Discuss the measures of financial viability of a project.

The primary aim of financial analysis is to determine whether the project satisfies the investment criteria of generating acceptable level of profitability. Therefore the project should be financially viable. The measure for financial viability are Net present value, Benefit cost ratio and Internal rate of return. Net Present Value (NPV) representing wealth creation by the Project, is calculated by taking the discounted sum of the stream of cash flows during the project life In symbolic terms we can express NPV of a project as under: NPV = C 1 /(1+r) + C 2 /(1+r) 2 + ........ C n /(1+r) n - Investment Where C = Cash Flows for different periods, r = Discount Rate In other words, NPV represents the difference between the present value of the cost and benefit streams. A project is considered viable if the NPV is positive at a given discount rate and vice-versa. When two or more mutually exclusive projects are being appraised, the project with the highest NPV should be selected. Among the discounted techniques, NPV is considered the most important parameter for assessing viability. Benefit Cost ratio (BCR) is the ratio of discounted value of benefit and discount value of cost. It can be expressed as under:- BCR = Summation of discounted value of Benefits / Summation of discounted value of Costs The project is viable when BCR is one or more than one and is unviable when it is less than one. Internal rate of return (IRR) represents the returns internally generated by the project. This is also the rate which makes the net present value equal to 0. 'Interpolation Method' could be used for finding out the exact IRR by the following formula. Exact IRR by interpolation method = L + [(H-L) * (NPV at L)] / [(NPV at L) - (NPV at H)] Where, IRR = Internal Rate of Return; L = Lower discount rate where NPV was positive; H = Higher discount rate at which NPV was negative. The project is considered viable if the IRR is more than the acceptable rate for the entrepreneur which could be the opportunity cost for his funds.