Chapter Three

Feasibility
Analysis

1
Feasibility Study
- Feasibility study is related to analysis
of the viability of the identified
project to support decision making of
investment.
- As its name implies, it is a study to
decide whether the identified project
is attractive enough to go for
implementation.
- The study needs inputs from many
professional disciplines for 2
Feasibility Analysis: A Schematic Diagram
P
r Generation of
e
l
ideas
i
m Initial Screening
i
n
a
r Is the Idea Prima Facie
y Promising?
w Yes No
o Plan Feasibility
r Analysis Terminate
k

A
Conduct Conduct
n
Market Technical
a
l Analysis Analysis
y Conduct
s
i E Financial
s v Analysis
a
l Conduct Economic and Ecological
u analysis
a
t Is the project
i Worthwhile? No
o Yes Termina
n Prepare Funding
Proposal te 3
Why Feasibility Study?
- To find if there is adequate demand for the
project’s output.
- To find if there is availability of suitable
technology and inputs
- To find the best options
- To examine the project’s financial and
economic viability
- To answer if the project meets the
environmental regulations and priority of
the nation

4
Areas of Analysis in Feasibility study
Demand/ Need and Market Analysis
Technical Analysis
Management Analysis
Financial Analysis
Economic Analysis
Environmental Analysis
Social Analysis

5
Demands
Should government make six lane fast track
road?
Should proposed cement factory plant be
able to produce 100 metric ton of cement per
day?
How many rooms to build in Sheraton Hotel?

6
Market and Demand Analysis

Market and demand analysis look at the need of

the project and help to estimate demand
The analysis covers mainly:
◦ Aggregate demand for the product/service
◦ The share of unfulfilled demand
◦ Demand forecasting
◦ Market price of product/service
◦ Analysis of competitors, their strength & weakness
◦ Distribution mechanism

7
Activity
 Conduct a market demand feasibility analysis for the
project idea you have identified in the previous section (in
this case, you may use the template given below):
 Objective:
To assess the demand for the proposed product or service in the target
market.
Steps:
1. Define the Target Market:
◦ Identify the demographics (age, gender, income level, etc.).
◦ Determine geographic location and market segments.
2. Analyze Market Trends:
◦ Research industry growth rates.
◦ Identify consumer preferences and emerging trends.
3. Competitor Analysis:
o Identify key competitors.
8
o
Activity…Cont’d

4. Survey Potential Customers:

o Conduct surveys, interviews, or focus groups.
o Assess willingness to pay, preferences, and unmet needs.
5. Estimate Market Size & Demand:
o Use secondary data (industry reports, government statistics).
o Calculate potential market share based on competitor insights.
6. Evaluate Barriers to Entry:
o Assess legal, financial, or operational challenges.
o Identify potential risks (e.g., high competition, regulations).
7. Summarize Findings:
o Determine if the market is large and profitable enough.
o Make recommendations on whether to proceed, modify, or halt the
project.

This activity helps in understanding the market viability of a project before

investing significant resources.

9
Technical Analysis
Every project must be technically feasible.
Technical analysis is related to examining
whether the project under study is
technically feasible to setup and
operate to produce service/product.
For example, in agricultural project of
Apple farming, types of field, soil test,
temperature required in selected location,
location selection, plantation distance
between plants, variety, etc. need to be
analyzed.
10
Technical Aspects to be
Considered
Technology:
• Choice of technological process and/ or
appropriate technology,
• Is the technology proven or tested?
• Does the technology/ process/ equipment
technically fit with the facility’s existing
technology/process/ equipment & machinery?
• Equipment capacity & whether it is as per
requirement
• List of recommended equipment suppliers.
• Reputation of the suppliers and
performance guarantees 11
Technical Aspects to be considered…Cont’d

