Feasibility Study Tools

What is PROVARA?

NPV (Net Present Value) is the project evaluation technique used by the World Bank, the European Bank for Reconstruction and Development, and just about every other bank and private project development investor

PROVARA works on the same basis and you can put this Proven System to work for YOU in a few minutes.

Dear Reader

You are about to discover how you can use your back-of-an-envelope cost and income calculations to find out whether your project will work.

I have used the real power of the NPV Option Analysis process to do this on large and small for over 30 years as a project consultant.

NPV is short for Net Present Value and refers to the sum of all discounted cash flows in and out of the project over its life.

What is NPV?

NPV stands for Net Present Value. It is used more or less exclusively in Feasibility Studies. It is based on the concept that the money that you receive in the future is worth less than the money you have now.

Whenever we open a savings account and place our money at, say, 5 percent interest per year, we are implicitly stating that for us $1.05 one year from today is worth at least as much as $1.00 today. If we buy a five-year certificate of deposit that pays 5 percent per year, for every dollar we give up today, we will receive $1.28 in five years (assuming that interest is compounded annually). We are implicitly stating that $1.28 in five years time is worth the same as $1.00 today.

Discounting involves the reverse procedure; it answers the question, how much is $1.28, received in five years, worth today? The answer depends on the interest rate we are willing to accept. If we are willing to accept an interest rate of 5 percent per year, then $1.28 in five years is worth $1.00 today. Equivalently, we are saying that $0.78 today is worth $1.00 in the future.

The Net Present Value of a particular Project alternative is the sum of the all positive and negative amounts of money that flow through the project during its life. All costs such as set-up cost and operating costs are negative and income is positive. Therefore the higher the Net Present Value is the better the alternative is.

What does it tell you?

Well if your project takes 1 year to set up and then produces income for 10 years and the NPV is $100,000 the average profit each year (taking account of all set-up costs) will be at least $10,000 before taxation ($100,000/10 = $10,000 per annum).

The estimate is slightly less than the actual profit that would be calculated by an accountant because of the discounting of the future income.

Every banker and investor that you take your project to will want to know what the NPV is.

All that you will need to do is fill in the input page following the simple advice provided by the Guide that comes with the software.

If the answer is not quite what you want just tune the input numbers and Provara will provide the NPV's that you require.

Then hit "Print" and you will get 4 pages that includes the input data and three pages with the NPV's and their probabilities - nothing could be simpler and you can take it to your bank to seek funding for the whole study.

I do not claim to have invented the NPV process or the Method of Identification and Selection of the best Option myself

I gained this knowledge over a period of 20 years working with some of the best Project Management companies in the world.

These included Chevron, Exxon Mobile, BP, Halliburton, Kellog Brown and Root (KBR) as well as the thousands of smaller companies that support these giants of the project world.

Make no mistake - although many of these companies may have chequered reputations from a "Green Viewpoint".

When you are spending billions of shareholders dollars on projects in some of the harshest environments and most difficult political circumstances on the planet - like Siberia and Alaska

The project systems have got to be 100% fail-safe!

But many projects are quite complex and it is easy to get into a situation where you cannot see "The wood for the trees"

All the large project management companies have simple to follow systems that allow the most complex situations to be easily resolved and understood.

I eventually realised that if you are forced to;

You are virtually certain to have carried out all the work required to ensure that your project is viable.

So how can you do this?

In the past I have had to develope an NPV spreadsheet for every project that I worked on and I found that an NPV tool;

How does Provara help in the Project Development process?

Well it helps at three different stages in the project process;

Brainstorming

When you are sat down on day one thinking about your project - how do you start to get a feel for it.

Well just write a page or two of text defining;

Then when you have done this work out three different ways of doing the project. They should be totally different to get maximum value from the process.

Examples

Setting up a business to sell widgets?

The Options might be;

1.) Rent or buy shop premises, buy the stock from a wholesaler and sell $50,000 worth per year

2.) Rent an industrial unit, manufacture your product and sell by mail order or on the Internet and sell $200,000 worth per year direct to your customers

3.) Set up a manufacturing facility and sell $2,000,000 worth of product to a wholesaler

Setting up a business as a travel agent

The Options might be;

1.) Rent or buy high street shop premises and sell package tours and travel tickets provided by the major international operators

2.) Rent an office, lease the necessary computer equipment and sell package holidays on the Internet using Pay Per Click advertising

3.) a combination of 1.) and 2.) above

Opening a Hotel

The Options might be;

1.) Buy the land, build a new 4 star hotel using local construction techniques and sell the rooms to business visitors and market the facility to the international business community.

