Financial Feasibility Study Overview

Financial structure refers to the mix of funds used by the project to finance its investments.
Includes both long-term and short-term sources of funds.

Short-term financing are funds obtained by a company with a repayment period of no more than one year.
Key factors to consider for short-term financing include:
- The duration of the short-term financing option
- The cost and risk associated with this source of funding.
Sources of short-term financing include:
- Trade Credit
  - Represents a type of short-term financing from suppliers which involves deferring payment for goods purchased.
  - Cost depends on suppliers' payment terms. If no discount is offered, it's effectively free financing. Discounts lead to calculated costs dependent on the discount taken.
- Short-term Bank Loans
  - Short-term loans provided by banks.
  - Usually less expensive than trade credit.
  - Cost is in the form of interest, or a percentage of the loan amount, based on tax rates charged by the borrowing company and the lender's terms.

Long-term financing are funds obtained by a company for a period longer than one year
Used to acquire fixed assets
Sources of long-term financing include:
- Common Stocks
  - Represents ownership in a company.
  - Has a par value, book value, and market value.
  - A company is not legally obligated to distribute dividends.
  - Provides permanent financing.
  - Issues of new common stock can reduce the company's debt-to-equity ratio.
- Preferred Stocks
  - Represents a form of ownership
  - Has a par value, book value, and market value.
  - Unlike common stock, preferred stocks have a fixed dividend that must be paid before common stock dividends.
  - Preferred stocks don't typically have voting rights. The initial stakeholders maintain control.
  - Companies can redeem outstanding preferred shares, giving some flexibility.
- Retained Earnings
  - Profits that the company keeps instead of distributing them as dividends.
  - Serve as a financial cushion for possible future shocks and losses.
  - Considered an internal source of financing.
- Long-Term Debt
  - Loans acquired for a longer term as compared to shorter term options
  - Associated with secured or unsecured debt.
  - Includes bonds

Investment Costs: Costs incurred from project inception to start of production, excluding operational expenses.
- Land costs
- Building and construction costs
- Furniture and equipment costs
- Contingency fund (5-10% of total investment)
Operating Costs: Expenses incurred during regular operations.
- Raw materials
- Packaging materials
- Wages
- Salaries
- Maintenance
- Rent
- Permits, licenses and registrations
- Research and development
Financing Costs (capital): Costs associated with financing the project

Payback Period: Length of time required for cumulative inflows to equal initial investment. Measured in years.
Average Rate of Return (ARR): A ratio of average after-tax profit/average investment cost.
Net Present Value (NPV): The difference between the present value of future cash inflows and initial investment.
Internal Rate of Return (IRR): Discount rate at which the present value of future cash inflows equals the initial investment.
Profitability Index (PI): Ratio of the present value of future cash inflows to the initial investment.

Inflation distorts cash flow projections.
Requires adjusting for inflation to use correct values when evaluating a project to account for real vs. nominal values.