Investment cost and operational cost of

different technology/process
Environmental aspects of different
technology
Location aspects of the project and
availability of infrastructural facilities with
probable alternative locations
Inputs: Availability of electricity, water, fuel,
raw materials
Size and scale of operations: based on the
demand, capital requirement, and
technology, inputs available 12
Management Analysis
- If the management is incompetent, even a
good project may fail. So it looks at:
- Types of organization
- Academic qualification, and experience of
key persons
- Availability of personnel required for project
execution.
- Assessment of other specific skills required
for the project
- User’s role in case of development projects
etc.
13
 Economic Analysis
Economic analysis estimate and analyze
the project’s net contribution to the
whole economy of the region or country.
It helps determine whether the project
increases the net wealth of a region or
country as a whole or not.
Estimation of Economic Costs of
Projects
Estimation of Economic Benefits of
Projects
 14
 Financial Analysis
The scope of financial appraisal varies
considerably with the nature of project and
whether it is revenue producing (e.g. industry,
agriculture) or not (e.g. roads, public schools).
Financial analysis covers:
- Investment Cost Estimation
- Operating Cost Estimation
- Benefits Estimation
- Cost Benefits Comparison
- Project Selection Decision

15
Types of Project Selection
Models
Subtypes of Numeric Models
a) Ranking by Inspection
b) Return on investment (ROI)
c) Payback Period
d) Accounting Rate of Return
(ARR)

16
A) Ranking by Inspection (RI)
 Basic question: Given alternative investments
which one should be implemented and which
one should be discarded in a mutually
exclusive investments?
 There may be an alternative as to build
a hotel or a factory on the same site.
 The investor might choose to start one with
limited resources he/she has.
 RI consists of choosing the best investment
by comparing the net proceeds of
alternative investments.
 The project that has more cash proceeds will
be preferred though are some peculiarities on
17
 Ranking by Inspection (RI) Steps……
 Comparing the net proceeds of A & B
projects, we can find out which project has
shorter life period
 Compare the net proceeds of the short
lived project with long lived one
 If the two have the same initial investment
& proceeds throughout the period of the
short lived investment; & if the long lived
investment continues to earn income after
the end of the short lived one, then the long
lived one is more desirable as the second
project continues to earn proceeds while the
first one has ended

18
 Net Cash Flow of 4 Hypothetical Projects with Identical
Initial Investment Outlays & Life Periods
Project Initial Net Cash Proceeds in Years
Investment Cost
1 2 Total

A 20,000 20,000 - 20,000

B 20,000 20,000 2,000 22,000
C 20,000 14,625 9,825 24,450
D 20,000 16,325 8,125 24,450
Then, which one is more desirable-taking into account the net
proceeds?
 Although the total net proceeds of C & D are identical, D earns
more income earlier than C. Thus D is more desirable than C
 Project B is more desirable than A
 Why????
19
B) Return on Investment (ROI)
 Also called average income on cost
 Calculated by dividing the average income by
the cost of investment
 Some planners prefer to take the ratio of the
average income to the book value (cost of
investment after depreciation)

20
E.g of ROI Computations
Investmen Cost ($) Average Average Ranking
t income ($) income on
cost (%)

A 20,000 0 0 4
B 20,000 660 3.3 3
C 20,000 800 4 1
D 20,000 800 4 1
N.B: Project C & D are preferred than A or B, but B is
preferred than A.
Weakness of ROI: It doesn’t take into account the timing of
the cash flow.

21
C) Payback
Period
 The payback period is the length of time from
the beginning of the project until the sum of
net incremental benefits of the project equal
to total capital investment.
 It is the amount of time it takes to recover the
original/investment cost.
 The method is very simple.
 Moreover, it is a good measure when the
project has problem of liquidity.
 The pay-back period is also a common, rough
means of choosing among projects in business
enterprise, especially when the choice entails
high degree of risk.
◦ Payback rule: If the calculated payback period is less
than or equal to some pre-specified payback period,
then accept the project. Otherwise reject it. 22
Payback Period
 This method has two important weaknesses:
 First, it fails to consider the time & amount of net
benefits after the payback period.
 Second, it does not adequately take into account the
time value of money even in the payable periods.
 Payback Analysis
◦ how long will it take (usually, in years) to pay
back the project, and accrued costs:It indicates
the number of years the project will take to repay
its investment cost
 It is the length of time between the starting time
of the project and the time when the initial
investment is recovered in the form of yearly
benefits

