Financial Analysis

Financial Analysis

DOI: 10.4018/978-1-5225-7696-9.ch005

Abstract

The market and technical analyses aim at finding out whether or not the conceived product of the investment project is marketable and that its production is technically feasible. If the product is marketable and the investment project is technically feasible, then a detailed financial analysis is required. The basic purpose of the financial analysis as the final stage of a feasibility study is three fold: (1) to compute the total amount of the investment needed for realizing the project and decide how it would be financed, (2) to estimate the total amount of annual manufacturing costs for the production process as well as the total amount of annual sales revenues expected during the operating period, and (3) to evaluate the profitability of the investment on the basis of the costs and sales revenues associated with the investment project. If the investment project is profitable, then a risk analysis is conducted to evaluate its riskiness so as to decide about its desirability. Accordingly, the financial analysis stage is the backbone of this book. However, a chapter that would include these three subjects must necessarily to be very large in size and complicated in content. Therefore, in order to prevent this complication and provide a clear theoretical explanation for the final stage of a feasibility study, the financial analysis stage is divided into three consecutive and complimentary chapters on the basis of the objectives stated above. Thus, this chapter is confined to the first objective in the sense of computing the total amount of investment in terms of the fixed capital (fixed costs) and the working capital, determining sources of financing, and estimating annual operating expenditures and expected sales revenues.
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Computing The Total Amount Of Investment

The total amount of investment refers to the amount of expenditures to be made for establishing a factory or a plant for production and making it ready to start and continue its operation smoothly. These expenditures and/or costs for realizing real capital investments are classified within two general categories; namely, fixed costs (or fixed capital) and working capital as explained in the following subsections.

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