The financial feasibility study is considered one of the key pillars of astute investment decisions. It is one of the most critical stages of feasibility studies in general and on which the investment decision to proceed will be made. The financial feasibility study measures the extent of the project’s commercial profitability, and determines the sources of finance and the structure of this proposed project finance.
The financial feasibility study is dependent on the results of the marketing study by determining the expected number and value of projected sales. It also depends on the technical and engineering studies that determine the investment and production costs. This is where the financial feasibility study’s role comes in. It analyses the results of all the previous studies and it clarifies the proposed project’s incoming and outgoing flow of funds. The financial feasibility study then determines whether the net value of the project’s funds is positive or negative.
The financial feasibility study also contributes to proposing the project’s optimal finance structure and it measures the project’s ability to meet its obligations over the production lifetime. It also determines the project’s ability to recoup its investments in an acceptable time frame, and how to achieve a balance between the project finance required and the sources for obtaining these funds.
The financial feasibility study is considered one of the optimal tools to compare various investment opportunities through the evaluation of Net Present Value (NPV), and the Internal Rate of Return (IRR). The financial feasibility study develops projected financial statements for the project and is considered the project’s financial business plan. It contributes to the ability to monitor project delivery through the comparison between actual project expenditure with the expenses estimated in the financial statements.
At the end of the day, the financial feasibility study directs the client to the most important decision of all—to proceed with the project or not.
How to Write a Financial Feasibility Study