Project Feasibility Analysis and Evaluation

The assignment presents a case study where the student needs to analyze the feasibility of a proposed project. The analysis involves calculating key financial metrics like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. Furthermore, the student must assess the organizational impact of the project, considering resource availability, departmental involvement, and potential changes in processes. Finally, based on the analysis, a recommendation is provided regarding the project's acceptance or rejection.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction..................................................................................................................................................................................................................................................................................................................................................2
Calculation showing NPV, Payback period and IRR..................................................................................................................................................................................................................................................................................2
Analyzing the forecasted sales for contract Manufacturing........................................................................................................................................................................................................................................................................4
Summary of the firms Recommendation.....................................................................................................................................................................................................................................................................................................5
Other factors that should be considered.......................................................................................................................................................................................................................................................................................................6
Conclusion...................................................................................................................................................................................................................................................................................................................................................7
Reference.....................................................................................................................................................................................................................................................................................................................................................8

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Introduction
In this report an attempt has been made to evaluate an investment or a project considering some key factors such as the project’s Net Present Value, Payback Period and Internal Rate of Return and to produce a report
stating whether the project is desirable or not. Thus in this report an extended calculation is performed considering 10 years of the project in order to figure out the project NPV, Payback Period and IRR. Then according to the
outcome of the calculations appropriate recommendations or suggestions is provided in the later part regarding the acceptance of the project. To end the report on a suitable note, an overall conclusion is added at the end.
Calculation showing NPV, Payback period and IRR
Statement showing calculation
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
Sales
New product
$1,500,000.0
0
$2,000,000.0
0
$2,750,000.0
0
$3,000,000.0
0
$3,060,000.0
0
$3,121,200.0
0
$3,183,624.0
0
$3,247,296.4
8
$3,312,242.4
1
$3,378,487.2
6
Contract manufacturing $250,000.00 $300,000.00 $375,000.00 $450,000.00 $500,000.00 $510,000.00 $520,200.00 $530,604.00 $541,216.08 $552,040.40
Total Sales
$1,750,000.0
0
$2,300,000.0
0
$3,125,000.0
0
$3,450,000.0
0
$3,560,000.0
0
$3,631,200.0
0
$3,703,824.0
0
$3,777,900.4
8
$3,853,458.4
9
$3,930,527.6
6
Profit on sale of Equipment $185,000.00
Total Revenue
$1,750,000.0
0
$2,300,000.0
0
$3,125,000.0
0
$3,450,000.0
0
$3,560,000.0
0
$3,631,200.0
0
$3,703,824.0
0
$3,777,900.4
8
$3,853,458.4
9
$4,115,527.6
6
Less:
Cost of raw material
New product $450,000.00 $600,000.00 $825,000.00 $900,000.00 $918,000.00 $936,360.00 $955,087.20 $974,188.94 $993,672.72
$1,013,546.1
8
Contract manufacturing $67,500.00 $81,000.00 $101,250.00 $121,500.00 $135,000.00 $137,700.00 $140,454.00 $143,263.08 $146,128.34 $149,050.91
Additional Wages $150,000.00 $153,000.00 $156,060.00 $159,181.20 $162,364.82 $165,612.12 $168,924.36 $172,302.85 $175,748.91 $179,263.89
Loss of sale for the current
product $575,000.00 $750,000.00
$1,000,000.0
0
$1,020,000.0
0
$1,040,400.0
0
$1,061,208.0
0
$1,082,432.1
6
$1,104,080.8
0
$1,126,162.4
2
$1,148,685.6
7
Variable cost $155,250.00 $202,500.00 $270,000.00 $275,400.00 $280,908.00 $286,526.16 $292,256.68 $298,101.82 $304,063.85 $310,145.13
Depreciation $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00
Interest on loan $36,049.00 $30,899.14 $25,749.29 $20,599.43 $15,449.57 $10,299.71 $5,149.86
Primary Expenses written off $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00 $33,200.00
Advertising Cost $375,000.00 $375,000.00 $300,000.00 $275,000.00 $150,000.00 $150,000.00 $150,000.00 $150,000.00 $150,000.00 $150,000.00
Total Cost
$1,852,499.0
0
$2,236,099.1
4
$2,721,759.2
9
$2,815,380.6
3
$2,745,822.4
0
$2,791,405.9
9
$2,838,004.2
6
$2,885,637.4
9
$2,939,476.2
4
$2,994,391.7
7
Net profit -$102,499.00 $63,900.86 $403,240.71 $634,619.37 $814,177.60 $839,794.01 $865,819.74 $892,262.99 $913,982.25
$1,121,135.8
9
Less:

