Project

feasibility
analysis
 • Financial feasibility
• Market price analysis
• Cost of capital and weighted
average
Content • Financial feasibility Vs
economic feasibility
• Shadow Pricing
• External Costs and Benefits
• Benefit-Cost Analysis (BCA)
What are the things/activities
that required to include to say
that project is viable or not?
Steps to be Used in Assessing Project Feasibility
Qualitative discussion of the socio-economic context & the objectives

Clear identification of the project (scope, all essential features, indirect effects, boundaries of the project, etc.)

Feasibility study & alternatives

Financial analysis (costs, return on investments, financial sustainability)

Economic analysis (impact on prices/tariffs, externalities, B/C ratios)

Risk assessment (sensitivity analysis, acceptable & mitigate risks)

Classification of Projects
Project ideas, in order to be converted into projects, need to be classified according to their
critical attributes:

Classification of Goals & Objectives

Social
Economical
Environmental
SDGs
“A new road/highway may satisfy economic goals by reducing travel time, satisfy social goals by providing access to services
such as schools and hospitals for inaccessible remote communities, and satisfy environmental goals by reducing air
pollution due to the reduction of congestion.”

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Classification of Projects
Project ideas, in order to be converted into projects, need to be classified according to their
critical attributes

Classification by Investment Type

New Assets
Improvements
Replacement/Rehabilitation
Maintenance
Technology and Human Resources Development

Discussion: What are the examples related for each of these categories?
Classification of Projects
Project ideas, in order to be converted into projects, need to be classified according to their
critical attributes: By Goals & Objectives; By Type of Investment; By Size of the Investment.

Classification by Size of Investment

✓ Small
✓ Medium The level of precision in analysis
✓ Large
 Financial Feasibility

Financial Analysis Market Price Financial Costs

Assess viability (Costs vs Benefits) Financial analysis uses market prices These are the "out-of-pocket"
from the point-of-view of the to check the balance of investment monetary expenses incurred from
investor/enterprise. and the sustainability of a project. the point-of-view of the spending
unit.
Benefits of projects

▪ User Benefits in a Project

Water for cultivation, ecstatic view, Access, reduced travel time, reduced vehicle
operating costs, reduced personal costs of accidents, improved quality of transport
and value of additional travel.

▪ Agency Benefits in a Related Project

Savings in operating & maintenance costs for transport infrastructure and assets;
improved productivity of resources.

▪ Societal Benefits in a Related Project

Reduction in environment pollution, Increased economic development, reduced
congestion, reduced emissions and reduced societal cost of accidents, .
Market Price Analysis

➢ The market price is the current price at which an asset or service can be bought or
sold.

➢ The market price of an asset or service is determined by the forces of supply and
demand.

➢ The price at which quantity supplied equals quantity demanded is the market price.
➢ Financial Price X Shadow Cost Factor = Economic Price
➢ Shadow cost factor include tax or subsidiary
➢ SF > 1 for Subsidiary
➢ SF < 1 for Taxes
Consumer and Producer Surplus

Consumer surplus describes the extra value that

they enjoy from their use of goods/services
compared to the market price they pay.

Producer surplus describes the extra value that

they obtain by providing goods/services at the
market price compared to the price they would
have been willing to accept.
 Consumer and Producer Surpluses
Case 1: “A village connected by a road in poor condition had a small weekly Pola (market) attended by a
few wholesalers. With recent road improvements many more wholesalers have begun to arrive. This is
attributed to the lowering of transport costs, as well as the fact that the Pola has now become more
accessible. This has resulted in an increase in demand for vegetables at this village. As wholesalers are
prepared to pay higher prices, more farmers are now motivated to grow vegetables.”

Case 2: “A university student was in the habit of visiting her village off Matara, once a month. She could not
travel more often, since the trip from Moratuwa took seven hours in each direction. The journey being so
tiring, the benefit of going home was inadequate compared with the opportunity cost of time spent in study.
Recently, an entrepreneur from her village commenced a luxury bus service to Colombo. Seats can be
reserved in advance and the travel time is only four hours. But now she must pay a higher price.”

