Report on Feasibility Study

Introduction of Feasibility Study

For getting on the job on time, public transportation is no longer a rational decision. Therefore, it has been decided to purchase a new car. However, it is not known whether purchasing a new car will be an economically rational decision or not. Therefore, a feasibility study has been performed to know how profitable it will be to purchase a new car. The approaches such as NPV, ROI and Cost and benefit analysis have been performed to evaluate the decision.

Identifying possible solutions of Feasibility Study

The key problem that is currently occurring is that it is not known whether purchasing a new car would be a good decision or not. In order to evaluate this decision, there are different ways through which the benefit and profitability of the decision can be analyzed. The project appraisal methods such as Net Present Value (NPV) method can provide a brief overview of the profitability of the project. Through risk analysis, Return on investment (ROI), and cost-benefit analysis the effectiveness of the decision can be easily understood (Kurowski & Sussman, 2011).

Economic Considerations of Feasibility Study

The net present value method is utilized to know whether the decision to acquire a car will be useful or not. The net present value approach is among the most commonly used approach for evaluating the profitability of the investment (GUPTA, 2017). While using this approach cash flows of 5 years are evaluated. It has been decided to purchase a non-luxury new car. The cash flows include the amount which is saved from operations. The estimated cash flow each year would be $10,000. The acquisition cost of the car is estimated to be $37,000. The Cashflow is discounted with the estimated discount rate of 10%. The Net present value (NPV) of getting a car is $907.87 which is a positive figure (GUPTA, 2017).

The NPV of getting a new car is positive; it means that this decision will be profitable in the future so buying a new car will be a wise decision (Kurowski & Sussman, 2011). In order to find the Return on Investment (ROI) the IRR function is used. By using the IRR function in the excel the value of ROI is evaluated to be around 11%. The rate of return is higher than the cost of capital which means that it will be feasible to purchase a car. It can be seen that the NPV is positive which means that buying a new car is profitable decision. Through IRR it can be said that it provides significant amount of value as well (Jonathan, 2010).

The risk should also be considered while making a purchase decision. Owning a car comes up with different kinds of risks such as income tax, repair, and maintenance charges and coverage charges, etc.  The average car maintenance charges in year are round d about $400 to $700. However the maintenance charges depend on the usage and type of car that is purchased by the individual. As it is a new car, there will be quite fewer repair charges in the first year however as the time pass due to depreciation, the repair and maintenance charges will begin to increase. Therefore it is highly important to include different kind of risks which the car owner will have to face after acquiring the car (Kurowski & Sussman, 2011).

Cost-benefit Analysis of Feasibility Study

The cost-benefit analysis provides deep insights into whether the chosen decision has more cost or benefit. Usually, such decision is selected which is higher in benefit and lower costs. In the above table the cost-benefit analysis of purchasing a car has been performed. It can be seen that benefit of purchasing a car is more than the cost of the decision. Therefore it has been decided to purchase the car (Kurowski & Sussman, 2011).

Conclusion of Feasibility Study

If all the above analysis is summarized than it can be said that The NPV of getting a new car is positive; it means that this decision will be profitable in the future, so buying a new car will be a wise decision. In order to find the Return on Investment (ROI), the IRR function is used. By using the IRR function in excel the value of ROI is evaluated to be around 11%. The rate of return is higher than the cost of capital which means that it will be feasible to purchase a car. The average car maintenance charges in year are round d about $400 to $700. However the maintenance charges depend on the usage and type of car that is purchased by the individual. As it is a new car, there will be quite fewer repair charges in the first year however as the time pass due to depreciation, the repair and maintenance charges will begin to increase.

References of Feasibility Study

GUPTA, A. (2017). PROJECT APPRAISAL AND FINANCING (illustrated ed.). PHI Learning Pvt. Ltd.

Jonathan, B. (2010). Financial Management. Pearson Education, India.

Kurowski, L., & Sussman, D. (2011). Investment Project Design: A Guide to Financial and Economic Analysis with Constraints (illustrated ed.). John Wiley & Sons.