Feasibility Study and Investment Appraisal
Introduction
This feasibility study and investment appraisal report is prepared to provide an overview of the potential financial returns associated with the proposed investment project. It seeks to provide the decision makers with an objective view of the financial viability of the investment project and analyse and appraise the financial implications, risks and returns associated with it. The detailed financial projections and analysis are provided in the appendices to support the viability analysis.
Presentation of the Viability Analysis
The viability analysis is presented using a number of criteria that includes Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period and Profitability Index (PI). The financial appraisal of the proposed investment project is made in comparison with the estimated cost of capital currently available in the market. The present value calculation is based on the discount rate of 5%, discounted cash flows technique, and include any relevant assumptions, sensitivities and related risks of the proposed investment project as well as the macro-environmental factors relevant to it.
NPV Calculation
The Net Present Value (NPV), is a measure of return on capital invested and is used to determine the profitability of any project after taking into account the targeted rate of return on the capital invested. It is calculated by subtracting the initial costs and any other associated costs from the present value of all cash inflows projected over the investment period.
For the purpose of this viability analysis, the Net Present Value has been calculated using the following assumptions: nominal rate of return of 5%, discount rate of 5%, and a ten-year investment horizon. Taking into account the assumptions, the Net Present Value of the proposed investment project is projected to be 2,207,643 (currency).
IRR Calculation
The Internal Rate of Return (IRR) indicates the return rate of the investment against the discounted cash flow produced by the investment. It is an important indicator used in financial project analysis as it provides a measure of the rate of return produced by an investment project.
For the purpose of this viability analysis, the Internal Rate of Return has been calculated using the following assumptions: an initial investment of 5 million, a nominal rate of return of 5%, a discount rate of 5%, a ten-year investment horizon. Taking into account the assumptions, the Internal Rate of Return of the proposed investment project is projected to be 8.01%.
Payback Period
The Payback Period is a measure of time for a project to recover the initial investment. This is one of the most commonly used metrics to assess the project’s financial performance and viability.
For the purpose of this viability analysis, the Payback Period has been calculated using the following assumptions: an initial investment of 5 million, a nominal rate of return of 5%, a discount rate of 5%, and a ten-year investment horizon. Taking into account the assumptions, the Payback Period of the proposed investment project is projected to be 16.93 years.
Profitability Index
The Profitability Index (PI) provides an indication of the return generated by the investment project compared to the investment amount. This type of analysis is used to determine the project’s performance against the rate of return required by the investor.
For the purpose of this viability analysis, the Profitability Index has been calculated using the following assumptions: an initial investment of 5 million, a nominal rate of return of 5%, a discount rate of 5%, a ten-year investment horizon. Taking into account the assumptions, the Profitability Index of the proposed investment project is projected to be 1.10. This indicates that the project would generate a return that is 10% greater than the required rate of return by the investor.
Conclusion
Based on the financial analysis and investment appraisal conducted, it is concluded that the proposed investment project is financially viable and offers a good return on the capital invested. The NPV, IRR, Payback Period and the Profitability Index of the project are all projected to be favourable and are in line with the targeted rate of return.
The financial projections in the appendices provide further detail on the project’s financial performance and are intended to provide the decision makers with an informed view of the financial viability of the investment project.
