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5. financial feasibility
1.
2. ď˝ ALL PROJECTS ARE CONSIDERED VIABLE
ONLY WHEN THEY ARE EXPECTED TO:
⌠BE PROFITABLE TO MEET SHORT- TERM
OBLIGATIONS
⌠BE LIQUID & TO REMAIN LIQUID DURING
ADVERSITIES
⌠GROW IN THEIR ABILITY FINANCE THEIR
OPERATIONS MOSTLY FROM NET-WORTH
SOURCES RATHER THAN CREDIT APPLICATIONS
⌠BE ABLE TO SERVICE THEIR FINANCING CHARGES.
3. ď˝ MAJOR ASSUMPTIONS
ď˝ TOTAL PROJECT COSTS
ď˝ INITIAL WORKING CAPITAL REQUIREMENTS
ď˝ ALTERNATIVE SOURCE OF FINANCING
CONSIDERED, IF ANY
ď˝ SOURCES OF FINANCING THE PROJECT
ď˝ BEGINNING & PRO-FORMA FINANCIAL
STATEMENTS
ď˝ FINANCIAL ANALYSES
4. ď˝ IN THE FORMULATION OF FINANCIAL
PROJECTIONS, ASSUMPTIONS PLAY A MAJOR
ROLE BECAUSE THEY SERVE AS THE
FOUNDATION FOR ESTIMATING THE FUTURE
EXPENDITURES, EXPENSES, & REVENUES OF
THE PROJECT AS ACCURATE AS POSSIBLE.
ď˝ THESE ASSUMPTIONS, THEREFORE, MUST BE
BASED ON WELL-CONSIDERED, REALISTIC &
WORKABLE FACTS.
5. ď˝ 1. EXISTING BUSINESS PRACTICES IN THE INDUSTRY
WHERE THE PROJECT BELONGS MAY PROVIDE SOME
VALUABLE INFORMATION & INSIGHTS ON:
⌠CREDIT TERM
⌠CREDIT EXTENSION
⌠BAD-DEBT ALLOCATIONS
⌠BAD-DEBT WRITE-OFF
⌠QUALITY-CONTROL COSTS
⌠DIVIDENT POLICIES
⌠SALES RETURNS, ALLOWANCES, & DISCOUNTS
⌠LABOR & MANAGEMENT COMPENSATION
⌠OVERHEAD ACCOUNTS
⌠INVENTORY COSTING
⌠OPERATING ACCOUNTS
⌠FIXED- ASSET REQUIREMENTS
⌠METHOD OF DEPRECIATION & AMORTIZATION
⌠INTANGIBLE ASSET PRE-REQUISITE
6. ď˝ 2. PREVIOUSLY MADE FEASIBILITY STUDIES DIRECTLY RELATED
TO THE PROJECT MAY CONTRIBUTE ADDITIONAL FACTORS TO
BE CONSIDERED, WHICH EITHER CONFIRM OR CONTRADICT
FINDINGS IN INDUSTRY STANDARDS, SPECIFICALLY THOSE
ITEMS INVOLVED IN THE COMPUTATIONS OF:
⌠SELLING PRICE
⌠SALES FORECASTS
⌠UNFORSEEN COSTS
⌠PRODUCTION VOLUME
⌠PRODUCT MIX
7. ď˝ GOVERNMENTAL REGULATIONS & INCENTIVES DIRECTLY OR
INDIRECTLY AFFECT THE PROJECT, SUCH AS:
⌠IMPORT POLICIES
⌠EXPORT POLICIES
⌠TAX RATES
⌠TAX EXEMPTIONS
⌠PRICE CEILINGS
⌠RELEVANT PRESIDENTIAL DECREES OR LOI
8. ď˝ OTHER PERTINENT DATA WHICH CAN JUSTIFY
THE ASSUMPTIONS OF THE STUDY, SUCH AS
⌠INDUSTRY POLICIES
⌠PRE-FEASIBILITY STUDIES
⌠SYMPOSIUM & CONFERENCES, &
⌠MATERIAL OUTPUTS OF INDUSTRY ASSOCIATIONS.
9. ď˝ ESTIMATES OF THE PROJECTâS INITIAL
COST/ASSET REQUIREMENT WHICH MUST BE
BASED ON THE MATERIALS, SUPPLIES,
EQUIPMENT, PHYSICAL PLANT, & MANPOWER
NEEDS OF THE PROJECT SPECIFIED IN THE
TECHNICAL PORTION.
