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This chapter delves into the financial aspects of project feasibility.
It examines the financial structure, cash flow projections, project costs, financial and economic evaluations, and the application of cost of capital to investment proposals.
It also analyzes the effects of inflation on investment evaluations and the usage of sensitivity analysis in project assessments.

Financial structure refers to the combination of sources used to fund a project's investments.
It encompasses both long-term and short-term liabilities.

Short-term financing involves borrowing funds with a repayment period of less than one year.
Key considerations include the company's reliance on this type of financing and its cost and risk.
Examples include trade credit.

Short-term bank loans are the most cost-effective alternative in the event that the trade credit facility does not present any payment discounts..
The cost of bank loans is defined as the interest rate paid to the lender.

Long-term financing encompasses funds borrowed or raised for a period exceeding one year.
It's commonly used for capital expenditures.
Examples include common stocks and preferred stocks.

Common stocks represent ownership in a company.
It includes par value, book value, market value, and liquidation value.
Advantages of using common stock include flexibility, but it also includes high costs.

Preferred stocks are a hybrid form of financing intermediate between common stock and bonds.
Advantages include reduced voting rights, no pledging of assets, long-term financing, and increased borrowing capacity.
Disadvantages include cost, lack of tax savings, and a potential decrease in the value of existing shareholders' equity.

Retained earnings represent accumulated profits that are not distributed to shareholders.
Motivation for retention includes legal compliance and funding future expansion.
Cost of retained earnings aligns with the cost of common stock excluding commissions and taxes.

Long-term debt encompasses long-term loans and bonds.
Companies obtain such loans through negotiations with financial institutions, defining conditions like interest rates and maturity dates.
Bonds establish a loan with a fixed interest rate and maturity date.
They are sold to diverse groups (public or financial institutions), unlike bank loans, which are limited to a few sources.
Bond value correlates strongly with prevailing interest rates. Higher interest rates depress bond value, while lower rates increase it.
Advantages include lower cost than equity and stable cost independent of profitability.
Disadvantages include potential insolvency and liquidity obligations for debt servicing.

Cost of capital (weighted average cost of financing) is the average return reflecting the return required by various financing sources.
This calculation considers the weights of different financing sources.

Project costs encompass everything from initial idea to production start.
Includes land, construction, equipment, furnishings, and contingencies.
Contingencies are estimates for unforeseen price changes or miscalculations and range between 5% to 10% to cover contingencies, depending on the item's nature and estimate confidence.

Several methods exist to assess investment options.
Key methods include payback period, average rate of return, net present value (NPV), profitability index, and internal rate of return (IRR).

The payback period measures the time required to recover initial investment from projected cash flows.
Choosing the project with the fastest payback period is preferred.

Average rate of return (ARR) evaluates the profitability of an investment relative to its initial cost.
A higher ARR indicates better profitability relative to initial cost.

NPV estimates the difference between the present value of inflows and outflows, discounting cash flows using a required rate of return.
A positive NPV suggests an attractive investment choice.

The profitability index (PI) is the ratio of present value inflows to initial cost.
A PI greater than 1 implies profitability; otherwise, the project isn't viable.

Inflation leads to distorted cash flow estimates affecting investment evaluations.
Inflation affects projections, depreciation, and ultimately, the assessment of investment's viability.

Sensitivity analysis measures the impact of variations in key project elements on evaluation criteria.
It assists in assessing project resilience to fluctuations.