152,317.40
147,880.97
2,013,449.32
321.472.69
19,808.96
156,886.92
260,968.45
32,621.06
244,657.92
24,465.79
52,272.00
40,776.32
78,942.96
322,880.96
40,360.1 2
302,700.90
30,270.09
57,499.20
50,450.15
97,671.49
2,968,826.19 3,058,135.05
3,413,450.80
FmanclngActivilies
Equity
5,500,000.00
1,590,639.25
Total Cash in~ from
financing activities
5.500,1XM!OO
176,000.00
22,000.00
165,000.00
16,500.00
43,200.00
27,500.00
53,240.00
195,520.00
24,440.00
183,300.00
18,330.00
47,520.00
30,550.00
59,144.80
2,550,391.54 2,657,520.71
(147,793.54)
(152,754 71)
250,931.20
31,366.40
235,248.00
23,524.80
47,520.00
39,208.00
75,906.69
798,639.75
709,330.89
314,000.00
314,000.00
314,000.00
578,000.00
578,000.00
240,000.00
240,000.00
240,000.00
300,000.00
300,000.00
Permit Fees
Construction Cost Eslima!e
Other Cons!ruction Materials from
3RuOOown Antique Houses
Antiques &lnteoor ~
Landscaping &Ex!eoor Design
Materials &Equipments
Net Cash OutfMJw from
inves!Nlg adivilies
Net Cash flow before financing
406,206.46
150,424.75
255,781.71
401,245 29
144,699.65
256,545.64
46 How to Prepare Project Feasibility Studies
1,352,639 75 1,587,330.89
507,945.89
432,844 72
919,795.03 1,079,385.01
2,468,639.25
789,964.56
1,678,674.69
0
0
0
0
0
0
0
Cash~from
NETCASH
Beginning Cash
Ending Cash
Measurement
Gross Income
Tax Expense
3,363,560.00
91,368.00
85,536.00
241 ,069 50
321.426.00
406,962.00
412,794.00
2.402,598.00 2,504,766.00
Cash ~kom In~ Activities
WoOOng Capital (2 months)
Busiless RegislratiorJ
YearS
Year4
Year3
Year2
Year 1
26,493.25
0.00
26,493.25
Value
Decision Criteria
Greater than required by the investor
4 years & 7 months
Net Present Value
Greater than or equal to zero
Php3,054,196
Internal Rate of Return
Greater than or equal to the
prevailing rate of Treasury Bills
20%
Payback Period
Financial Study 47
Exhibit 3
Step-by-Step Process in Computing
for Internal Rate of Return Using Excel
Exhibit 2-3
Casa Fernandina
Pro-forma Income Statement
for the Year Ended December 31,2004
Year1
Year2
Year3
Year4
YearS
ASSETS
Cash
Inventory on Hand
Total Current Assets
600,619.63 1'178,637.97
3,128.02
3,128.02
603,747.65 1'181 ,765.98
2,418,643.05 3,819,500.74 5,818,037.22
6,001.56
4,390.66
4,390.66
2,423,033.70 3,823,891.40 5,824,038.78
5,473,506.75 5,152,034.06
321,472.69 321,472.69
4,830,561.37 4,509,088.68
321,472.69 321,472.69
4,187,615.99
321,472.69
5,152,034.06 4,830,561 .37
5,755,781.71 6,012,327.35
4,509,088.68 4,187,615.99
6,932,122.38 8,011,507.39
3,866,143.30
9,690,182.08
Accounts Payable
Totalliabilit1es
Equity
Capital
5,500,000 00 5,500,000.00
Begmnmg Reta1ned Eammgs512,327.35
255,781 71
Retained Earnings
255,781 71
256,545.64
End1ng Reta1ned Earnings
255,781 71
512,327.35
Total Equity
5,755,781 71 6,012,327 35
5,500,000.00
1,432,122.38
919,795.03
1,432,122.38
6,932,122.38
5,500,000.00
2,511,507.39
1,079,385.01
2,511,507.39
8,011 ,507 39
5,500,000.00
TOTAL LIABILITIES
& EQUITY
6,932,122.38 8,011,507.39
9,690,182.08
Property, Plant, & Equipment
Less: Depreciation
Total Property, Plant,
& Equipment
TOTAL ASSETS
LIABILITIES
5,755,781.71 6,012,327.35
1,678,674 69
4,190,182.08
9,690,182 08
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.
5. The values should
come from the net
cas h 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
1=1RR(
J
IfliR;;c;;. IM"u I
look for Financial,
then check IRR on
the list.
7. Press 'Enter' to get the Internal rate of return
c
Year (i
a."n Oper.t!DJS
Exhibit 2-4
Casa Fernandina: Financial Ratios
Operating Profitability
Year 1
Vear2
Vear3
••
Vear4
0.07
0.06
0.19
0.19
0.25
Operating Profit Margin
0.14
0.14
0.31
0.37
0.43
Total Asset Turnover
0.49
0.49
0.63
0.54
0.60
F1xed Asset Turnover
0.55
0.60
0.96
1.04
1.49
Inventory Turnover
48
0.04
0.04
0.13
0.13
0.17
77.07
102.76
106.43
88.08
128.70
How to Prepare Project Feasibility Studies
Vez 2
12tt00
240COO
Year 3
~
... "::Il
YearS
ORIOI
Return on Equity
..
.-45((00
Yeor 1
...