23
 Payback Period
Peak
cumulative
cash flow
Payback period
Total
+ve profit

Birr
Time

h
as
- ve

fc
w o
flo te
Ra
Cash trough Calculate annual net cash flow
Accumulate year on year
Cumulative net Plot on graph of CNCI against time
cash inflow
24
Payback Period
 Ifthe expected cash inflow is a constant
sum:

Pay Back period= Cash outlay (investment)

Net Annual cash inflows
 If the expected cash inflow varies from
period to period:

Pay Back period=Year before full recovery +

Unrecovered cost at the start of
year
Cash flow during the year

25
Payback Period
 But if the net cash inflow is the same across
years, we use a simple formula to get the
payback period.
Example:
1. If Birr 2 million is invested to earn Birr 500,000
per annum for 7 years, the pay back period is
computed as follows:
 Pay back period = Br 2million/500,000= 4yrs

26
 Payback Period
Example 1:
$200 $420 $645 $855

Time
0 1 2 3 4

$-600

Payback period = 1 Year + 400/420

= 1.95 Year

27
Payback Period
 Assume that a firm is considering two
projects: project A and project B, each
requiring an investment of Br100 million. The
cost of capital is 10%. Below is the summary
of expected net cash flows in millions.
 Then find the payback period for the two
projects and indicate which project should be
chosen.

28
Payback Period

29
Payback Period
Alternative Year Investment cost Net incremental Cumulative net
projects benefits incremental benefits

I 0 20000 -
1 2000 31000
2 8000
3 12000
4 9000
II 0 20000 -
1 2000 34000
2 12000
3 8000
4 12000
III 0 20000 -
1 1000 37000
2 5000
3 6000
4 8000
5 10000
6 5000
7 2000

30
Merits of payback period as an
investment appraisal technique
A. Simplicity
B. Rapidly changing technology, If new plant
is likely to be scrapped in a shorter period
because of obsolescence, a quick payback
is essential,
C. Payback favors projects with a quick return
 Rapid project payback leads to rapid
company growth
 Rapid payback minimizes risk, Etc

31
Critics of payback period as an
investment appraisal technique
 Project return may be ignored- in
particular, cash flows arising after the
payback period are ignored.
 Timing is ignored
 Lack of objectivity-what length of time
should be set as the minimum payback
period
 Project profitability is ignored-

32
D) Accounting Rate of Return (ARR)
 The accounting rate of return (ARR),
expresses the profit forecast as a
percentage of the capital expenditure
involved.
 ARR is also known as accrual accounting rate
of return, unadjusted rate of return model and
the book value model
 ARR is a measure of profitability in accounting
terms.
 This method aims to quantify the profits
expected from investment projects under
consideration
 There are different methods of calculating the
ARR 33
Formulas For ARR
 ARR=Average Income after tax
Initial Investment
 ARR=Average Income after tax
Average Investment
 ARR=AIAT, but before Interest
Initial Investment
 ARR=AIAT, but before Interest
Average Investment
 ARR= Average Inc. b/r Int. &tax
Initial Investment
 ARR= Average Inc. b/r Int. &tax
Average Investment
34
Accounting Rate of Return (ARR)…Cont’d

Illustration:
Assume 90,000 Br is invested in a project
with the following after tax net profits.
Year 1 2 3

Net Profit 20000 30000 10000

The life of the project is 3 years and no
salvage value. Compute ARR of the project.
*Average _ profits  20,000  10,000  30,000 20,000
3
* Average investment = ½ (90,000 +0) =
45,000
20,000
ARR  100 44%
45,000
E) NPV
Suppose that the project has the following data
 Initial Investment (I) = 300,000 Birr
 Annual costs of operation = 20,000 Birr
 Expected annual revenue =
100,000 Birr/year in the first 2 years
and
200,000 Birr/year in the next 3 years

 Time horizon = 5 years

36
Gross cash flows
Time 0 1 2 3 4 5
(yrs)
Revenu 100 100 200 200 200
e
Costs (300) 20 20 20 20 20
Gross -300 80 80 180 180 180
cash
flows

N.B: - All revenues and costs are in thousands of Birr

37
Undiscounted Cash flow before
tax
Year 0 1 2 3 4 5
Cash -300 80 80 180 180 180
flows
Cum cash -300 -220 -140 40 220 400
flow

