What are BEP and Feasibility Study?

Very well explain by Mr. Khalid & Ms. Ghada, I will try to explain in simple words BEP standards Break Even point, this is the point where you are in a position of No Profit No Loss. Before any investment, e.g machinery, products, building or land for company you do break even analysis, just to know how much time it will take repay or payback period, where profit and loss become Zero.

Feasibility study is a practically assessment of any plan proposed by you. Like before starting any business you make feasibility report, what will be the demand, environment, population, target market, class, age, gender etc. On the basis of that you make some study then presents to the investors and after approval you go a head with that proposed plan.

Thanks for invitation!!

BEP and Feasibility study:

The break-even point technique is used in the analysis of the profit, cash generation, and debt service ability. The purpose of the break-even point analysis is to find out the level of sales (Quantity) or the selling price per unit at which the project will break even. If the projected sales volume or selling price is higher than the BEP then the project is expected to gain. The BEP may also be used to establish the level of sales volume or the selling price per unit at which the project will generate just enough cash for the operation. If the projected sales volume or selling price is higher than the BEP, then the project is expected to generate from the operations some funds which may be used to pay other obligations. This will also be used in determining the level of sales volume at which the project will generate just enough cash for operation and for payment of loan.

Feasibility is a test by which an investment is evaluated. There are three types of feasibilities evaluated for a project viz. 1) market feasibility 2) technical feasibility and 3) financial feasibility. For projects evaluated by government, economic and social feasibility is also considered. The break-even point technique is used under financial feasibility study of a project.

Employ a break-even analysis and derive a break-even point is important in feasibility study when analyzing a business initiative or project.

Break-even analysis can determine the minimum amount a company needs to sell in order to cover its costs with no gains or losses. In economics and business, the break-even point (BEP) represents the point at which there is no net loss or gain because costs and revenue are equal.BEP, in the control sense, is a feasibility model for continuing an existing operation or opening a new one.Break-even analysis represents the minimum quantity a company needs to sell to cover costs like rent, building expenses, utilities, and other aspects of day-to-day operations.As long as a business can cover the minimum costs, it is "breaking even" and can remain in business without turning a profit.Break-even analysis lets companies compare their production or sales numbers with the minimum they need to achieve in order to stay in business. In economics and business, the break-even point (BEP) is when costs (or expenses) and revenues are equal: there is no net loss or gain and the business has "broken even" by earning back its costs.

Identifying BEP

Break-even analysis determines the minimum quantity a company needs to sell in order to cover its minimum costs, including rent, building expenses, utilities, and the operational costs of running day-to-day operations. As long as a business can cover its minimum costs, it is "breaking even" and can remain in business even if it is not turning a profit.

For example: a business selling tables has a BEP of tables per month. If the company sells fewer than tables each month, it loses money; if it sells more, it makes a profit. Business leaders use this information to determine whether or not they will produce and sell tables per month and proceed based on that analysis. If they estimate they cannot sell that many, they can reduce their fixed costs (renegotiating rent, keeping phone bills or other expenses down), reduce variable costs (paying less for materials per item produced, usually by finding a new supplier), or raise the price of their tables. Any of these approaches would lower the break-even point; the company might only need to sell tables per month and pay its fixed costs if it can cover or alter them through other means.

A break-even analysis is typically depicted by a graph showing the midpoint between profit and loss with the axes as units sold and price of goods sold.

This graphs depicts an example of a break-even point based on sales and total costs.

This graphs depicts an example of a break-even point based on sales and total costs.

The graph shows when sales can cover fixed costs so the company will be able to stay in business in the short-term. Over a longer period of time, other factors can come into play, like changes in rent or quantity sold, or other competitors entering the market.