Financial Stud y
49
Exhibit 4
Casa Fernandina: Break-even and Sensitivity Analysis
BREAKDOWN OF FIXED AND VARIABLE EXPENSES
HOTEL
Salaries & Wages
VARIABLE
FIXED
126,542.95 108,942.00
Depreciation
Promotional Materials
Rent Expense
108,942.00
26,789.39
25,182.03
25,182.03
1,466.67
1,466.67
1,466.67
11 ,616.00
Utilities
10,454.40
10,454.40
Air-conditioning
8,000.00
5,600.00
3,360.00
2,240.00
1,607.36
72,000.00
95,310.00
COGS
7,374.60
34,438.50
8,906.40
27,550.80
11,133.00
34,438.50
1,161.60
Gross Revenue
50,225
41,810
63,094
67,759
60,867
60,872
Fixed Expense
157,057.45
25,991.45 157,660.09
26,029.91 126,128.08
20,823.93
Break-even Sales
180,118.21
47,400.61 179,915.66
36,613 64 149,197 78
32,605.22
2,400.00
300.00
Water
7,500.00
5,250.00
3,150.00
2,100.00
2,250.00
315.00
210.00
225.00
750.00
525.00
Phone
3,600.00
3,240.00
3,240.00
360.00
Office Supplies
1,250.00
1,125.00
1,125 00
125.00
Housing Supplies
2,420.00
2,420.00
2,420.00
26,029.91
190,935.01
164,905.09
Sales Units
Percentage Change
in Break-even
Beg. Cash
Fixed Expense
HOTEL COFFEE HOTEL COFFEE HOTEL
72,000.00 95,310.00 86,400.00 114,372.00 72,000.00
11,133.00 34,438.50 11,133.00 34,438.50 13,359.60
60,867 60,871.50
75,267
79,934
58,640
157,660.09 26,029.91 157,660.09 26,029.91 157,660.09
Break-even Sales
186,497.23
Sales
Variable Cost
Gross Revenue
Sales Units
Percentage Change
in Break-even
2.59
0.62
2.50
0.38
2.07
0.34
2072%
45.38%
-3.53%
-1016%
-20.00%
-2000%
CASH BUDGET
1
20% Increase
in Fixed Cost
3.13
Cash Budget for Loan
157,660.09
20% Increase
in COGS
COFFEE
95,310.00
280.00
20% Increase
in Sales
HOTEL
72,000.00
420.00
MONTHLY
COFFEE
76,248.00
700.00
7,245.00
HOTEL
COFFEE
20% Decrease
in Fixed Costs
57,600.00
1,000.00
Total Operating Expenses
20% Decrease
in COGS
Sales
Lights
Other Electricity
HOTEL
17,600.95
-
-
20% Decrease
in Sales
COFFEE
2
-
3
-
4
-
5
66,828.88
6
7
864,570 45 1,662,312 02
Inflow
3,363,560.00 3,471,560.00 4,901,501.90 5,225,501.90 6,654,953.60 6,654,953.60 6,654,953.60
Outflow
3,100.084.95 3,207,321.03 3,860,925.64 4,021,943.02 4,720,482.03 4,720,482.03 4,720,482 03
COFFEE
Ending Cash
w/odebt
service
263,475.05
264,238.97 1,040,576.26 1,203,558.88 2,001 ,300.45 2,799,042.02 3,596,783.58
95,310.00
86,400.00 114,372.00
Debt Service
595,518.05
595,518.05 1'136,730.00 1,136,730.00 1,136,730.00 1,136,730.00 1,136,730.00
41,326.20
11,133.00 34,438.50
COFFEE HOTEL
53,984
75,267
79,934
Ending
Balance
(332,043.01) (331,279.08)
(96,153.74)
66,828.88
864,570.45 1,662,312.02 2,460,053.58
26,029.91 189,192.11 31,235.90
40,756.53 180,980.14 37,244.63 193,578.60 45,956.58 217,17617 44,693.55
0.43
2.09
0.33
2.69
0.48
2.51
0.39
·19.13%
-2385%
3.80%
12.76%
·2.96%
-8.62%
SO How to Prepare Project Feasibility Studies
Financial Study 51
Socio-Economic Study
industry on the other hand, the project may r~sult .in. ii.n pr?ved
product quality and/or decreased prices~ e~peCially ~f It IS h1ghly
competitive in quality and pricing upon Its mtroduchon.
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.
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 shows how a project can contribute to improve the
standard of living, enhance community development, increase both
foreign exchange savings and reserves, aid in the lowering of prices,
and increase the demand for local materials.
Figure 8. Aspects
Social and Economic
Factors Affected
The socio-economic evaluation of the 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
Employment
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
Socio-Economic
Contributions
Improved
Standard of
Living
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.
Foreign
Exchange
Reserves
The production activity of the 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
Utilization
of Local
Materials
Socio-Economic Study 53
Organization and
Management Study
3. Organizational chart I Management of the Project
4. Officers and Key Personnel I Labor Requirement
5. Project schedule
A. BASIC CONSIDERATIONS
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.
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.
2.
3.
4.
Single proprietorship
Partnership (general or limited)
Corporation ranging from small to large-scale enterprises
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
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:
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.
1. Basic considerations in forming the organization
2. Form of ownership
54 How to Prepare Project Feasibility Studies
Organization and Management Study 55
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 "What if?" 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.
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 of environmental 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 Critical Area (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 Environmental Management 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.
56 How to Prepare Project Feasibility Studies
57
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 of impact; an analysis of future 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. Proposal for an Environmental Monitoring Fund
VI. Attachments or Annexes - list of EIS documents; Accountability
Statements of EIS; Process documentation reports; Maps and
photos of project site and impact areas.
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
1
1-------. EIA DOCUMENT PREPARATION
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.
EIAREVIEW
DECISION
APPROVE
DENY
1
'------- MITIGATION AND MONITORING
58 How to Prepare Project Feasibility Studies
Environmental Impact Assessment Study
59
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 prevent negative
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
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
Source: www.emb.gov.ph
60 How to Prepare Project Feasibility Studies
Environmental Impact Assessment Study 61
Detailed Outline of a
Project Feasibility Study
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
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
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
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
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-Economic Study (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 a brief discussion of the 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?
