Understanding Financial Feasibility in Project Management
A feasibility study is conducted to evaluate the practicality of a project or system by identifying its strengths, weaknesses, opportunities, and threats in the natural environment. The study aims to assess the resources required to carry out the project and its potential for success. The two criteria used to assess feasibility are the cost required and the value to be attained.
The primary objective of a feasibility study is to provide an unbiased evaluation of a proposed project’s technical, economic, financial, legal, and environmental aspects. This information helps decision-makers determine whether to proceed with the project or not.
Parameters for Financial Viability Assessment in New Projects
To assess the financial viability of a new project, a cost-benefit analysis is conducted to determine its viability, cost, and benefits before allocating financial resources. This process serves as an independent project assessment that enhances project credibility by enabling decision-makers to evaluate the positive economic benefits the proposed project can provide.
For a new project, the following parameters can be used to determine its financial viability:
- The project’s anticipated total cost
- Project financing details, including the capital structure, debt to equity ratio, and promoter’s percentage of total cost
- Investment already made by the promoter in a different company
- Projected cash flow and profitability
To determine the financial viability of a project, a thorough financial analysis is conducted which includes the following:
- Computation of Pro-forma Financial Statements
- Capital Budgeting
A. Computation of Pro-forma Financial Statements
Pro-forma financial statements depict the financial projections over the forecast period. These statements play a crucial role in understanding how the business will be performing financially and help in quantifying the financial milestones over the projected period. Following are the Pro-forma financial statements:
- Pro-forma Balance Sheet: Reports the firm’s financial position at a given point in time.
- Pro-forma P&L Statement / Income Statement: Summarizes the financial performance of the company over a specified period.
- Pro-forma Cash Flow Statement: Provides aggregate data regarding all cash inflows & outflows.
B. Capital Budgeting
Capital Budgeting is a crucial planning process which is used for decision making of the long-term investment. It helps in deciding whether the projects are fruitful for the business and will provide the required returns in the future years.
Following are the major techniques used in capital budgeting decisions:
- Profitability Index
- Payback Period
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
- Return on Investment (ROI)
A feasibility study is a crucial step in assessing a project’s viability. A feasibility study that evaluates a project’s viability, costs, and advantages must consider its financial feasibility. Making informed decisions regarding project management and resource allocation requires having a solid understanding of financial feasibility.
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