10. ď˝ LAND & LAND IMPROVEMENTS
⌠COST OF LAND, NOTARY FEES, REGISTRATION DUTIES, &
OTHER RELATED COSTS
ď˝ BUILDINGS, INCLUDING ELECTRIC & WATER UTILITIES,
FURNITURE & FIXTURES
⌠BUILDING COST, WELLS, WATER PIPES, ELECTRICAL
CONNECTIONS, GAS SUPPLY, TELEPHONE SYSTEM,
RESERVOIR & TANKS, WASTE WATER DISPOSAL, FENCING,
ROADS & PATHS, EMPLOYEES HOUSING, & FIRE PROTECTION
ď˝ EQUIPMENT, PLUS INSTALLATION COSTS
ď˝ PURCHASE & INSTALLATION OF MACHINERY
⌠PURCHASE TAXES, FREIGHT & INSURANCE EXPENSES,
CUSTOMS DUTIES
ď˝ TRIAL-RUN ASSOCIATED WITH ELECTRIC UTILITIES,
EQUIPMENT & MACHINERY
⌠ELECTRICITY & TELEPHONE LINES, ELECTRICAL EQUIPMENT,
INTERNAL TRANSPORT EQUIPMENT, VEHICLES, OFFICE
EQUIPMENT & SUPPLIES, FURNITURE & FIXTURES,
MAINTENANCE & CLEANING EQUIPMENT, & SPARE PARTS
11. ď˝ INVENTORY INVESTMENTS
⌠PURCHASES OF MATERIALS & SUPPLIES
⌠FREIGHT EXPENSES
ď˝ INVENTORY-RELATED COSTS
⌠INDIRECT & DIRECT LABOR W/ CORRESPONDING FRINGE BENEFITS
⌠HEAT, LIGHT, & POWER
⌠MAINTENANCE
⌠WAREHOUSING EXPENSES RELATED TO RAW MATERIALS
⌠MATERIALS IN PROCESS
⌠FINISHED GOODS
ď˝ CASH CREDITS
⌠PRE-PAID EXPENSES (COST OF INITIAL INVESTIGATIONS, PRE-FEASIBILITY STUDIES,
RESEARCH & TECHNICAL STUDIES, ECONOMIC & MARKETING STUDIES,
FINANCIAL & PROFITABILITY STUDIES, DESIGN STUDIES, &
CONSULTING- ENGINEERING FEES).
⌠INTANGIBLE ASSETS (PATENTS, LICENSES, GOODWILL, REPRODUCTION RIGHTS)
⌠OPERATING SALARIES
⌠WAGES & FRINGE BENEFITS
⌠ENGINEERING COSTS
⌠OPERATING TAXES
⌠OFFICE SUPPLIES
⌠COMMUNICATION FACILITIES
⌠OFFICE UTILITIES
⌠BILLING COSTS
⌠TRANSPORTATION COSTS
⌠EXPENSES FOR ADVERTISING
⌠BORROWING COSTS
⌠PROVISIONS FOR UNFORSEEN COSTS
12. ď˝ STEPS IN DECIDING ON THE FINANCING
SCHEME TO SUPPORT THE PROJECT:
⌠LIST THE ALTERNATIVE SOURCES OF FINANCING
⌠DETERMINE SOURCES SELECTED OR PROPOSED AS A
FUNCTION OF MAXIMUM PROFITABILITY
⌠FINALIZE THE AMOUNT & TERMS FOR EACH SOURCE
SELECTED
⌠STATE THE STATUS OF FINANCING FROM EACH
SOURCE
⌠SPECIFY THE FINANCING OF CONTINGENCIES &
FLUCTUATIONS IN WORKING CAPITAL
⌠PINPOINT ALTERNATIVE SOURCES OF FINANCING IN
ORDER OF PRIORITY
13. ď˝ PRESENT IN AN ORDERLY &
UNDERSTANDABLE FORM THE CASH BUDGET,
THE OPERATING PERFORMANCE, & THE
FINANCIAL CONDITION OF A BUSINESS
ENTERPRISE
ď˝ IT DEPICT THE PROGRESS OF A FIRM IN
FINANCIAL TERMS
14. ď˝ 1. THE INCOME STATEMENT- IS THE
COMPUTATION OF THE PROJECTâS TOTAL
REVENUES & TOTAL COST FOR ONE PERIOD
OR FISCAL YEAR,THEREBY ARRIVING AT THE
CONCERNâS NET INCOME OR DEFICIT WITHIN
THE PERIOD, TOGETHER WITH ITS
PERFORMANCE IN TERMS OF PROFITABILITY &
COST CONTROL
15. ď˝ 2. THE CASH-FLOW STATEMENT or THE CASH
BUDGET- IS A SYSTEMATIC PRESENTATION OF
CASH RECEIPTS & DISBURSEMENTS FOR A
GIVEN OPERATING PERIOD OR FISCAL YEAR,
TAKING FOR GRANTED THE âACCRUAL
CONCEPTâ IN ACCOUNTING.