In the 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
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 next in importance.
It is of little 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 is now 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 product of 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
't bt"l "ty This is so because a profitable income statement
profi a 1 .
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,
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 of overall busmess
performance.
?Y
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
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 profitably produce 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.'
extent 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.
!he
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 distinguish between 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
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. It will determine the successful realization
of the project goals and objectives. Every step, therefore, must
be carefully taken in 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.
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, nonavailability 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 temper its 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.
70 How to Prepare Project Feasibility Studies
A Final Note
71
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
ANNEXA
too small to push the study for further research and development, or
the results may be so attractive that despite the crude estimate, ' gut
feel' for a project's potential success may be justified.
Market Tests
MARKET FORECASTING: TOOLS AND TECHNIQUES
There are two types of forecasting: (1) forecasting for a new business, which
offers a total!y new product and service in the market, and (2) forecasting
for an established product or existing business.
I. Forecasting for a New Business
Forecasting for. a x:ew business is a very challenging task. If the
product or service IS really new in the market, then there will be no
r~levant historical data to use in projecting sales. It is also difficult to
fin~ or ~e~ermine potential customers or even salespersons to give
vahd 0p1X:10ns on a product or service that they are not familiar with.
Techniques used in forecasting for new businesses are:
1. Substitute method
2. Needs analysis
3. Market tests
Substitute Method
The .Substi~te.M~thod requires the researcher to find a product or
service that IS Similar to or a possible competitor of the new business.
J?at.a about that product or service can be used to determine the upper
hmit ~n potential sales. Research and exploratory surveys can also
help ~nd out the potentials of the product/ service in the market.
Once mformation is made available, potential upper limits can be
ascertained and figures can be scaled down by market realities, such
as customer preferences at various price levels.
Needs Analysis
Surveys are the only way to find out if there is a need for the new
produ~t or ser:ice. The survey to be conducted can give preliminary
m~uts If there IS a market for the product or service. Survey data will
be mterpreted. to come up with a sales forecast. Informal surveys and
careful analysis may show that the highest attainable sales volume is
74 How to Prepare Project Feasibility Studies
Another way to determine if there is really a demand for the product
or service is to actually try it in the market. This process requires a
lot of time to determine the real demand for the product or service.
Researchers should not be misled by the initial demand during the
introduction of the product or service in the market. Analysis of
the sales pattern in the market test should consider what is called
the "S-curve" effect. It means sales will definitely shoot up after the
product/service is introduced and then decline quickly, level off, and
then a possible rise in sales as customers repeat purchase. The major
challenge for the researcher is to determine where the market will
level off, rather than when it will initially peak, and the only way
to know this is through continuous research over several months or
years depending upon the product/service and the eventual repeat
customer rate.
Steps in Forecasting for A New Business
1. Develop a customer profile and determine the trends in the market.
i. Identify trends by interviewing trade suppliers about the
performance of products, particularly those that are similar
to the new product in mind.
ii. Make some basic assumptions about the customers. A good
rule of thumb is "80-20," i.e., 20% of the customers account
for 80% of sales. It is important to identify the customers that
deliver 80% of sales to develop a good profile of the principal
market.
2. Establish the approximate size and location of the planned trading
area.
i. Acquire the available statistics to understand the general
characteristics of the area such as number of households, using
census data and family income and expenditure to identify
average expenditure on goods and services.
Annexes 75
ii. Neighbor business owners, local chamber of commerce,
government office, community newspapers are some sources
that can give informative insights regarding the possible
location of the business.
3. List and profile competitors selling in the trading area.
i. Conduct an ocular visit in order to study the competitors, talk
to potential customers, see traffic patterns, know the hours of
operations, compare prices, identify promotional techniques,
and assess quality of product or service.
4. Use the research to estimate sales on monthly basis for the first
year.
i. The most common basis for forecasting is the average monthly
sales of a similarly-sized competitor supplying for a similar
market.
ii. Consider the unique offerings of the product or service in order
to get a good share of the market.
iii. Make the necessary adjustments for the year's predicted trend
for the industry; to be conservative, consider targeting no more
than 50% market share for the start-up months.
II. Forecasting for an Established Product I Existing Business
A major requirement in forecasting for an existing business is a
detailed breakdown of the company's sales figures. It is also important
to take into consideration the general market and what the company
has done in the past to have a solid basis for forecasting.
Techniques used in forecasting for Established Product I Existing
Businesses are the following:
1.
2.
3.
4.
5.
Collective or Jury of Executive Opinion
Surveys, panels, and market tests
Economic Indicators
Method of Least Squares
Time-series Analysis
Collective or Jury of Executive Opinion
management. Top management then reviews and comes up with the
final sales forecast report in the light of certain factors, which the sales
force and middle management are not made aware of.
This method is relatively simple and straightforward. It does not
require highly sophisticated skills and can be done quickly and easily.
The main input for this method is the information given by those
people in the organization who have first-hand experience~ dealing
with the demands of the client. However, the method IS almost
completely subjective. Results cannot provide a precise breakdown of
estimates by products, time intervals, specific geographic markets, etc.
Surveys, Panels, and Market Tests
This process provides good inputs for forecas~g, giving speci~l
attention to the reaction of the target customers g1ven the changes m
the marketing mix of the product or service. For example, a product
currently distributed in Metro Manila may not be doing w~ll in terms
of sales due to competition, but when the company dee1des to sell
the product in the provinces with little or no competition, sales pick
up. The company then concludes that there is _more demand ~or the
product in the provinces than in Metro Marula. Such expenments
will enable realistic estimates for forecasting.