NPV = 400 (in thousands)

PBP = 2.78 years

38
Graphic Representation of Cash Flows

500

400

300

200

100
Cash flows
Cum cash flow
0
0 1 2 3 4 5

-100

-200

-300

-400

39
Time Value of Money
 Cash flow is an important concept in today’s
business language
 Cash inflow or outflow usually occurs over a
period of time.
 This leads us to consider the time value of
money
 The value of money depends on when the
cash flow occurs
 Thus, the earlier value of money is
greater than the latter one
 Why?
 Reasons: interest or rent, uncertainty,
inflation
40
Methods of estimating time value
of money
a)Compounding and discounting
◦ Cash flows occur at different points of
time
◦ For meaningful comparison, all these
cash flows should be assessed at
the same point of time
◦ Either the cash flow occurring today
has to be converted into its
equivalent at a future date or the
cash occurring later has to be
converted back to today’s value.
◦ The future value is calculated 41
b) Compounding
 With simple interest, the future value is
determined
t
by:
FVt PV (1  r )

Where FVt = is future value at time t

PVt = is the original sum invested or the principal value and
r =stands for annual rate of simple interest

 Suppose you have won a lottery worth of Birr

1,000,000. If you deposit it in Commercial
Bank of Ethiopia with an interest rate of Birr
5% for 5 years, how much will the FV be in
the 5th year? 1,276,281.56
 What about 1,000 Birr saved in Bank for 8
years with an interest of 10%? 2,143.59
42
c) Simple Interest
 Ifno interest payment is reinvested to earn
further interest in future periods, we apply the
following formula:

 For example, if Birr 1,000 is invested at 12%

simple interest for 5 years, what will be the
value at the end of the 5th year?
 Answer:
1,000(1  5 * 0.12) 1,600

43
d) NPV
 The process of discounting, used for
calculating the PV, is simply the inverse of
compounding.
t
FVt PV (1  r )

(1  r)t PV FV [(1 / 1  r )t ]

 Dividing both sides by we get:

44
NPV
 Present value of a single amount
 What is the PV of Birr 1,000 in 3 years at 10%
interest rate?

=909.09
091

=826.44
628

=751.31
48

45
NPV: as Investment Criteria
NPV: it determines the net present value of all cash flows
by discounting them by the required rate of return.

n
Ct
NPV  A0   t
i 1 (1  r )

Where,
Ct = the net cash flow in period t

r = the required rate of return, and

A0 = initial cash investment (because this is an outflow, it will be
negative).

46
Discounted cash flows for
interest 10%
Year 0 1 2 3 4 5
Cash -300 80 80 180 180 180
flows
DF (10%) 1 0.909 0.826 0.751 0.683 0.621
Discounte -300 72.72 66.08 135.18 122.94 111.78
d Cash
flow
(DCF)
Cum DCF -300 -227.28 -161.2 -26.02 96.92 208.7
NPV = 208.7
DPBP= 3.2 years

47
Graphical Representation of Cash
flows
500

400

300

200

100

0
1 2 3 4 5

-100

-200

-300
Cash flows NDCF Discounted Cash flow (DCF) Cum DCF

48
 Collaborative Learning Exercise

 Do the same analysis at DF of 15%, 20%,

25% 30%, and 35%.
 What happens to NPV and PBP when DF
increases?
 Use graphs to display your answers

49
NPV
Year Cash flow
0 Birr (1,000,000)
1 200,000
2 200,000
3 300,000
4 300,000
5 350,000

If the cost of capital (discount rate) is 10%, then NPV is calculated as follows

200,000 200,000 300,000

NPV  1
 2
 3

(1.10) (1.10) (1.10)
300,000 350,000
4
 5
 1,000,000  5,273
(1.10) (1.10)