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List the different costs and
benefits that can be identified?
✓ Port City Project
✓ Uma Oya Multipurpose Development Project
✓ Mannar Wind Power Project
✓ Kaluganga – Moragahakanda Transfer Canal (KMTC)
Project
✓ Re-gasified Liquefied Natural Gas (R – LNG) Pipeline
Project
 Economic Analysis
• INPUT
• Identification of project impacts,
• Segregation of impacts into costs and benefits,
• Grouping costs & benefits as monetizable & non-monetizable
• Valuation of costs and benefits for a specific cost and benefit
• Value for each project evaluating

• METHOD
• Synthesizing the total cost and benefit values of each evaluating project to derive a corresponding
‘score’

• DECISION
• Scores for each project & Threshold value for testing implementation feasibility
• Determining implementation feasibility of evaluated projects and their prioritization based on
their scores
 Economic Analysis:Procedure
“Economic analysis is concerned with the true value a project holds for
the society as a whole. It subsumes all members of society and
measures the project’s positive and negative impacts”.

➢ Defining project objectives and economic reasoning;

➢ Forecasting demand for project outputs;
➢Choosing the least-cost design for meeting demand or the most cost-
effective way of attaining the project objectives;
➢ Determining whether economic benefits exceed economic costs;
➢Assessing whether the project's net benefits will be sustainable throughout
the life of the project.
 Shadow Pricing Factors
Shadow Price Factors

Case: Revenue from ticket sales is a

financial value, which must be adjusted
for distortions in order to be converted
into an economic value.

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 External Costs
Externalities during construction Externalities during operation
These are costs of externalities such as delays and These costs also include those for which the user
disruption due to construction. These would be does not fully pay the full cost to society (e.g. total
relevant mainly for projects in which there are cost of accidents may not be recovered in insurance).
existing users who would get affected, such as There are non-user costs arising from accidents and
infrastructure improvement projects (e.g., roads, pollution. Land values may also fall causing more
bridges, railway tracks). Non–users also may bear cost to non-users.
costs due to pollution aspects.

✓ Cost of increased traffic delays ✓ Cost of air emissions

✓ Cost of increased vehicle operating costs ✓ Cost of noise pollution
✓ Cost of increased accidents ✓ Loss of productivity of land due to increased or
✓ Cost of environmental impacts unsustainable levels of transport activity.
✓ Cost of congestion

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 EstimatingBenefits
Economic benefits include thefollowing:
❑ Net increases in economic activity and jobs arising from: improved transport infrastructure that
provides access to under-developed regions; education/training programmes that teach new skills;
reductions in death rates to prevent premature loss of knowledge and output; etc.

❑ Reduced use of economic resources - for example: reduced spending on health care arising from better
education, accident prevention programmes, reduced emissions, clean water, and sanitation; reduced
spending on education (e.g., tuition classes) arising from improved effectiveness of teaching; reduced
spending on transport arising from effective land use planning; etc.