Economic Indicators
Economic indicators describe the situation prevailing during a given
time period. Researchers can get inputs from these indicator~ to _what
are the factors affecting sales or demand for the product/serviCe m the
market. Such indicators can be accessed from government agencies
and from various private organizations like trade associations.
Some commonly used economic indicators are as follows:
• Gross national income
• Personal income and expenditure
• Consumer prices
• Employment rate
• Automobile registrations
An important input to forecasting is the opinion or judgment of those
people who have close contact with the clients. The information
coming from these front liners would then be the input for the middle
managers to make the necessary forecasting to be reviewed by top
76 How to Prepare Project Feasibility Studies
The correlation between the increase in the number of women in
the work force and the number of people eating outside their homes
(in restaurants) is an example of an economic indicator.
Annexes 77
Table 2: Relationship of increase of working women with the increase
in the number of people eating outside their homes.
YEAR
No. of women in
in the workforce•
Table 3: Tuition Fee vs. Number of Enrollees
YEAR
Tuition Fee
(per unit)*
Number of
Enrollees*
1998
250
20,000
1999
300
40,000
2000
300
41,000
No. of people
eating outside
their homes*
1998
120,000
40,000
1999
160,000
80,000
2000
140,000
60,000
2001
350
50,000
2001
180,000
120,000
2002
375
50,000
2003
450
47,000
*Hypothetical numbers only
*Hypothetical numbers only
Graph 1: Relationship of increase of working women with the increase
in the number of people eating outside their homes.
Graph 2: Relationship of increase of tuition fee to the number of
140,000
enrollees
120,000
100,000
/
80,000
60,000
/
~
/~
60,000
40,000
.....
•
~
30,000
/
40,000
.... ~
50,000
20,000
20,000
10,000
0
0
50,000
100,000
150,000
200,000
No. of people eating outside their homes
0
0
This technique yields an equation, which describes and locates the
line of best fit. Straight lines can be described in terms of two things:
1. Y-intercept, which is the point at which the line intersects the
Y-axis
2. Slope of the line, which is the amount by which the Y variable
increases for an increase of 1 unit in the value of the X variable.
400
500
•
Series1
- L inear (Series1)
Method of Least Squares
300
No. of enrollees
+
An examination of the gra ph would reveal that the points
somewhat fall on the line of best fit. Hence, it can be concluded that
there exists a strong correlation between two variables.
200
100
Series1
- L inear (Series1)
Summary of Output
Regression Statistics
Multiple R
0.755125305
R Square
0.570214226
Adjusted R Square
0.462767783
Standard Error
8288.189961
Observations
6
Annexes 79
78 How to Prepare Project Feasibility Studies
AN OVA
Of
Regression
Residual
Total
ss
MS
F
1 364556962 364556962 5. 306962317
4 274776371.3 68694092.83
5 639333333.3
Significance
F
0.082603638
Coefficients
Standard Error
t Stat
P-value
320.6751055
18121.76433
0.017695579
0.986729182
X Variable 1 121.5189873
52.74983917
2.303684509
0.082603638
Lower95%
Upper95%
Lower95.0%
Upper95.0%
-49993.40877
50634.75898
-49993.40877 50634.75898
X Variable 1 -24.93804541
267.9760201
-24.93804541
Intercept
Intercept
267.9760201
Residual Output
Observation
Predicted Y
Residuals
1
30700.42194
-10700.42194
2
36776.37131
3223.628692
3
36776.37131
4223.628692
4
42852.32068
7147.679325
5
45890.29536
4109.704641
6
55004.21941
-8004.219409
NOTE: To. derive the summary of output the researcher should use
the an.alysis tool pac~ .in Excel and use regression analysis to derive
the Y-mtercept coefficient and the r-squared.
In the su~mary of output, Y-intercept is 320.68 and the slope is
121.52 (X.Vanable ~).Once theY-intercept and the slope are known,
the equation ~f the lme can be determined from the general expression
for the equation of any line:
Y::;a+ bX
Where:
a= Y-intercept
b =slope
80 How to Prepare Project Feasibility Studies
Therefore, in the given example, to predict the number of enrollees
for 2004 with tuition fee equal to Php 425.00, the equation of the line
becomes:
y = 320.68 + 121.52 (425.00)
y = 51,967
Where:
Y = Number of enrollees
X =Tuition fee
In the above example, points do not fall on a straight line and a
decision has to be made where the line should be located. This is done
by making the appropriate substitutions using the formula below:
Where:
X= given values of the independent variable
Y = given values of the dependent variable
N =number of paired observations given
A = Y-intercept of the line of best fit
B = slope of the line of best fit
An example would be, given the following data:
Table 4: Output vs. Manufacturing Costs
Tuition Fee
(per unit)*
(X)
Number of
Enrollees*
(Y}
250
300
300
350
375
450
1: 2 025 •L
62,500
90,000
90,000
122,500
140,625
202 ,500
5,000,000
12,000,000
12,300,000
17,500,000
18,750,000
21,150,000
20,000
40,000
41,000
50,000
50,000
47,000
248.ooo
X2
XY
.L:
86.7oo.ooo
.L:
708,125
*Hypothetical value
Annexes
81
...
Substituting the preceding total and with n=6 in the two equations
above:
248,000 = 6a + 2,025b
86,700,000 = 2,025a + 708,125b
Properties of the least-square line:
1. The sum of the deviations will always be equal to zero.
2. The sum of the deviations squared is a minimum; i.e., if the line
had been drawn in any other position, the total of the squares
of the resultant deviations would have been greater.