2.) Buy an existing hotel, refurbish it to 3 star standard and sell the rooms to the international package tour industry.

3.) Buy the land, import a packaged hotel construction system and furnish it to a 2 star standard and sell the rooms to back packers.

You get the idea - Provara can be used for any type of project!

OK I have done the Brainstorming and prepared the Project Shell - what now?

You should then guestimate the input for the three Options for Provara!

But how can guessing help?

Well the input numbers will be informed guesses because you must have some idea or otherwise the project would be a non- starter from Day 1!

When you have finished guessing you can look at the NPV's that Provara has calculated.

If you divide the NPV by the project life in years you will have a conservative estimate for the annual profit that your project will generate during each year of its useful life.

If you want to you can also use Provara to estimate how sensitive your project is to 10 or 20% changes in the guesses. So you can immediately see where the risks to your project lie.

These answers will give you a very good indication as to whether your project is a sound proposition or a wild goose chase

And you will have done this with a few hours work!

OK that is the first time that Provara helps - what next?

Refining your Idea

This is the refinement stage. You just take every number that you have put into Provara and refine your guesses into estimates. The sensitivity output from Provara will have already shown which estimates are important and this will allow you to concentate on these.

Every time that you improve your estimates you type the new numbers into Provara and you will have the new NPV'S.

Your original guesses will have already shown whether your project is viable or not and so your time is not being wasted.

Finalise your Choice of Scheme

This is the last stage before you have to start spending real money on market research, site surveys and all those other data acquisition studies that can be so expensive and may need to be financed.

So you now input your most refined estimates into Provara. If you still have a viable proposition you can head off to the bank to get some finance!

I hope that you can now see the benefit of this tool that will allow you to improve the quality of your Feasibility Study easily and quickly!

The Technical Stuff

This for those of you who want to know all about the technical nitty-gritty!

What is Provara?

It is an Microsoft Excel 1997 spreadsheet tool that allows the simultaneous analysis of 9 variations of Capital Cost, Operating Cost and Incomes for 3 Options and provides 81 NPV values and 81 Probabilities at a time. It will run on all later versions of Excel.

How easy is it to use?

It is extremely user friendly and comes with a Free 31 page Guide on the Economic Assessment of projects using Provara that will allow you to analyse your projects and get results in a few minutes.

How does it work?

The input data looks like this. The costs can be in thousands or millions or whatever it is convenient to use. Don't worry about the complexity of the probabilities - once you have used it a couple of times you will see how intuitive it is to use these to the best advantage.

Populating Provara with data

Provara can be used for any industry. The direct and indirect cost description cells are not locked so that you can edit these to suit your project.

The following hints are provided to help populate the Provara with data;

What does the output look like?

There are three output pages - one for each Option and each page looks like this. There are 27 ways to combine the subscenarios C1, C2, C3, I1, I2, I3, O1, O2 and O3 to obtain the Probability and NPV of each.

So when you hit print in Excel when you are happy with the calculation you will get a 4 pages printout with the input data as shown on the yellow sheet above and 3pages of output - one for each Option - as shown on the blue table below.

Option 1

The table output just how powerful an analytical tool that Provara is. It also demonstrates just how much the NPV can vary with a quite high discount rate of 10%.

The output above are the result from the input data shown above in the yellow Provara input table.

The highest NPV of 500 has a probability of 3.0%

The lowest NPV of - 136 has a probability of 1.8%

The most likely NPV of 187 has a probability of 12.5%

The next most likely high NPV is 358 at a probability of 7.5%

The next most likely low NPV is 177 at a probability of 7.5%

So what are the benefits of Provara?

How many times can I use it?

You can run it as many times as you like on as many projects as you like. It analyses three Options at a time. If you have 8 Options run it three times.

How can I incorporate the output into my Feasibility Study documents?

It is set up to print out the input values for Costs and Income on the first page and the output for each of the three Options on the three following pages.

Why can't I just set up my own Spreadsheet?

You can - but it has taken hundreds of hours of my time to get it set up in such a user friendly way and test it - and I knew what I was doing when I started!

How can I download it?

The Buy Now button below will take you to a Paypal payment page. After you have paid you will be able to download it and use it immediately.

What happens If I do not think it is worth the money?

Send me an Email with your telephone number and I will refund the purchase price

Is payment secure?

When you click on the Paypal and credit card links below you will be taken onto the PayPal site - this is totally secure and used for millions of Internet transactions every day. As soon as you have paid you will be Emailed the download links and the passwords.

I look forward to hearing your comments on this superb tool

Regards

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