50
 NPV
 The NPV represents the net benefit over and above the
compensation for time and risk. Hence, the decision rule
associated with the net present value criterion is:
accept the project if the NPV is positive and reject it if
NPV is negative.
 Properties of NPV:
◦ NPVs are additive:- The NPV of a package of projects is
simply the sum of the net present values of individual
projects included in the package.
◦ Intermediate Cash Flows are Invested at Cost of
Capital:- The NPV rule assumes that the intermediate
cash flows of a project-that is, cash flows that occur
between the initiation and the termination of the project-
are reinvested at a rate of return equal to the cost of
capital
◦ NPV calculation permits time-varying discount
rates:- when the discount rate changes over time, we use 51
NPV
Interest rate 14% 15% 16% 18% 20%
Investment 12000
Cash flow 4,000 5,000 7,000 6,000 5,000

PVC1 4,000 / 1.14 3509

PVC 2 5,000 /(1.14 1.15) 3814

PVC3 7,000 /(1.14 1.15 1.16) 4603

PVC4 6,000 /(1.14 1.15 1.16 1.18) 3344

PVC5 5,000 /(1.14 1.15 1.16 1.18 1.20) 2322

NPV of Project =3509+3814+4603+3344+2322-12000 = 5592

52
Exercise
 Find the NPV of the following projects and choose the best
project
Projects Initial Cash Flows
Investment
Year 1 Year 2
(Outlay)

A 10,000 10,000 -
B 10,000 10,000 1,100
C 10,000 3762 7762
D 10,000 5762 5762

Cost of capital (discount rates) are 5% and 10%

Which project do you choose based on;

a) NPV and why?

b) PBP and why?

53
Find the NPV of an environmental project from the
following table and suggest whether the project
should be accepted

Year Gross Benefits Costs

1 200,000 50,000
2 200,000 50,000
3 300,000 100,000
4 300,000 100,000
5 350,000 100,000
Initial Investment: Birr 1,000,000
Discount Rate: 10%

Find NPV and PBP

54
Present Value of an Annuity
 In annuity, we have the same amount of cash
inflows every single year
 Assume that we have Birr 1,000 annually for
three years.
 What is the present value of the benefits at
10% discount rate?
 The answer is:
 1,000(1/1.10)1 + 1,000(1/1.1)2 + 1,000(1/1.1)3
 = 1,000*0.9091 + 1,000 * 0.8264 + 1,000
* 0.7513
 = Birr 2,486.8

55
Exercise
 Assume that the initial investment of a project
is Birr 450,000. In the first and second years,
the net benefits are 50,000 and 75,000
respectively. In the third, fourth and fifth years,
the net benefits stand at 100,000; 125,000
and 150,000. respectively. The discount rate
is 10%.
 Based on this information, find the NPV and
show whether the project should be accepted
or rejected.
 Will your decision change if the discount
factor is increased to 15%?

56
NPV
To include the impact of inflation where we have is the predicted
rate of inflation p during period t
t

n
Ct
NPV  A0   t
i 1 (1  r  pt )

•Initial investment Birr 100,000.

•Net cash inflow Birr 25,000
• discount factor: 7%
•Inflation rate: 5%
•The life span of the project is 8 years
•Find the NPV and make a decision whether the project should be
accepted or not.

57
NPV (exercise)
 Early in the life of a project, net cash flow is likely to be
negative
 The major outflow at this stage is the initial investment in
the project
 The project is acceptable if the sum of the NPVs of all
estimated cash flows over the life of the project is positive.
 Example, the investment is 100,000 with a net cash inflow
of 25,000 per year for a period of eight years. The discount
rate is 15%, an inflation rate is 3% per year. Calculate NPV.
 Use the above formula.
 The answer is = 1939.
 The NPV of the inflows is greater than the NPV of the
outflow-i.e., the NPV is positive-the project is deemed
acceptable.