The quantitative measure of the strength of the relationship
depicted by the least-square line is the coefficient of correlation, r. Its
magnitude will vary with the degree of correlation that exists between
the variables. The equation to calculate the coefficient is as follows:
n_Lnr-{_Lx*_LY}
r= ~n_L2-(LxJ lnLY -(LY)2
The coefficient of correlation is 1 whenever the two variables are
correlated perfectly. The weaker the relationship between the two
variables, the greater will be the squared vertical deviations of the
actual points from the line of best fit. This will increase the size of
the fraction and reduce the value of the coefficient of correlation. The
minimum value it can assume is 0, which would indicate a complete
absence of any relationship between the variables. The following
represents a generally accepted rule of thumb:
Table 3: r-value and its interpretation
R-value
Interpretation
0.90- 1.0
Very high correlation
f--:--:------1-0.70- 0.90
High correlation
1-------+-0.40- 0 .70
Moderate correlation
1-:--:-:-----+-0.20 - 0.40
low correlation
f--:--:------1-0.000.20
Slight correlation
L
__ _
_ _--L__
82 How to Prepare Project Feasibility Studies
To simplify computation for r-value simply refer to the r-squared
value in the summary of output of the regression analysis.
Application to Forecasting
A company may find that a relationship exi~t~ be~ween th~ sales of
some or all of its products and some economtc mdtcator. ~1s me~s
that the resultant least square line would suggest a relatively high
degree of correlation. A company should try_ to fir:d an indicator
which coincides with its sales but whose magmtude IS forecasted by
an organization that can be trusted upon. Once the indicator_is f?und,
the firm can express the relationship of its sales and the mdtcator
either graphically or in the form of an equation.
Limitations of economic indicators as a forecasting tool:
1. The need for finding an appropriate indicator.
2. The relevant indicator is normally an annual index whereas
the company may want to forecast on a month-to-month basis.
3. It does not lead itself to the forecast of new products because
no past data exists on which a correlation analysis can be ~ased.
4. It is expected to yield fairly accurate forecasts for a penod of
approximately one to two years. .
.
.
. .
5. Indicator proves that a past relationship existed and It 1s not
necessarily true that this relationship will continue in the future.
Time-Series Analysis
• Not all past economic or sales behavior can be neatly exten_ded
with a straight line. Much economic activity is charactenzed
by ups and downs. Time-series analysis technique can cope
with such variation.
• Makes use of hard data, projecting past experience into the
future on the assumption that the future will be somewhat like
the past.
• In this approach, the company analyzes ~ts past pe~formance
to determine if there is a trend. The trend IS then proJected into
the future and the resultant indicated values are used as the
basis for a forecast.
Annexes 83
The total variation around a trend line is assumed to be composed
of three different types of variations:
1. Seasonal variations -resulting in product seasonality
2. Cyclical variations- caused by fluctuations in business cycle
or economic conditions
3. Residual variations - representing all other causes: such as
strikes, unusual weather, wars, etc., all of which may have an
influence on a company's sales during a specific period.
There is no reliable quantitative method for handling cyclical
and residual variations. However, a satisfactory method called the
"ratio-to-trend" method is often used for adjusting the trend value
of sales for seasonal variations.
The Ratio-to-Trend method assumes that the trend line based
on past sales data has been determined. Then actual sales values
are compared with trend sales values and the total variations are
computed. The variation is described by expressing the actual sales
Y. as a percentage of the calculated sales Yc .
Advantages of the Time-Series approach:
• It is less subjective than collective opinion;
• As opposed to the use of economic indicators, it is not
dependent on the company's ability to find an appropriate
indicator;
• It is easier to forecast by periods (monthly, quarterly, annually)
than by taking an annual forecast from collective opinion or
economic indicator and then breaking down the forecast by
desired period.
Disadvantages of the time-series approach:
• It cannot be used to forecast sales of a new product because no
past data or insufficient past data exists.
• There is no way of knowing what the relationship is between
the variables beyond the points in the trend line.
• The adjustments made for seasonal variations are caused by
those forces whose exact future nature and magnitude are
unknown.
• There is no way by which the effects of changes in selling prices,
product quality, marketing methods, promotional efforts, and
economic conditions can be incorporated into the method itself.
84 How to Prepare Project Feasibility Studies
ANNEX B
BOARD OF INVESTMENTS GUIDELINES FOR THE PREPARATION
OF PROJECT FEASIBILITY STUDIES
I. GENERAL ASPECTS
A. Give a brief summary of major m arket, technical, and financial
characteristics of the project and conclusions on its feasibility.
B. Outline the timetable and present position of the project.
C. Specify proposed management for the project, inclu~ing type of
business organization, organizational chart and functwns of each
unit, use of professional firms or consultants, etc. .
D Outline the agreements proposed or entered into w1th the other
. parties, which affect the operations of the project (e.g., technical
assistance, foreign loans, patents, contracts, contracts of sales, etc.).
Terms and conditions should be specified.
II. PRODUCT AND MARKET ASPECTS
A. Describe the products to be produced, indicating s~ecifica~ions of
their physical, chemical, and/or agronom_ic properties, wh1c~ever
is applicable. Specify by-products resultmg from the opera.hons.
B. Present estimates of the annual volume and value of domestic and
overseas sales of each product for the first 10 years of the project's
life. Specify the export markets where it will be applicable. Outline
the assumptions underlying the projections.
.
C. Give the proposed selling prices of each produc~ 1~ both ~e local
and overseas markets. Show basis for determmmg pnces and
extent of possible variations.
D. Outline the proposed marketing arrangements for the products,
i.e., channels of distribution, selling organization, etc. Indicate
especially the trade names to be used: long-term contracts,
guaranteed markets, importers contacted m overseas market~ and
the status of these customers, affiliations with other comparues or
bodies for marketing purposes (local and overseas), and terms of
sales and sales schedules showing inventory levels.
