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INVESTMENT FEASIBILITY STUDY
Investment Feasibility Study: Steps, NPV and IRR
An investment feasibility study evaluates whether a planned project is commercially, operationally and financially viable. It links the intended investment to projected demand, construction or setup costs, operating expenses, working capital and the cash flows needed to support the decision.
QUICK ANSWER
Define the Investment Case
Start with the strategic purpose: new capacity, a production facility, an acquisition or entry into a new market. Identify the target customer, expected economic benefit, operating constraints and the alternatives to investing. A project should be evaluated against a realistic counterfactual.
Start with the strategic purpose: new capacity, a production facility, an acquisition or entry into a new market.
Define the Investment Case
Identify the target customer, expected economic benefit, operating constraints and the alternatives to investing.
Collect Cost and Revenue Assumptions
A project should be evaluated against a realistic counterfactual.
Model Cash Flow and Capital Requirements
Estimate initial investment, equipment and construction spending, staffing, working capital, operating costs and maintenance.
Evaluate NPV, IRR and Payback
Revenue projections should be supported by demand assumptions, pricing, ramp-up periods and capacity constraints.
Document which inputs are verified and which remain management estimates.
Sensitivity and Implementation Risks
Convert the operating plan into cash flows, including investment timing, taxes where supported by qualified advisers, working capital and financing needs.
Discount Rate and Project Comparisons
A financially attractive project may still create a liquidity gap before revenues mature.
Risk and Sensitivity Matrix
Net present value discounts projected cash flows at a selected required return.
Decision Gates and Follow-up
Internal rate of return identifies the discount rate at which NPV is zero.
Practical Considerations
Each metric has limitations, so decisions should not rely on one output alone.
PRACTICAL CHECKLIST
Points to Review Before Making a Decision
Use this checklist to identify available evidence and questions requiring further analysis.
APPLICATION STEPS
Four Steps for a Structured Assessment
01
Define the Investment Case
Start with the strategic purpose: new capacity, a production facility, an acquisition or entry into a new market.
02
Collect Cost and Revenue Assumptions
Identify the target customer, expected economic benefit, operating constraints and the alternatives to investing.
03
Model Cash Flow and Capital Requirements
A project should be evaluated against a realistic counterfactual.
04
Evaluate NPV, IRR and Payback
Estimate initial investment, equipment and construction spending, staffing, working capital, operating costs and maintenance.
Test lower demand, delayed launch, cost overruns, changes in exchange rates or financing costs, and alternative operating outcomes.
Practical Considerations
Define decision gates, accountable owners and monitoring KPIs.
Practical Considerations
Practical Considerations
Further Considerations: Investment Feasibility Study
Local regulatory requirements should be reviewed with the appropriate specialists. Suppose a company is evaluating additional manufacturing capacity. Its plan should first estimate equipment and installation expenditure, workforce changes, production ramp-up, raw materials and customer demand.
Expected production volume is not the same as sales, and the model should account for scrap, downtime, capacity constraints and payment terms. If suppliers require deposits or customers receive credit, working capital may be needed before the project reaches stable operations. The financial plan must show these timing differences clearly.
NPV depends on discounting projected free cash flows at a rate consistent with the risk and financing perspective of the project. Comparing one alternative using nominal cash flows and another using real cash flows, or mixing pre- and post-tax assumptions, can distort the result. Evaluate mutually exclusive projects consistently, taking account of their different investment sizes and useful lives.
IRR can also be misleading for unconventional cash flow patterns, so a company should not use it as the only decision criterion. Identify the assumptions with the greatest effect on expected value: sales prices, unit volumes, raw material costs, exchange rates, implementation delay and refinancing conditions are common examples. Run downside and upside scenarios, but distinguish a plausible operational case from an arbitrary percentage change.
Consider whether a risk can be mitigated with a supplier contract, staged capital spending or commercial commitments. Record any regulatory permissions or specialist inputs that remain unresolved. A project can be approved in stages, subject to feasibility evidence, financing readiness or customer commitments.
Define which milestones justify the release of additional capital, who is responsible and what management will measure after launch. Monitoring should compare actual capex, volumes, quality, margins and cash against the model. A difference does not automatically make the original decision wrong; it should lead to an evidence-based assessment of what changed and which corrective actions are available.
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ADDITIONAL READING
Supporting References and Related Research
FREQUENTLY ASKED QUESTIONS
Common Questions About Investment Feasibility Study
What is the purpose of an investment feasibility study?
It helps management assess expected returns, funding requirements, operating feasibility and risks before committing capital.
Is a positive NPV enough to approve a project?
Not on its own. Affordability, assumptions, strategy and material risks must also be considered.
How does IRR differ from NPV?
IRR expresses an implied rate of return; NPV expresses value at a chosen discount rate.
How can this topic inform business decisions?
Evaluate available financial and operational data, relevant risks and the decision objectives before taking action.
How can this topic inform business decisions?
Evaluate available financial and operational data, relevant risks and the decision objectives before taking action.
How can this topic inform business decisions?
Evaluate available financial and operational data, relevant risks and the decision objectives before taking action.
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