Financial feasibility is another way of saying financial sense and there are a number of ways to test for financial feasibility. At its core, financial feasibility is a function of revenues and costs. If the cost of a particular project outweighs the potential revenue or return, then the project is not financially feasible. Most financial analysts are taught to assess financial feasibility on the basis of the present value of future cash flows. They also like to look at something referred to as the payback period. This is the time it takes to pay back invested funds from the project.
Identify the costs associated with the project. These are the costs associated with the project from labor, to inventory, to equipment and utilities. Try to obtain estimates where historical data is not available. Determine all monthly costs and then sum for the year.
Estimate the cash flows received from the project. Projects may not have cash flow in the beginning. In this case cash flows are zero. Estimate cash flows on a monthly basis and then total for the year.
Calculate how long the project will be able to generate cash flows without another investment or injection of capital.
Walk through an example to calculate the payback period. Assume the estimated monthly costs for the investment are $500 and the cash flow for the project are $1,000. This means that you are making $500 every month. Assume the initial investment is $5,000. Divide the total initial investment by the monthly profits for the number of months it will take to make back the investment. The answer for this example is $5,000 divided by $500 or 10.
Analyze your data. You now know the costs, revenues and monthly profit associated with the project. You also know how many months it will take to pay back the investment. Compare the results with other projects in order to help determine the best project.
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