Annexes
85
III. TECHNICAL ASPECTS
A. Des~ribe the processes and/or production methods, showing
det.a~l~d flow charts. Specify maintenance and other support
faCihhes proposed, quality control and requirements for the
processes adopted.
B. Specify major machinery and equipment requirements, indicating
the following:
1. N_umber, specifications, rated capacities, and life of major
pieces of equipment, whether new or second-hand, allocated
to c.ategories according to major use (for example, production,
mamtenance, waste disposal, etc.). Outline functions to be
performed by each major unit.
2. Quotations from suppliers, machinery guarantees, delivery
and payment terms, and other arrangements. Indicate also the
supplier, country or port of origin, taxes and duties, installation
~osts and all~wances for minor equipment, etc. State why
Imported equrpment and not locally produced equipment is
used for each item, where applicable.
3. Is equipment to be exclusively used for the production of the
products specified? If not, specify to what extent the equipment
will be used for other purposes.
C. Encl.ose plans, drawings of major structures, and physical layout
of stte,. plant, and machinery, indicating also provisions for
e.xpanst.on. Enclose cost quotations for land and major structures
~mcludmg contingencies, land improvements, and additional
mfrastructure and allowances for major structures).
D. Specify ann~al rate and daily capacity of plant at a specified
n~mber of shifts per day and number of operating days per year.
Grve the expected attainable annual production volume of each
product for the first ten years of the project's life.
E. Show volu~e and value of material inputs per unit output (and
the respective wastage factors, if applicable) for each product to
be produced, separating imports, locally purchased imports and
locally produced inputs. Also:
86 How to Prepare Project Feasibility Studies
1. For locally produced material inputs and locally purchased
imports, give delivered prices at factory, or transfer price if
produced by applicant.
2. For imported material inputs, give current CIF (Cost, Insurance,
and Freight) price, tariff, sales tax, other charges, and delivered
price at factory.
3. Give details or prospective sources of major inputs, consignment
arrangements, supply contracts, etc.
F. Specify special requirements and costs for electricity, water, and
other utilities.
G. Detail _total labor requirements from start of operations until
normal production capacity is attained. Also:
a. Indicate number of workers according to skill, sex, and whether
full-time/part-time/seasonal, at normal production capacity.
b. Specify wage rates, salaries, fringe benefits, etc.
c. Justify foreign personnel involved, if any.
d. Set out details of special training programs, including costs.
IV. FINANCIAL ASPECTS
A. Specify sources for short-term financing, long-term financing,
and suppliers' credits, and their respective uses. Also indicate (if
possible):
I. Amount and terms of financing from each source selected
indicating currency, security, repayment period, interest and
other features.
2. Status of financing from each source relating to actual releases
already made, applications already approved, applications
pending and applications still to be made. For equity financing,
indicate subscriptions made.
B. Prepare two sets of the following statements-one set assuming no
Board of Investments (BOI) incentives and the other set assuming
BOI incentives, for each of the first 10 years of the project's life.
Annexes 87
1. Cost of sales and operating expenditures statements (see item
E.7below)
2. Profit and loss (or income statement)
3. Cash flow statement
4. Balance sheet statement
The formats for these statements are as per attachments A, B, C
and D.
C.
The following financial evaluations are to be based on the
information contained in these statements, both with BOI
incentives and without BOI incentives:
1. Profitability evaluation, calculating discounted rate return
on total investment, discounted rate of return on capital
stock and net present value.
2. Profitability ratios, calculating gross operating profit ratio
(net operating profit as ratio of sales) and net profit after
tax ratio for each year, and its average over the projected
operating period.
3. Solvency ratios, calculating debt to equity ratio, and debt
service coverage for each year.
4. Break-even analysis, calculating break-even price, and
capacity.
V. ENCLOSURES TO BE ATTACHED TO THE STUDY
A. Bio-data of principal officers
B. Certified copies of all export and domestic sales contracts
C. Certified copies of all patents, technical and management
agreements, foreign loans contracts, and all other agreements
proposed or entered into other parties.
D. Copies of quotations for machinery, structures, inputs, etc.
E. Clearances from proper authorities for waste disposal and
emission control
F. Relevant background data compiled for the project study.
G. For applicants under Republic Act 6133
1. Computation for tax credit on raw materials and supplies.
2. Computation of standard raw material usages.
88 How to Prepare Project Feasibility Studies
ANNEX C
BOARD OF INVESTMENTS FEASIBILITY STUDY FORMAT
(The Board of Investments requires projec~ feasibility studies ~ro.m appli~ant
enterprises wishing to register new proJects or expand extstmg. ~r?Jects
which propose to avail themselves of tax exemptions for the acqmsthon of
capital equipment.)
A. SUMMARY OF PROJECT
1. Name of firm
2. Location
a. Head office
b. Plant site
3. Brief description of the product
. .
4. Highlights of major assumptions such as o:-arke~ proJeCtions, share
and prices, investment costs, method of financmg, e~c.
5. Summary of findings and conclusions on the followmg:
a. Market feasibility
b. Technical feasibility
c. Financial feasibility
B. GENERAL INFORMATION
1. Management of the project
.
.
.
a. Management during the operatmg penod \type of busme~s
organization, organizational ch~rt and fun~twns of ~ach umt,
management personnel specifymg the duties and ti~e to be
devoted to the project, qualifications, and compensatwn! ..
b. Labor (skills required of each job, recruitment ~~~ tr)ammg
programs, compensation, fringe benefits: and. facthhes .
c. Professional firms or consultants to be hued, If any.
d. Status of timetable of the project.
e. Other information, for example, on pending litigations,
information regarding intangibles, etc.