16. ď˝ 3. THE BALANCE SHEET- SHOWS THE ASSETS
DERIVED BY THE PROJECT FROM CORRESPONDING
LIABILITIES & EQUITIES (NET WORTH). IT IS AN
OVERALL PICTURE OF A FIRMâS FINANCIAL
CONDITION AS OF A CETAIN TIME.
17. ď˝ THIS PORTION GAUGES THE PROJECTâS
PROFITABILITY, LIQUIDITY, CASH SOLVENCY &
GROWTH OVER TIME.
18. ď˝ THESE MEASURES ARE USED TO DETERMINE A FIRMâS ABILITY TO MEET
SHORT-TERM OBLIGATIONS, & TO REMAIN SOLVENT IN THE EVENT OF
ADVERSITIES.
⌠1. CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
⌠2. QUICK or ACID-TEST RATIO = CURRENT ASSETS- INVENTORIES
CURRENT LIABILITIES
⌠3. LIQUIDITY OF INVENTORIES = COST OF SALES
AVERAGE INVENTORY
⌠4. DEFENSIVE POSITION = CASH + MARKETABLE SECURITIES + RECEIVABLES
PROJECTED OPERATING EXPENDITURE/NUMBER OF DAYS
19. ď˝ THESE TESTS ARE EMPLOYED TO PRESENT THE PROJECTâS ABILITY
TO MEET LONG-TERM OBLIGATIONS.
⌠1. DEBT-TO-NETWORTH RATIO = TOTAL LIABILITIES
TOTAL EQUITIES
⌠2. TOTAL CAPITALIZATION RATIO = LONG-TERM LIABILITIES
LONG-TERM LIABILITIES & EQUITIES
20. ď˝ THESE SHOWS THE OPERATIONAL PERFORMANCE & EFFICIENCY OF
THE PROJECT.
⌠1. NET PROFIT MARGIN = NET INCOME AFTER TAX
SALES
⌠2. OPERATING PROFIT MARGIN = PROFIT BEFORE INTEREST & TAXES
SALES
⌠3. GROSS PROFIT MARGIN = GROSS PROFIT
SALES
⌠4. RETURN ON FINANCIERâS INVESTMENT = NET INCOME + INTEREST
STOCK EQUITY & LONG-TERM LIABILITY
⌠5. RETURN ON OWNERâS INVESTMENT = NET INCOME
STOCK EQUITY
⌠6. RETURN ON COMMON STOCK EQUITY = NET INCOME â PREFERRED STOCK DIVIDENDS
NET-WORTH â PAR VALUE OF PREFERRED STOCK
⌠7. RETURN ON NET OPERATING PROFIT = PROFIT BEFORE INTEREST & TAXES
TOTAL TANGIBLE ASSETS
⌠8. ASSET TURNOVER = SALES
TOTAL TANGIBLE ASSETS
⌠9. RETURN ON ASSETS, OR EARNING POWER = NET INCOME
TOTAL TANGIBLE ASSETS
21. ď˝ TEST OF TOTAL DEBT COVERAGE = PROFIT BEFORE INTEREST & TAXES
(INTEREST + PRINCIPAL PAYMENT)
(1/1 â INCOME TAX RATE)
22. ď˝ THIS TECHNIQUE IS EMPLOYED TO DETERMINE THE
MAJOR USES & SOURCES OF FUNDS WITHIN ONE YEAR
IN A PROJECTâS LIFE.
