Assessment of the viability and financial feasibility of the project

 

One of the most important issues to be addressed in the formation of the OI is the assessment of the viability and financial feasibility of the project. To assess the viability of the project, its variants are compared in terms of their cost, implementation time and profitability. As a result of this assessment, the investor (customer) must be confident that the products resulting from the project will maintain stable demand throughout its life cycle, sufficient to assign a price that would cover the costs of operating and maintaining facilities, paying debts and a satisfactory return on investment.

The project viability assessment includes answers to the following questions:


is it possible to ensure the required dynamics of investment?
is the project capable of generating revenue streams sufficient to compensate its investors for the resources they have invested and the risk they have assumed?


For comparison (if there are both a number of alternative options and a single option), the so-called situation without a project is taken. This means that, for example, the project of reconstruction of the enterprise should be evaluated by comparing its indicators with the indicators of the existing enterprise, and if you intend to build a new enterprise, with the situation "without building a new enterprise".

Work to assess the viability of a project is usually carried out in two stages:

1) from the alternative options of the project, the most viable one is selected;

2) for the selected project option, financing methods and investment structure are selected to ensure maximum viability of the project.

The viability of the project is assessed using the methods for analyzing the effectiveness of the project options given in Chapter 10.

Financial feasibility is an indicator (taking two meanings - "yes" or "no") characterizing the availability of financial capabilities for the implementation of the project. The requirement of financial feasibility determines the required amount of funding for individual entrepreneurs. If financial insolvency is identified, the financing scheme and, possibly, certain elements of the organizational and economic mechanism of the project should be adjusted.

Financial feasibility is checked for the total capital of all project participants, excluding the company (but including the state and all commercial participants, including creditors). 

 

The cash flows coming from each participant to the project are inflows in this case (and are taken with a plus sign), and the cash flows coming to each participant from the project are outflows (taken with a minus sign).

In addition, the cash flow of the project itself is considered (in this case, the sum of flows from revenue and other income is inflows recorded with a plus sign, and investment and production costs, not counting taxes, are outflows recorded with a minus sign).

So, a project is financially feasible if, at each step of the calculation, the algebraic (taking into account signs) sum of inflows and outflows of all participants and the cash flow of the project is non-negative.

Example. Consider a project that is being implemented by three firms and two banks. The financial participation of the state is reduced to the receipt of taxes. Let at some step the cash flows be described in Table. 4.1.

Table 4.1. Cash Flows

Name of cash flow element	Meaning
Sales revenue (including VAT, excises and duties)	+2100 units
Production costs (with VAT for material costs)	–600 units
Taxes received by the state	–500 units
Firm Flow 1 (firm gets paid in this step)	–600 units
Firm Flow 2 (the firm gets the money in this step)	–700 units
Firm Flow 3 (firm invests money in this step)	+200 units
Bank Flow 1 (receipt of interest by the bank)	–100 units
Bank Flow 2 (bank loan)	+300 units

In the project at this step, the revenue from sales acts as inflows; company flow 3 (the company invests 200 units in the project); a loan of 300 units received from bank 2. All of them are given with a plus sign. 

Outflows at the same step are: 

production costs (with taxes included in the price, VAT, excises and duties), but without other taxes; taxes received by the state, in the amount of 500 units; flows of firms 1 and 2 (these firms receive 600 and 700 units from the project, respectively); interest on the loan received by bank 1 equal to 100 units. All of them are given with a minus sign.

In order to check the sufficiency of funds in this step, find the sum (with signs) of all elements of the flow. It is equal to

2100 + (-600) + (-500) + (-600) + (-700) + 200 + (-100) + 300 = 100 (units).

Since this amount is not negative (in this case, positive), there are enough funds to implement the project at the stage in question. If the accrued amount of similar values is non-negative at any step of the calculation, the project is financially feasible; otherwise, financially unrecognizable.