Project Managers and Break-Even Analysis

Break-even analysis lets companies compare their production or sales with the minimum point (the break-even point) they need to achieve in order to stay in business. Typically, companies want to produce above BEP in order to make a profit and will adjust their output level to surpass the break-even point. Because they are in charge of specific process flows, understanding BEP and how to lower it through operational efficiency is central to the responsibilities of a project manager (PM). When making financial projections or pitching a new line of goods, the PM must estimate BEP and how they can exceed it in a given market. BEP, in this sense, is a feasibility model for either continuing an existing operation or opening a new one.

Source: Boundless. “Break-Even Analysis.” Boundless Management. Boundless, Jul.. Retrieved Apr.

Break-even point 

In economics and business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even." A profit or a loss has not been made, although opportunity costs have been "paid," and capital has received the risk-adjusted, expected return. It is shown graphically as the point where the total revenue and total cost curves meet. In the linear case the break-even point is equal to the fixed costs divided by the contribution margin per unit.

The break-even point is achieved when the generated profits match the total costs accumulated till the date of profit generation. Establishing the break-even point helps businesses in setting plans for the levels of production which it needs to maintain be profitable

Using the breakeven point formula, an appraiser can quickly determine the feasibility of a project from several points of view. An expanded breakeven point formula combines the possibilities of the land and building residual techniques with cash flow model analysis. The article illustrates the importance of making revisions to the original formula - which is commonly found in real estate investment texts - to include leasing commissions and tenant improvements in office or retail space analysis. (Reprinted by permission of the publisher.

 Feasibility Study

As the name implies, a feasibility study is an analysis of the viability of an idea. The feasibility study focuses on helping answer the essential question of “should we proceed with the proposed project idea?” All activities of the study are directed toward helping answer this question.

Feasibility studies can be used in many ways but primarily focus on proposed business ventures. Farmers and others with a business idea should conduct a feasibility study to determine the viability of their idea before proceeding with the development of a business. Determining early that a business idea will not work saves time, money and heartache later.

A feasible business venture is one where the business will generate adequate cash-flow and profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals of the founders. The venture can be either a start-up business, the purchase of an existing business, an expansion of current business operations or a new enterprise for an existing business. Information File C5-, Feasibility Study Outline is provided to give you guidance on how to proceed with the study and what to include.  Also, Information File C5-, How to Use and When to Do a Feasibility Study will help you through the process and help you get the most out of your study.

A feasibility study is only one step in the business idea assessment and business development process (Information File C5-). Reviewing this process and reading the information below will help put the role of the feasibility study in perspective.

Feasibility Study vs. Business Plan

A feasibility study is not a business plan. The separate roles of the feasibility study and the business plan are frequently misunderstood. The feasibility study provides an investigating function. It addresses the question of “Is this a viable business venture?” The business plan provides a planning function. The business plan outlines the actions needed to take the proposal from “idea” to “reality.”

The feasibility study outlines and analyzes several alternatives or methods of achieving business success. The feasibility study helps to narrow the scope of the project to identify the best business scenario(s). The business plan deals with only one alternative or scenario. The feasibility study helps to narrow the scope of the project to identify and define two or three scenarios or alternatives. The person or business conducting the feasibility study may work with the group to identify the “best” alternative for their situation. This becomes the basis for the business plan.

 The feasibility study is conducted before the business plan. A business plan is prepared only after the business venture has been deemed to be feasible. If a proposed business venture is considered to be feasible, a business plan is usually constructed next that provides a “roadmap” of how the business will be created and developed. The business plan provides the “blueprint” for project implementation. If the venture is deemed not to be feasible, efforts may be made to correct its deficiencies, other alternatives may be explored, or the idea is dropped.

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Feasibility study is a review to assess whether the project is going to achieve its intended objectives and whether it will be feasible or not to carry on the project.

Break Even Point (BEP) is an analysis which shows level of sales/activity where there will be no profit and no loss. It helps to identify how early or later the project can reach the level of no profit/loss.

The analysis of BEP is a part of feasibility study as it will help to assess at which point the project would be feasible to carry out.

Thanks.

