Final answer:
To determine if a project is economically feasible, follow these steps: estimate project costs, forecast revenue, calculate net present value (NPV), analyze return on investment (ROI), and conduct sensitivity analysis.
Step-by-step explanation:
In project evaluation, determining if a project is economically feasible involves analyzing its financial viability and potential profitability. Here are the steps to determine if a project is economically feasible:
- Estimate project costs: Identify all the costs associated with the project, including initial investment, operational costs, maintenance expenses, and any other relevant expenses.
- Forecast revenue: Estimate the expected revenue from the project, taking into account factors such as sales volume, pricing, market demand, and competition.
- Calculate net present value (NPV): Use the NPV formula to evaluate the project's cash inflows and outflows over its lifespan, taking into account the time value of money.
- Analyze return on investment (ROI): Calculate the ROI by dividing the project's net profit by its total investment, which provides insight into the project's profitability.
- Conduct sensitivity analysis: Assess the project's sensitivity to changes in critical variables such as costs, revenues, and market conditions to understand potential risks and uncertainties.
By following these steps, one can evaluate the economic feasibility of a project and make informed decisions based on its financial prospects.