⌠1. CASH-FLOW ANALYSIS
ď a. SOURCES OF FUNDS:
ď NET DECREASE IN ANY ASSET OTHER THAN CASH
ď NET INCREASE IN ANY LIABILITY
ď PROCEEDS FROM THE SALE OF STOCKS
ď FUNDS PROVIDED BY OPERATIONS
ď b. USES OF FUNDS:
ď NET INCREASE IN ANY ASSET OTHER THAN CASH & FIXED ASSETS
ď GROSS INCREASE IN FIXED ASSETS
ď NET DECREASE IN ANY LIABILITY
ď A RETIREMENT OF STOCK
ď CASH DIVIDENDS
23. ⌠2. WORKING CAPITAL-FLOW ANALYSIS
ď a. SOURCES OF FUNDS:
ď NET DECREASE IN ANY ASSET OTHER THAN CURRENT ASSETS
ď NET INCREASE IN LONG-TERM LIABILITIES
ď PROCEEDS FROM THE SALE OF STOCKS
ď FUNDS PROVIDED BY OPERATIONS
ď b. USES OF FUNDS:
ď NET INCREASE IN OTHER ASSETS
ď GROSS INCREASE IN FIXED ASSETS
ď NET DECREASE IN LONG-TERM LIABILITIES
ď RETIREMENT OF STOCK
ď CASH DIVIDENDS
24. ď˝ THESE FUNCTIONS INDICATE HOW THE PROJECT EMPLOYS ASSETS FOR
WHICH IT PAYS A FIXED COST. BEFORE THESE TESTS ARE APPLIED, A
CLARIFICATION SHOULD BE MADE ON WHAT âVARIABLEâ & âFIXEDâ COSTS
ARE.
⌠1. BREAK-EVEN VOLUME ANALYSIS
BEV = FIXED COSTS
SELLING PRICE â VARIABLE COST/UNIT
⌠2. BREAK-EVEN CASH ANALYSIS
BEC = CASH FIXED COSTS
SELLING PRICE â CASH VARIABLE COST/UNIT
⌠3. BREAK-EVEN SELLING PRICE ANALYSIS
BESP = VARIABLE COSTS + FIXED COSTS
UNIT VOLUME
= TOTAL COST X SELLING PRICE
SALES
⌠4. BREAK-EVEN SALES ANALYSIS
BES = BESP X UNIT VOLUME
= FIXED COST
1 â (VARIABLE COST/NET SALES)
25. ď˝ THESE TECHNIQUES PRESENT HOW A PROJECT EMPLOYS
FUNDS WHICH PAY A FIXED RETURN.
⌠EARNINGS PER SHARE = NET INCOME
SHARES
⌠DIVIDENDS PER SHARE = NET INCOME â PREFERRED STOCK DIVIDENDS â RETAINED EARNINGS
COMMON SHARE
26. ď˝ THESE FINANCIAL TOOLS EVALUATE THE
JUSTIFICATION FOR INVESTING IN THE
PROJECT.
⌠AVERAGE RATE OF RETURN = AVERAGE NET INCOME
AVERAGE NET INVESTMENT
⌠PAYBACK PERIOD IN YEARS = INITIAL-YEAR CASH OUTFLOW
SUCCEEDING ANNUAL NET CASH FLOW
⌠CAPITAL RECOVERY OR CASH PAY-OFF PERIOD IN YEARS = STOCKS
ANNUAL CASH DIVIDENDS
27. Expected Sales
Less: Raw materials
Labor cost
Utilities
Marketing expenses
Depreciation costs
Others
Equals: Net profits
ROI = Net profit / Total expenses X 100%.
30. Item Period 1 Period 2 Period 3
Sales
Expenses
_________
_________
_________
_________
Add: beg balance
Ending cash balance
31. Cash Flow from Operating Activities
(Inc.) Dec. in Prepaid Insurance (2,396,457.43)
Net Cash Provided by (used in) Operating Activities (2,396,457.43)
Cash Flow from Investing Activities
Purchased of Fixed Assets (420,587,622.00)
Payments for Organization/Pre-Operating Cost (9,551,729.00)
Net Cash Flow Provided by (used in) Investing Activities (430,139,351.00)
Cash Flow from Financing Activities
Proceeds from Issuance of Stocks 300,000,000.00
Proceeds from Bank Loan 150,000,000.00
Net Cash Provided by (used in) Financing Activities 450,000,000.00
Net Increase (Decrease) in Cash 17,464,191.57
Cash Balance, Beg. 0.00
Cash Balance, End. 17,464,191.57
35. Assets:
Current Assets
Cash 20,464,191.57
Prepaid Insurance 2,396,457.43
Total Current Assets 22,860,649.00
Non-Current Assets
Property Plant and Equipment 420,587,622.00
Organization Cost 6,551,729.00
Total Non-Current Assets 427,139,351.00
Total Assets 450,000,000.00
Liabilities and Stockholders Equity:
Non-Current Liability
Bank Loan 200,000,000.00
Stockholders' Equity
Common Stock, 100par, 5,000,000 shares authorized 250,000,000.00
Total Liabilities and Stockholders' Equity 450,000,000.00