When a client asks the question, what is my breakeven cost on this project, he is really asking, "When will my project have a breakeven cash flow if I obtain typical financing?"Important questions like this can be answered using the breakeven point (BEP), which is really a single year's cash flow model. The formula answers the following questions: How much is the land worth for a proposed use? What rental rate will be needed, given the cost of constructing the improvements and buying the land? Given market rental rates, what can the operating expenses be and still meet the lender's requirements?Breakeven economic analysis: Just as finance and real estate disciplines had their origins in economics, the breakeven point formula is closely associated with the breakeven point analysis of a perfectly competitive firm.As shown in figure 1, when total revenue (TR) = total cost (TC), breakeven points exist:BEP = TC/TR = 1 = Breakeven

Breakeven cash flow analysis: Breakeven cash flow (BECF) analysis, as used in real estate with financing and after income taxes, is shown below:PGI - V&RL = EGI - OE = NOI - DS = BTCF - TAXES = ATCFwhere,PGI = Potential gross income V&RL = Vacancy and rent loss EGI = Effective gross income OE = Operating expenses NOI = Net operating income DS = Debt service + interest BTCF = Before-tax cash flow TAXES = Federal and state income taxes ATCF = After-tax cash flowLet:BECF (before-tax) = OE +DS/EGI = BEP = 1If [OE + DS ] = EGIBECF (after-tax) = OE +DS/EGI + TAXES = BEP = 1Thus, the BEP is:BEP = OE + DS/EGIThis simple formula can be used to do many types of real estate analysis.Breakeven point analysis: The simple BEP formula is only the tip of an iceberg that leads to numerous applications. Generally, it illustrates the following:* BEP shows the percentage of the effective gross income (EGI) at which the before-cash tax flow or BTCF is 0.* If EGI - (OE + debt service or DS) = 0, then, BEP = 1 and BTCF = 0.* If (OE + debt service or DS) [less than] EGI, then, the BTCF is positive.* If (OE + DS) [greater than] EGI,then, the BTCF is negative.The financing, as expressed in the DS component of the BEP formula, is a function of (f) the following:DS = f (AMC, loan amount) AMC = f (i, Term) Loan amount = f (LTV, V) LTV = f (%, V) DCR = f (NOI, DS)where,AMC = Annual mortgage coefficient LTV = Loan-to-value ratio i = Interest rate Term = Amortization period V = Value DCR = Debt coverage ratioValue is a function of:Value = f (Building value, land value)Building value = f (Building square footage, price per square foot)Land value = f (Land square footage, price per square foot or acre)Income or revenue is a function of:Retail and office:PGI = f (Leasable area, price per square foot per year, other income)Apartments (300-unit project):PGI = f [(1001BR/1BA x $500 x 12) + (1002BR/2BA x $550 x 12) + (1003BR/3BA x $600 x 12) + other income]orPGI = f [(1001BR/1BA x Y x 12) + (1002BR/2BA x 1.10Y x 12) + (1003BR/2BA x 1.2Y x 12) + other income]EGI = f (PGI - V&RL)V&RL = f (%, PGI)Operating expenses (OE) are a function of:OE = f (Property taxes, insurance, utilities, management, utilities, etc.)The BEP formula can be used to derive an estimate of any of the variables listed. The formula can be used to:* Determine how much to pay for the land or how much can be spent on improvement costs* Determine what the apartments or leasable area rent must be* Determine if the project will meet the lender's financing requirements (LTV, DCR, etc.)