58
f) IRR
 Internal Rate of Return (IRR);- emerges from the cost-
benefit data of the project
 It is the discount rate that reduces the NPV of a project to zero

IRR = Discount Rate, which makes the NPV zero

NPV
NPV

IRR

Discount Rate

59
 IRR

NPV
IRR Project-A

IRR Project-B

Discount rate

60
 IRR

Two Value Method

Interpolation
NPV

Extrapolation Project IRR

Too low Too

high
Discount rate

61
IRR
 Internal rate of return (IRR)
 The internal rate of return is defined as the rate of discount,
which brings about equality between the present value of
future net benefits & initial investment. It is the value of r in
the following equation.
n
Ct
I   1  r 
t 1
t

 I – investment cost
 Ct – Net benefit for year t
 r - IRR
 n - Life of the project
 Illustration: For project A in the below table can be
IRR is PV(Benefits)
formulated = PV(Costs). Use algebra or a spreadsheet
as follows:

62
IRR
 Calculation of IRR
 Year Cash flow
0 -100000
1 30000
2 30000
3 40000
4 45000
 The IRR is the value of r which satisfies the following
equation:
 1000,000 30,000 30,000 40,000 45,000
0 0
 1
 2
 3

(1  r ) (1  r ) (1  r ) (1  r ) (1  r ) 4
30,000 30,000 40,000 45,000
100,000    
(1  r ) 1 (1  r ) 2 (1  r ) 3 (1  r ) 4
The calculation of r consists of a process of trial & error by assuming various
values of r say eg. 12, 14, 15, 16 and so on. The IRR % may fall anywhere
between these % values.

63
 IRR

Year 0 1 2 3 4
Cash flow (100,000) 30,000 30,000 40,000 45,000

IRR is the value of r which satisfies the following equation:

30,000 30,000 40,000 45,000
100,000    
1  r 1 1  r 2 1  r 3 1  r 4
 The calculation of r involves a process of trial and error. We try
different values of “r” till we find that the right-hand side of the
above equation is equal to 100,000. Let us try to use 15%. This
makes the right-hand side to be:
30,000 30,000 40,000 45,000
100,000     100,802
1.15 1.15 1.15
2 3
1 .154

Since the value is slightly higher than our target value, which is 100,000, we
increase the value to 16%.

30,000 30,000 40,000 45,000

100,000     98,641
1.16  1.16  1.16 
2 3
1 .16 4

64
IRR
 Since this value is now less than 100,000, we conclude that
the value of r lies between 15 and 16%. For most of the
purposes, this indication suffices.
 If a more refined estimate of r is needed, we use the
following procedure:
1. Determine the NPV of the two closest rates of return
(NPV/15%) = 802
(NPV/16%) = 1,359
2. Find the sum of the absolute values of the NPVs obtained
in Step 1
802+1,359 = 2,161
3. Calculate the ratio of the NPV of the smaller discount rate,
identified in Step 1, to the sum obtained in Step 2
802/2,161 = 0.37
4. Add the number obtained in Step 3 to the smallest discount
rate
15+0.37 = 15.37
65
Exercise
Find the NPV and IRR of an environmental project from the following table

Year Gross Benefits Costs

1 200,000 50,000
2 200,000 50,000
3 300,000 100,000
4 300,000 100,000
5 350,000 100,000
Initial Investment: Birr 700,000

Consider different discount rates.

Hint: you may start from 10%

66
Modified IRR (MIRR)
 Example: A project’s cash flows are -400,
325 and 200. Appropriate r is 12%

T
FV (inf lows )  Ct (1  r )T  t if Ct  0
t 0

FV (inf lows ) 325(1  0.12) 2 1  200(1  0.12) 2 2 564

T
Ct
PV (outflows )  t
if Ct  0
t 0 (1  r )

400
PV (outflows )  0
400
(1.12)

67
Modified IRR (MIRR)
1/ T
FV  FV 
PV  MIRR  1
(1  MIRR )T  PV 
1/ 2
 564 
MIRR   1 0.1874
 400 

Accept the project because 18.74%>12%

68
Criterion of IRR

 When using IRR, the investment criterion is

that the IRR should be greater than the
discounted rate
IRR r/nship with other methods
 When the NPV (the discounted benefits are excess of the
discounted costs) is positive, then the IRR is greater than
the rate of discount
 When the NPV is 0, then the IRR is equal to the rate of
discount and the discounted benefits are equal to the
discounted costs
 When the NPV is negative, then the IRR is smaller than
the discount rate and the discounted benefits are smaller
than the discounted costs
69
Conditions of Financial Viability of a Project
 The acceptance criterion for an investment is:
 NPV positive,
 IRR greater than the discounted rate; and
 discounted benefits greater than discounted
costs