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Tax @ 30% $0.00 $19,170.26 $120,972.21 $190,385.81 $244,253.28 $251,938.20 $259,745.92 $267,678.90 $274,194.67 $336,340.77
Profit after tax -$102,499.00 $44,730.60 $282,268.50 $444,233.56 $569,924.32 $587,855.80 $606,073.82 $624,584.09 $639,787.57 $784,795.12
Add:
Depreciation $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00 $10,500.00
Sale of equipment $185,000.00
Less:
Principal Repayment
$
55,979.00
$
61,128.86
$
66,278.71
$
71,428.57
$
76,578.43
$
81,728.29
$
86,878.14
Increase in Accounts Receivable
$
193,000.00
$
61,644.00
$
94,520.00
$
14,729.00
$
15,023.58
$
15,324.05
$
15,630.53
$
15,943.14
$
16,262.01
$
16,587.25
Net cash flow -$340,978.00 -$67,542.26 $131,969.79 $368,575.99 $488,822.31 $501,303.47 $514,065.14 $619,140.95 $634,025.57 $963,707.88
Discounting factor 0.869565217 0.756143667 0.657516232 0.571753246 0.497176735 0.432327596 0.37593704 0.326901774 0.284262412 0.247184706
Discounted Cash flow -$296,502.61 -$51,071.65 $86,772.28 $210,734.52 $243,031.08 $216,727.32 $193,256.13 $202,398.27 $180,229.64 $238,213.85
$1,223,788.8
3
Initial Investment
Cost of Machinery $ 105,000.00
Building modification $ 75,000.00
Increase initial WC investment $ 150,000.00
Total Initial Investment $ 330,000.00
Payback period
Accumulated cash flow
$
(330,000.00) -$340,978.00 -$408,520.26 -$276,550.47 $92,025.52 $580,847.83
$1,082,151.3
0
$1,596,216.4
4
$2,215,357.3
9
$2,849,382.9
5
$3,813,090.8
3
Payback period 3.75
NPV
Total Discounted cash flow
$1,223,788.8
3
Less:
Initial Investment
$
330,000.00
Net Present value
$
893,788.83
Internal rate of Return
Cash flows
$
(330,000.00) -$340,978.00 -$67,542.26 $131,969.79 $368,575.99 $488,822.31 $501,303.47 $514,065.14 $619,140.95 $634,025.57 $963,707.88
IRR 33%

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Analyzing the forecasted sales for contract Manufacturing
Statement showing analysis
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Savings in wages expenses $50,000.00
Savings in variable cost $45,000.00 $54,000.00 $67,500.00 $81,000.00 $90,000.00 $91,800.00 $93,636.00 $95,508.72 $97,418.89 $99,367.27
Increase in sales $150,000.00 $200,000.00 $275,000.00 $300,000.00 $306,000.00 $312,120.00 $318,362.40 $324,729.65 $331,224.24 $337,848.73
Less:
Loss in contract sales $250,000.00 $300,000.00 $375,000.00 $450,000.00 $500,000.00 $510,000.00 $520,200.00 $530,604.00 $541,216.08 $552,040.40
Profit or (Loss) -$5,000.00 -$46,000.00 -$32,500.00 -$69,000.00 -$104,000.00 -$106,080.00 -$108,201.60 -$110,365.63 -$112,572.94 -$114,824.40
The table above shows the analysis that if the contract sales is removed from the sales forecast then the company will make losses. Therefore, it can be said that the sales forecast is appropriate.

