Chapter 5:
Financial Study
Lenore A. Loqueloque, CPA, DBM
Chapter 5: Financial Study
This chapter comprehensively presents the overall financial picture in terms of
of the projected financial statements (monthly for the 1st year and yearly for
the next four (4) years, break-even point analysis, return on sales (income
before tax over sales) for 5 years, payback period, return on investment, net
present value etc.
This also includes determination of the financing requirements, financing
leverage as well as possible sources of financing.
This will also cover the presentation of the expected profitability, cash needs
and cash sources based on the results of the study of the marketing, technical
and financing requirements.
Steps in Conducting a Financial Study
Set clearly the assumptions and its basis
Determine the total cost of the proposed project
Identify the sources of financing
Prepare the projected financial statements
Perform financial statement analysis
Major Assumptions
● List down the major assumptions used in the study and cite clearly the
basis of such assumptions:
● As a minimum requirement, assumptions must be made on the following
items:
○ Sales volume
○ Manufacturing costs
○ Operating expenses
Assumptions are not wild guesses
○ Tax rates without logical thinking, but rather they
○ Price changes are results of critical review of reliable
facts.
Total Project Cost
The total project cost refers to the estimated initial
funding requirements of the proposed project.
○ Cost of the land, building, machinery, and other
infrastructure
● Working capital requirement
Sources of Financing
● Identify the sources possible sources of funds to finance the initial funding
requirements of the proposed project
● Must answer the following questions:
○ Who will finance the project?
○ what financing scheme should be adopted?
○ What are the terms of the financing scheme?
○ Are the terms financially beneficial to the project?
Projected Financial Statements
● Common financial statements included in the study
○ Statement of comprehensive income Yearly projected financial statement
○ Statement of financial position for 5 years.
○ Statement of cash flows monthly for the 1st year and yearly
for the next four (4) years
● Supporting Schedule:
○ Quantity of raw materials to be purchased
○ Required number of units to be produced during the period.
○ Manufacturing cost (materials, direct labor and overhead cost)
○ Estimated cash collection and payment during the period.
○ Lapsing (depreciation) schedule
○ Compensation cost, and
○ Amortization schedule
Financial Statement Analysis
● Analyze the projected financial statements in terms of profitability, liquidity,
solvency, and management efficiency using the following tools
○ Horizontal analysis
○ Vertical analysis
○ Financial ratios
Financial Viability Indicators
What are financial viability indicators for a project?
○ A set of tools used to assess a project or investment’s financial viability
■ Payback Period
■ Net Present Value (NPV)
■ Internal Rate of Return (IRR)
○ Helps decision-makers / project managers decide whether to accept or
reject a project
○ Used to assess if the project is attractive enough for a private partner to
invest in.
Financial Viability Indicators
Financial Accept Project Reject Project
Viability Indicator
Payback Payback period < Payback period >
the maximum the maximum
acceptable acceptable
payback period payback period
NPV NPV > 0 NPV < 0
IRR IRR .> WACC IRR < WACC
Scenarios and Sensitivities
● To guide the decision-maker, the financial model
should be able to present a number of different
scenarios
● Example: the following sensitivities could be run:
○ 20% reduction in consumption or demand
○ 20 % increase in consumption or demand
○ 20% increase in costs