❑ Improved productivity of resource use - for example: better fuel consumption arising from
improved engine technology or greater vehicle occupancy; higher utilisation of motor vehicles
arising from reduced traffic congestion; greater yield from agricultural land arising from
appropriate use of fertilisers, crop rotation / multi cropping, irrigation; etc.
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 BCRExample
Question: Given below are cost and benefit streams of a Road Construction project undertaken by
the central authority of road development. Interest rate is 8%.
1. Find the Net Present Value of the Project for the 10 years?
2. What is the benefit cost ratio?
Costs (Rs. Billion) Benefits (Rs. Billion)
Investment Cost Recurrent cost VOC savings VOT savings Accident Savings Regional Benefits
Year 0 160 - - - - -
Year 1 140 40 - - - -
Year 2 - 40 25 15 20 30
Year 3 - 40 27 18 19 32
Year 4 - 40 30 21 18 34
Year 5 - 40 33 25 17 36
Year 6 - 44 36 31 16 39
Year 7 - 48 40 37 15 42
Year 8 - 53 44 31 14 45
Year 9 - 58 42 26 13 48
Year 10 - 64 39 22 13 51
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 Cost of Capital and Weighted Average
• Example: You invest $500 now, and get back • Example: Same investment, but the discount
$570 next year (Discount Rate is 5%) rate is 20%
• Money Out: $500 now • Money Out: $500
• You invested $500 now, so PV = -$500.00 • You invested $500 now, so PV = -$500.00
• Money In: $570 next year • Money In: $570 next year:
• PV = $570 / (1+0.05)1 = $570 / 1.10 = $542.86 (to • PV = $570 / (1+0.20)1 = $570 / 1.20 = = $475
nearest cent) (to nearest cent)
• The Net Amount is: • Work out the Net Amount:
• Net Present Value = $542.86 - $500.00 = $42.86 • Net Present Value = $475 - $500.00 = -$25
• So, at 5% discount, that investment is worth • So, at 15% discount, that investment is worth
$42.86 -$25
• A Net Present Value (NPV) that is positive is
good (and negative is bad)

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 Cost of Capital and Weighted Average
The Cost of Capital (COC) is used to determine the necessary return a company must
generate before moving forward on a capital project.

Decision is practical if a company invests in a project that generates more value than the
cost of capital.
Depends on:
✓ Industry- As of January 2019, transportation in railroads has the highest cost of capital
at 11.17%. The lowest cost of capital can be claimed by non- bank and insurance
financial services companies at 2.79%.
✓ Project or initiative- A highly innovative but risky initiative should carry a higher cost
of capital than a project to update essential equipment or software with proven
performance.
 Cost of Capital and Weighted Average
Weighted Average Cost of Capital (WACC) (Discount Rate)
The Weighted Average Cost of Capital (WACC) is the rate that a company is expected to pay on average
to all its security holders to finance its assets.

Applications:

✓ Discounted cash flow analysis

✓ Return on invested capital (ROIC) performance
✓ Minimum acceptable rate of return
Introduction to Multi-Criteria Decision Making (MCDM)

Define the Determine the Establish the Identify

Problem Requirements Goals Alternatives

Selecting Develop an
Check the
Apply the Tool Decision Evaluation
Answer
Making Tools Criteria
 Multi Criteria Decision Analysis (MCDA)
What is MCDA?
Technique to assist decision-making that takes into account more than one
decision criterion

Key elements in MCDA:

❑ Enable decision makers to gain a better understanding of the problem.
❑ Organize the entire range of information.
❑ Integrate objective measurements with value judgements.
❑ Ensure that all criteria and decision factors have been taken properly into
account.

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 Multi Criteria Decision Analysis (MCDA)
❑ Umbrella term for a range of tools and methodologies
❑ The level of complexity, interaction with the decision maker and level of
detail utilized in the decision-making process can very substantially
❑ In general, the decision maker follows the same process:
1. Identify multiple criteria on which to base their decision
2. Identify multiple alternative solutions to their decision
3. Provide (subjective) ranking or weighting of criteria and
4. Provide values, rankings or weighting of alternatives for each criteria

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 MCDA Tools
❑ AHP- Analytical Hierarchy Process
• Derive ratio scales from paired comparisons
❑ TOPSIS- Technique for Order of Preference by Similarity to Ideal Solution
• Based on the concept that the chosen alternative should have the shortest geometric distance from
the positive ideal solution (PIS) and the longest geometric distance from the negative ideal solution
(NIS)
❑ ELECTRE- ELimination and Choice Expressing Reality
• Choose the best action(s) from a given set of actions, addressing three main problems: choosing,
ranking and sorting
❑ PROMITHEE- Preference Ranking Organization METHod for Enrichment of Evaluation
• Provides a comprehensive and rational framework for structuring a decision problem, identifying and
quantifying its conflict and synergies, clusters of actions, and highlight the main alternatives and the
structured reasoning behind
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