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Summary of the firms Recommendation
NET PRESENT VALUE (NPV)
Net present Value or NPV can be termed as the difference that exist in between the current value of cash inflows and that of the present value of cash outflows. In the process of capital budgeting, NPV always plays a
vital role. It assists a project manager in deciding based on inflows and outflows of cash that whether the project can be undertook or not. Moreover, through the process of NPV, a project manager can also establish the
profitability of an investment or project (Damodaran, 2016). If the NPV of a project is positive then it suggests income that is generated from the project surpasses that the initial cost and hence the project can be accepted. In
this case, as it was found from the above calculation that the total of discounted cash flow is $1,223,788.83 and the amount of initial investment was $330,000.00. Thus the NPV is $893,788.83 which is positive. Thus
considering the positive NPV of the project that is well greater than the initial investment, the project can always be accepted.
PAYBACK PERIOD:
In general, term payback period refers to that period within which the initial amount which was invested on the project or investment at the beginning of the project is returned back to the owner out of the earning of
the project. The less is the payback period, the more are the chances of the project to be accepted. Smaller payback period means that project or investment is capable to draw substantial amount of earnings or profit which
results in withdrawal of the initial investment in a short period (Fracassi, 2016). In this project, the lifetime of the project is 10 years. From the above calculation it was found that the project is capable to return the entire
initial investment in just 3.75 years which is quite considerable. Thus after taking into account the payback period of the project it can be recommended that the project can be accepted.
INTERNAL RATE OF RETURN (IRR)

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A metric that is used in the process of capital budgeting in order to gauge an investment’s potential of profitability is called the project’s Internal Rate of Return. In other words, IRR can be referred to that particular
rate of interest which ensures that the NPV from every cash flows from an investment is zero. Thus higher is the IRR, the better the possibility of the project of being accepted. In the given case as it was found that the IRR is
33% thus the project is desirable considering its IRR (Ehrhardt & Brigham, 2016).
Thus after considering the above scenarios the result is quite predictable. After analyzing the potential of the project, its capability and estimating its profitability or earning it can be found that the project is quite
desirable. The NPV of the project is $893,788.83. Again, the Project’s payback period is also quite good which is just 3.75 year and the IRR is 33% that is also considerable to accept the project. Thus after considering these
three key factors, it can obviously be recommended to accept the project (Hillier et al., 2013).
Other factors that should be considered
The factors other than Net Present Value and Internal Rate of Return that a firm must consider while assessing a project is discussed here. The key factors are:
 Alignment of Projects with Organizational Strategy:
The individual who plays a crucial role in an organization must be brought together under one shed so that they can get familiar with the organization’s overall plan and strategy. This will assist the project managers to draw-
up strategy to meet multiple organizational objectives. Thus, an effective way through which the efficiency of the project can be measured is using a 2-by-2 matrix. The ease of implementation of the project shall be placed on
one axis while the estimated impact on the project shall be drawn on the other axis. Thus, this process will enable the project manager in gauging the major differences between the two projects (Vernimmen et al., 2014).
 Organizational Assessment:
Every organization at the time of taking any decision regarding any project must perform an organizational or environmental assessment or evaluation in order to assess the intense or impact of the project. This process is
considered as a key element that assists a PM in understanding whether the project should be undertaken or not. In this assessment few questions are required to be clarified which consists of the followings:
 In what ways or how the different functions of the organization will be involved in this project.
 The functioning or processes of which particular department will play a major role in deciding the project’s outcome and what are the most important changes that they are supposed to make.
 Is the project is restricted to the IT department only or is it a project where functioning of cross-functional department is involved.

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 Assessing the Resources:
Assessing the available resources in hand and its determination plays an important role in the process of accomplishment of the project. In this context resources may be termed as those factors such as people, time, budgets,
etc. without the presence of which the project can never be accomplished successfully. In case if in a project, the required resources are insufficient then the project shall stall in the mid-way resulting in wastage of the
resources and money as well (Huang & Kisgen, 2013). Whereas in case of a less ambitious project, it might assist a PM in reaching a situation from where one can realise more expensive or time-consuming objectives with
ease.
Conclusion
The objective behind this project was to provide an overall recommendation that whether or not the project is desirable. Thus for the purpose a calculation in order to find out the NPV, IRR and payback period of the
project was performed. Therefore, from the calculation the NPV was found to be positive, the IRR was also decent, and the payback period was quite small as well. Therefore taking the above factor into account the project
was accepted by the organization as it have adequate potential of profitability and also possess all the necessary requirement which are required by the organization to achieve its desired goal through this project.

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Reference
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.
Fracassi, C. (2016). Corporate finance policies and social networks. Management Science.
Hillier, D., Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2013). Corporate finance. McGraw Hill.
Huang, J., & Kisgen, D. J. (2013). Gender and corporate finance: Are male executives overconfident relative to female executives?. Journal of Financial Economics, 108(3), 822-839.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.