* Determine the maximum expenditures for operating expenses per unit and still meet the lender's requirementsEach variable following the "function of" or f above can be solved for and the BEP formula can be rewritten as needed by the analysis to include all or portions of the variables.Applications for the BEP formula are shown in the following examples.Example A: BEP Analysis of an Apartment Project1. The lender's requirements are as follows:1.30 = DCR (minimum) 25 years = Term 8.5% = Interest rate (monthly payments) 75% = Maximum loan-to-value ratio 9.4% = Acceptable capitalization rate2. A 300-unit project is planned on a 15-acre parcel of land. Current vacancy rates of comparable projects in the area average 5%. Comparable rents for tenant-paid utilities projects show that:1.00Y = 1BR/1BA (100 units) 1.10Y = 2BR/2BA (100 units) 1.20Y = 3BR/2BA (100 units)Property managers' records and published data indicate that the average annual operating expense per unit is $2,000.3. According to a preliminary sketch of the project from an architect and estimates of a general contractor, the project could be built for $28,000-$32,000 per unit plus $8,000 per unit for the land, or a total of $38,000 per unit.4. What must the apartments rent for each month to satisfy the lender's requirements? The problem is solved using breakeven point analysis:BEP = OE + DS/EGIY = Required apartment rent for 1-bedroom/1-bath1 = OE + 1.30DS/[0.95(100)(1Y)(12) + [0.95(100)(1.10Y)(12) + 0.95(100)(1.20Y)(12)]OE = $2,000 x 300 units = $600,000DS = (AMC) (loan amount)DS = (0.09662725)(0.75) (cost)Cost= $38,000 per unit x 300 units= $11,400,000DS = [0.09662725 (0.75) (11,400,000)]DS = $826,1631.30DS = $1,074,0121 = 600,000 + 1,074,012/[1,140Y + 1,254Y + 1,368Y]3,762Y = $1,674,012Y = $445Therefore, the required rent is as follows:* $445 per month for a 1-bedroom/1-bath unit* $490 per month for a 2-bedroom/2-bath unit* $534 per month for a 3-bedroom/2-bath unitCheck (pro forma):$534,000 (1-bedroom/1-bath is 100 x $445 x 12) $588,000 (2-bedroom/2-bath is 100 x $490 x 12) $640,800 (3-bedroom/2-bath is 100 x $534 x 12) $1,762,800 (PGI - rental income)- 88,140 (V&RL - 5%)/1,674,660 (EGI)- 600,000 (OE - 300 units x $2,000)/1,074,660 (NOI)- 826,163 (DS - 8.5% for 25 years in monthly payments)/$248,497 (BTCF)DCR = 1,074,660/826,163 = 130Loan amount = DS/AMC = 826,163/0.09662725= $8,550,000LTV ratio (cost) = 8,550,000/11,400,000 = 0.7500LTV ratio (market) = 8,550,000/11,432,553 = 0.7479[V.sub.MKT] = NOI/0.094 = 1,074,660/0.094 = 11,432,553Example B: BEP Analysis of Retail Center1. Given the following lender's requirements:1.30 = DCR (minimum)25 years = Term8.50% = Interest rate (monthly payments)75% = Maximum loan-to-value ratio10.00% = Acceptable capitalization rate2. A 160,000-square-foot leasable area retail center is planned on a 15-acre parcel of land. The estimate is based on comparable rents and expenses and property managers' records of similar projects.The annual stabilized NOI pro forma is:$1,760,000 (PGI - $11 per square foot) - 88,000 (V&RL - 5%)1,672,000 (EGI) - 480,000 (OE - $3 per square foot)$1,192,000 (NOI)$1,200,000 (rounded)3. The maximum amount of the lender's loan is estimated using the following methods:DCR method:DCR = 1.30DCR = NOI/DS1.30 = 1,200,000/DSDS= 1,200,000/1.30= $923,077DS/AMC = Loan amount maximum923,077/0.096627 = $9,552,968 Maximum loan amountLoan-to-value ratio method:V = NOI/RV = 1,200,000/0.10 = $12,000,0000LTV ratio = 75% maximum $12,000,000 x 0.75 = $9,000,000 Loan amount maximum = $9,000,000In conclusion, the lender will offer only $9 million at 8.5% for 25 years with a maximum loan-to-value ratio of 75%.4. A preliminary sketch and footprint of the retail center drawn by an architect has been obtained. According to the builder's estimate, the cost for gross building area is $55-$65 dollars per square foot (includes all direct and indirect costs), or about $60 per square foot. The gross building area is equal to the leasable area. Thus, the estimated building cost is 160,000 square feet x $60 = $9,600,000.5. How much can the investor afford to pay for the land and meet the lender's requirements?Land residual method:$12,000,000 (Lender's property value) - 9,600,000 (Building cost)$2,400,000 (Land residual value) $160,000 per acre $3.67 per square footBreakeven point analysis solution:BEP = OE + DS/EGIBEP = 480,000 + 869,645/1,672,000BEP = 80.7204%Breakeven cash flow occurs at 80.7204% of the EGI, or restated:PGI - V&RL = EGI x 80.7204% = BEP = [(OE + DS) - 0.807204 EGI = 0]Working backward, BE occurs at 23% vacancy; market vacancy is 5%.