70
f. Benefit-Cost Ratio (BCR) Computation

 BCR =

Or

Pr esent Value of Cash Inflows

BCR 
Pr esent Value of Cash Outflows

71
 BCR

Benefit t 
t T


t 1 1 r
t
BCR  t T
Cost t 

t 1 1  r 
t

72
Find the BCR and decide whether to accept the
project

Time Gross Cost

Benefit
0 100 150

1 100 100

2 100 50

DF: 10%
73
Find the BCR

Time Benefit Cost Net Benefit

0 100 150 -50

1 100 100 0

2 100 50 50

What is your decision?

74
BCR

PVB= 100/(1.1)0 + 100/(1.1)1 +100/(1.1)2 = 273.54

PVC = 150/(1.1)0 + 100/(1.1)1 +50/(1.1)2 = 282.22

BCR = 273.54/282.22 = 0.97 < 1

75
Quiz
 The details of a project which costs Birr. 25,000 as initial
investment are given below:
 Year Cash flow
0 (25,000)
1 5,000
2 7,000
3 13,000
4 16,000
 Calculate:
 a)Net present Value(NPV) at 10%, 15%, and17%:
 b) Internal Rate of Return(IRR): Try at 19%
 c) Payback Period:
 Use graphs to display your answers

76
DF 10% 15% 17%

4545.4545 5000 4347.8261 1.74900625 4273.50427

5785.124 7000 5293.0057 5113.59486

9767.0924 13000 8547.711 8116.81723

10928.215 16000 9148.0519 8538.40077

31025.886 27336.595 26042.3171

NPV 6025.89 2336.59 1042.32

77
Summary of Decision-making
Methods
Technique Accept Reject

Payback Period(PBP) PBP < target period PBP > target period

Accounting Rate
of Return(ARR) ARR > target rate ARR < target rate

Net Present Value(NPV)NPV > 0 NPV < 0

Internal Rate of
Return(IRR) IRR > cost of capital IRR < cost of capital

Profitability Index(PI) PI > 1 Profitable PI < 1 not profitable

or
BCR BCR > 1 BCR <1

78
Find IRR
C0 C1 C2
-160,000 1,000,000 -1,000,000

 -160,000+1,000/(1+r)1 – 1,000,000/(1+r)2

 Tryat 20%, 25%, 100%, 200% and 400%

 What do you say about the relationship
between IRR and NPV?
 How do you evaluate the strength of IRR as a
measure of project selection criterion?

79
Environmental Analysis
A project may causes environmental
impacts in many ways
Identification and analysis of adverse
effects on the environment
Identification of positive impacts
Required Mitigation measures
Designing environmental
management plan
Provision of fund for environment
management plan 80
Environmental Analysis
Main acts/guidelines in Nepal are
Environment Protection Act 1996,
The Environment Protection
Regulation 1997,
National Environmental Impact
Assessment Guidelines, 1993.
The analysis should meet the
requirements mentioned by these acts
and regulations
81
Social Analysis
A project may cause social impacts in
many ways
Will the project have any adverse
effects on the society?
What are the positive and negative
impacts?
Viable measures to address negative
impacts
Estimating cost for addressing social
impacts 82
 Feasibility Analysis Matrix
Feasibility Analysis Matrix – a
tool used to rank candidate
systems.
Weighting Candidate 1 Candidate 2 Candidate 3
Description
Technical Feasibility
Managerial Feasibility
Social Feasibility
Cultural Feasibility
Economic Feasibility
Environmental
Feasibility
Ranking
83
Initiating the Feasibility Study

Appointment of an experienced
manager and Selection of study
team members
Scope of the study
External Advisers to support study
team
Plan and Schedule the Study
Starting study as per plan and
schedule
Controlling study to complete as per 84
Completing the Feasibility study

The feasibility study should act as

a springboard for the next phase in
the project life cycle. – design and
appraisal –ensuring that it is able
to commence in a focused way.
The end product of Feasibility
Study should therefore comprise a
clear, concise report, called
Feasibility Study Report 85
Activity
Using the attached template, complete the
technical feasibility study of the project idea
that you have selected previously.

86