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Financial Feasibility Analysis

What is Financial Feasibility?

Financial feasibility analysis aims to understand the costs of starting a particular project and the expected returns of said project. If the costs outweigh the returns, the project is considered not financially feasible. If the returns surpass the costs, it is financially feasible. It aims to consider all the relevant financial aspects of a project; the start-up capital, expenses, revenues, investor income, disbursements, etc. Once this data is obtained, the financial feasibility of a project can be calculated.

Methods to calculate Financial Feasibility

Internal Rate of Return (IRR) - used to estimate how profitable potential investments will be by calculating the rate of return that an investment or project is expected to provide. It is often used in tandem with Discounted Cash Flow Valuation (DCF).

Project Profit –Primarily used with start-ups, it analyses the various trends which could impact the overall operating conditions on revenues and profit of the project. It checks the movement of all profit and loss are in line with the projected costs. Thus, any deviations and corrections to the projection will be determined beforehand.

Investment Multiple - also known as the Total Value to Paid-In (TVPI) multiple. An often-used ratio in private equity. To calculate the TVPI, you add all the total proceeds and then divided it by the total investment provided to the project. It gives the investor insight into the fund’s performance by showing the fund’s total value as a multiple of its cost basis. It is important to bear in mind that this investment multiple doesn’t consider the time value of money.

Return on Investment - estimating both the cost and returns. It predicts the expected gain which is often expressed as a percentage of the investment cost.

Payback Period - a model that calculates the length of time it takes a project to break-even which can be used to compare strategies and investments.

Net Present Value - the sum of projected cash flows that will be generated by a project which is then discounted to their present value. Unlike the payback period, NPV considers the time value of money.

Financial Ratios - standard ratios designed to evaluate the financial position of a company or other organizations.

Sensitivity Analysis – It aims to foresee the potential negative impacts of certain actions. By running multiple simulations in different scenarios, the potential benefits and risks of a certain activity can be highlighted.

Importance of Financial Feasibility Analysis

Financial feasibility analysis can focus on a variety of projects or developments or can focus on one specific activity. However, any financial feasibility analysis, whether focused on one element or many should aim to understand:  The amount of capital ones needs to begin the business  The capital ones needs to operate the business  when investors can expect to get a return on their investment  Whether or not to abandon a project

For more on Financial Feasibility

What is financial feasibility analysis

Methods to calculate financial feasibility

Importance of financial feasibility analysis

How to do financial feasibility

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