Annexes 89
C. ECONOMIC ASPECTS
1. Market study
a. Export demand
1) Consumption in targeted importing countries for the past
10 years. Also state the major consumer industries or sectors
of the products.
2) Projected consumption in targeted importing countries
for the next 10 years. Indicate methods used and factors
considered in preparing the projections.
b. Domestic demand (whenever applicable)
1) Consumption for the past 10 years. Also state the major
consumer industries or sectors of the products.
2) Projected consumptions for the next 10 years. Indicate
methods used and factors considered in preparing the
projection.
c. Export supply
1) Supply in the targeted importing countries for the last 10
years, broken down as to source, whether imported or
locally produced. For imports, specifications should be
made on the form in which the goods are imported, the
country of origin, and the brands.
For locally produced goods, the companies producing
them, their production capabilities, and brands used shall
be specified.
2) Project supply in the targeted importing countries for the
next 10 years.
3) Factors affecting trends in past and future supply in the
targeted importing countries.
d. Domestic supply (whenever applicable)
1) Supply in the targeted importing countries for the last 10
years, broken down as to source, whether imported or
locally-produced.
2) Projected supply for the next 10 years.
3) Factors affecting trends in past and future supply in the
targeted importing countries.
90 How to Prepare Project Feasibility Studies
e. Competitive position considering imported and/or substitute
products.
1) In targeted importing countries:
a. Selling price- Prices to be adopted including tariff
protection assumed or expected for the project.
Comparison with landed cost of goods from other
countries at the prospective importing country, and with
prevailing prices , either wholesale or retail, whichever
is applicable.
b. Competitiveness of the quality of the product.
2) In the domestic market (whenever applicable):
a. Selling price- Prices to be adopted including tariff
protection assumed or expected for the p~oject. Fo~ ~he
products to be sold locally, comparison w1~h pre~ailing
prices (both local and imported) and Wl.th pr.Ices of
substitute products, either wholesale or retail, whichever
is applicable in the light of the applicant firm's marketing
program.
b. Competitiveness of the quality of the product.
2. Marketing program
a. Description of the present marketing practices of competitors
in the export (and domestic) market.
b. Proposed marketing program of the project, des~ri~ing .the
selling organization, terms of sales, cha~els of d1stnbuh?n,
location of sales outlets, and transportation and warehousmg
arrangements and then corresponding costs.
3. Projected export (and domestic) sales
a. Expected annual volume of export (and domestic) sales fo~ :he
next 10 years considering the demand, supply, competitive
position, and marketing program.
4. Contributions to the Philippine economy
b. Net annual amount in dollars earned or saved, after subtracting
for amortization of imported capital investment and any
importation of raw materials.
c. Labor employed and taxes paid.
Annexes 91
D. TECHNICAL FEASIBILITY
1. Product(s)
a . Descr~ption ~f the product(s) including specifications relating
to their physical, mechanical, and chemical properties.
b. Uses of the product(s).
2. Manufacturing process
a. Description of the process showing detailed flow charts
indicating material and energy requirement at each step, and
the normal duration of the process.
b. Licensing agreement, if any, including terms.
c. Alternative processes cons idered and factors used in
determining the process to be used.
d. Processes used in existing plants and in similar projects in the
Philippines or abroad.
3. Plant size and production schedule
a. Ra.ted annual and daily plant capacity at a given number of
shifts per day and number of operating days per year and
factors used in determining plant size.
b. Expected attainable annual production volume for the next 10
years, considering start-up and technical factors .
4. Machinery
a . Machinery layout, showing the number, specifications, rated
capac~t.ies of major pieces of equipment, and balancing of
capaCities of each major and auxiliary equipment, and standby units.
b. Availability of spare parts and repair service.
c. Quotations from suppliers, machinery guarantees, delivery,
terms of payments, and other agreements.
5. Plant location
a. Location map of the plant.
b. Desirability of locations in terms of distance to sources of raw
materials and market, and other factors.
92 How to Prepare Project Feasibility Studies
6. Plant layout
.
a. Description of the plant layout and the layout chart
b. Effect of layout on materials flow and treatment of matenals
handling and storage.
c. Provision for expansion.
7. Structure
a. Building and costs of erection
b . Other structures and their respective costs.
c. Land improvements such as roads, drainage facilities, etc., and
their respective costs.
8. Raw materials
a. Description and specifications of their physical, mechanical,
and chemical properties.
.
b. Alternative raw materials considered and the factors used m
selecting the raw materials.
c. Material balance.
d. Availability, continuity of supply, and current prospective
sources.
e. Current and prospective cost of raw materials and terms of
any long-term contracts.
9. Utilities
Electricity, fuel, water, steam, and supplies specifying the uses,
quantity required, balance of utilities, availability, sources and
alternative sources and costs.
10. Waste disposal
a.
b.
c.
d.
e.
Description and quantity of the waste to be disposed of.
Description of the waste disposal methods.
Methods used in other plants.
Costs of waste disposal.
.
.
Clearance from proper authorities or compliance with legal
requirements.
Annexes
93
E. FINANCIAL FEASIBILITY
ANNEX D
1. Total project cost-All items considered and assumptions made.
2. Initial capital requirements-All items considered and
assumptions made.
3. Sources of financing
a. Selected or proposed sources for both long-term and short-term
financing.
b. Alternative sources considered.
c. Amount and terms of financing for each source selected
indicating the currency, security, repayment period, interests,
and features.
d. Status of financing from each source relating to actual release
already made, applications already approved, applications
pending, and applications still to be made.
e. Financing of contingencies and seasonal peaks in working
capital.
4. Financial statements
a. Projected income statement for 10 years.
b. Projected cash flow statement for 10 years.
c. Projected balance sheets for 10 years.