$1,760,000 (PGI) - 410,355 x V&RL = (0.233156 x PGI)$1,349,645 (EGI) $1,672,000 (EGI) x 80.7204% (BEP)$1,349,645 (EGI)Check (pro forma):$1,349,645 (EGI) - 480,000 (OE)869,645 (NOI) - 869,645 (DS)$ 0 (Breakeven cash flow)Given a 75% LTV ratio from the lender, an AMC of 0.09662725, and building costs (BC) of 9,600,000, the appraiser then solves for land value (LV):BEP = OE + DS/EGIBEP = OE + [0.75 (BC + LV) AMC]/EGIBEP = 480,000 + [0.75 (9,600,000) + LV) AMC]/1,672,0000.81 = 480,000 + [0.75 (0.09662725) (9,600,000 + LV)]/1,672,0001,349,645 = 480,000 + [(0.072470)(9,600,00 + LV)] 1,349,645 = 480,000 + 695,716 + 0.07247044 LV 1,349,645 - 480,000 - 695,716 = 0.07247044 LV173,929/0.07247044 = Land value = $2,400,000/15 acresLand value = $160,000 per acre Land value = $3.67 per square footThe total cost for the building and land is:$9,600,000 (Building) + 2,400,000 (Land - 160,000 x 15 acres)$12,000,000CONCLUSIONUsing the expanded BEP formula, an appraiser can quickly determine the feasibility of a project from several points of view by including many other variables. As described, the BEP formula combines the possibilities of the land and building residual techniques with cash flow model analysis. However, an appraiser should consider revising the formula when leasing commissions and tenant improvements are part of the analysis, so that the revised formula is:BEP = OE + DS + LC + TI/EGIwhere, LC = Leasing commissions TI = Tenant improvementsGenerally, leasing commissions and tenant improvements will apply when retail and office space are analyzed. Apartment projects account for these categories in operating expenses: management, maintenance, and repairs. The revised BEP formula gives the owner or purchaser a more realistic cash flow breakeven expectation. The formula, whether revised for LC and TI or not, can also be written to reflect an after-tax analysis by adding income taxes in the numerator.

BEP (Break Even Point)

Meaning of BEP:  Break Even Point is a level of Sales point at which there is neither a Profit nor a loss to the company i.e.  Total Revenue = Total Cost. In other wards we can say Total Contribution equal to Fixed Cost.

Feasibility Report: It is a documents which help to  assesses and disclose the details of business. This kind of report cover the project report with disclosing financial and non-financial part for the organisation. When ever any merge or acquisition or start of new business , it is must to prepare  the feasibility report  in Financial , & Technical to know the strength & weakness of business.

In order to know the Profitability & growth of business it must to do analysis Break Even Point (BEP) by considering the financial report of feasibility report. BEP point gives the idea to know the Margin of Safety ( MOS) & what next level of sales or production is required.

Abdul Khalique answer is precise and good.

BEP stands for the Break Even Point, at which a project ( for instance) it at a no loss no profit phase.Feasibility study is a study that should be performed prior to starting to work on any project to ensure what kind of obstacles you will face and then to find a way how to tackle them before you construct anything.