Note: these financial statements shall be made in the two following
sets:
a. One set assuming registration and the enterprise availing
of the incentives provided for in Republic Act 5186
b. One set not assuming registration.
5. Financial analyses (to be done for both sets of financial statements
described above)
a. Unit cost estimates and detailed breakdown of all cost factors
from first year until normal operation is attained.
b. Break-even point analysis.
c. Capital recovery, and earnings showing the cash pay off period,
rate of return, and discounted cash flow-rate of return.
d. Others.
94 How to Prepare Project Feasibility Studies
ASIAN DEVELOPMENT BANK
PRE-FEASIBILITY STUDY REPORT FORMAT
(REVISED VERSION 3, DECEMBER 4, 2004)
Project Title
Table of Contents
List of Annexes
Author (s), Organisation (s), Date
I. Executive Summary
II. Map Showing the Location of the Project
III. Introduction - Briefly describe the proposed project; the proj~ct's
benefits; overall economic and financial viability o~ the pr_oJ_e~t;
stakeholders involved; and likely dates for any followmg feas1b1hty
studies, detailed costing, detailed design, etc.
IV. Background
.
.
a. Description and prospects for the sector in which the proJect w1ll
operate
.
b. Opportunities, constraints and issues related to the p~oJect sectbor
c. Sustainable development objectives likely to be contnbuted to y
the project
.
d . Government policies and strategies relevant to the proJeCt sector
e. Extent to which applicable policies are enforced
f. Overlap of government and ADB objectives
V. Description of the Proposed Project
a. Project rationale from the perspective of relevant ~e~ ~takeholders
b. Project goal, objective, expected results, achv1t1es, s~?pes,
proposed specific characteristics and circu_mstances .. Specifically
what concrete outputs are to be achieved m the proJect towards
the goal and objectives.
Annexes 95
c. Poverty reduction and other MDG (Millennium Development
Goal) impacts
d. Technology transfer
e . Core business of the proposed project partners and the business
and financial relationships between them.
f. The product (s), service (s) to be generated by the project
XII. Stakeholders' Comments
a. Invitation letters to the Stakeholders
b. Comments of local Stakeholders
c. How any comments received have been incorporated in the project
design
VI. Project Implementation Plan - include timeframe of the planning,
implementation, and operational stages
XIII. Key factors impacting project
a. List key legal, economic, political, socio-demographic,
environmental and technical factors affecting
b. Project Uncertainties
VII. Contribution to Sustainable Development
a. Long-term benefits
b. Other benefits including economic, social, environmental and
technological improvements.
c. Other impacts of the project
XIV. Conclusions and Recommendations
XV. Any other relevant information
XVI. Annexes, for any more detailed supporting data and reports
VIII. Project Baseline
a. Current production and delivery patterns
b. Flowchart of the current delivery system with the main
components and their connections
c. Status, adequacy and operation modes of the baseline
d. Project boundary and monitoring domain
e . Baseline methodology and calculation
f. Calculation of total project
XVII.
References
IX. Monitoring and Verification
a. Identification of data needs and data quality with regard to
accuracy, comparability, completeness and validity
b. Describe methodology used for data collection and monitoring
including quality assurance/ control provisions for monitoring,
collecting and reporting
c. Estimates of costs for monitoring and verification
X. Financial Analysis of the Project
a. Estimation of Overall Cost Estimates
b . Project financial Analysis
c. Financing Plan
XL Economic Analysis
a. Statement of poverty reduction impacts
b . Statement of social, gender and environment impacts
c. Project Economic Analysis
96 How to Prepare Project Feasibility Studies
Annexes 97
REFERENCES
Mayer, Raymond R. Production Management (2nd Edition). Tokyo: McGrawHill Book Company, 1968.
McCarthy, E. Jerome. Basic Marketing: A Managerial Approach (Sth Edition).
Illinois: Richard D. Irwin, Inc., 1975
Parel, Cristina, et. AI. Introduction to Statistical Methods (With Application).
Manila: Macaraig Publishing Company, Inc., 1966.
WEBSITES
http:/;www.su rveysystem .com
http://home.ubalt.com
http:/;www.smallbusinessresources.com
http://www. va-interactive.com
http:/jobelia.jde.aca.mmu.ac.uk
http://www.emb.com
http://www.gdrc.org
Roberto, Eduardo L. Applied Marketing Research (A Seminar Manual). Makati,
Metro Manila, 1988
Burns, Alvin S. & Ronald F. Bush. Marketing Research (3'a Edition). NJ:
Prentice Hall, Inc., 2000
Edmunds, Holly. AMA Complete Guide to Marketing Research for Small
Business. Illinois: NTC Business Books, 1996.
Walonick, DavidS., Survival Statistics. Minneapolis: StatPac, Inc.,1997
Malhotra, N aresh, K., Marketing Research, An Applied Orientation, International
Edition(3'd Edition). Prentice Hall, Inc. 1999.
Roberto, Ned, User-friendly Marketing Research (2"a Edition). Life Cycle Press,
June 2002.
ADB, Pre-feasibility Study Report Format (revised version 3), December 4, 2004.
Dy, Rolando, Handout on How to Prepare a Project Study, 2004.
Industrial Environmental Management, Environmental Impact Analysis
Participant's Manual.
Hunger, David J., Wheelen, Thomas L., Strategic Management (5 1h Edition).
Addison Wesley Publishing Co. 1996.
98 How to Prepare Project Feasibility Studies
References 99
I
Project Management Team
Paz Resurreccion M. Alip
Project Supervising Fellow
Joanne Q. Nuque
Project Manager
Shirley T. Cubilla
Project Assistant
Dr. Cayetano W. Paderanga
Dr. Eulogio A. Castillo
Technical Reviewers