LECTURE 9

PROJECT FEASIBILITY
(Continued from Lecture 8)

BROAD CONTENTS

What is a Feasibility Study?

Why is a Feasibility Study done?
What a Feasibility Study is not?
Scope of a Feasibility Study
Elements of a Feasibility Study

9.1 WHAT IS A FEASIBILITY STUDY?

A feasibility study is essentially a process for determining the viability of a

proposed initiative or service and providing a framework and direction
for its development and delivery. It is a process for making sound
decisions and setting direction. It is also a process which:
• Is driven by research and analysis
• Usually involves some form of consultation with stakeholders,
community, users, etc.
• Focuses on analyzing, clarifying and resolving key issues and areas of
concern or uncertainty
• Very often involves basic modeling and testing of alternative concepts
and approaches

There is no universal format for a feasibility study. Feasibility studies can

be adapted and shaped to meet the specific needs of any given situation.

A feasibility study is designed to provide an overview of the primary

issues related to a business idea. The purpose is to identify any “make or
break” issues that would prevent your business from being successful in
the marketplace. In other words, a feasibility study determines whether
the business idea makes sense.

A thorough feasibility analysis provides a lot of information necessary for

the business plan. For example, a good market analysis is necessary in
order to determine the project’s feasibility. This information provides the
basis for the market section of the business plan.
 Because putting together a business plan is a significant investment of
time and money, you want to make sure that there are no major
roadblocks facing your business idea before you make that investment.
Identifying such roadblocks is the purpose of a feasibility study.

A feasibility study looks at three major areas:

a) Market issues
b) Organizational/technical issues
c) Financial issues

Again, this is meant to be a “first cut” look at these issues. For example, a
feasibility study should not do in-depth long-term financial projections,
but it should do a basic break-even analysis to see how much revenue
would be necessary to meet your operating expenses.

9.2 WHY DO FEASIBILITY STUDIES?

Developing any new business venture is difficult. Taking a project from

the initial idea through the operational stage is a complex and time-
consuming effort. Most ideas, whether from a cooperative or an investor
owned business, do not develop into business operations. If these ideas
make it to the operational stage, most fail within the first 6 months. Before
the potential members invest in a proposed business project, they must
determine if it can be economically viable and then decide if investment
advantages outweigh the risks involved.

Many cooperative business projects are quite expensive to conduct. The

projects involve operations that differ from those of the members’
individual business. Often, cooperative businesses’ operations involve
risks with which the members are unfamiliar. The study allows groups to
preview potential project outcomes and to decide if they should continue.
Although the costs of conducting a study may seem high, they are
relatively minor when compared with the total project cost. The small
initial expenditure on a feasibility study can help to protect larger capital
investments later.

Feasibility studies are useful and valid for many kinds of projects.
Evaluation of a new business ventures, both from new groups and
established businesses, is the most common, but not the only usage.
Studies can help groups decide to expand existing services, build or
remodel facilities, change methods of operation, add new products, or
even merge with another business. A feasibility study assists decision
makers whenever they need to consider alternative development
opportunities.

Feasibility studies permit planners to outline their ideas on paper before

implementing them. This can reveal errors in project design before their
implementation negatively affects the project. Applying the lessons
gained from a feasibility study can significantly lower the project costs.

The study presents the risks and returns associated with the project so the
prospective members can evaluate them. There is no "magic number" or
correct rate of return a project needs to obtain before a group decides to
proceed. The acceptable level of return and appropriate risk rate will vary
for individual members depending on their personal situation.

The proposed project usually requires both risk capital from members and
debt capital from banks and other financers to become operational.
Lenders typically require an objective evaluation of a project prior to
investing. A feasibility study conducted by someone without a vested
interest in the project outcome can provide this assessment.

General requirements and potential benefits of conducting feasibility

study include:

• Developing any new business venture is difficult.

• Taking a project from initiation of idea to operational stage is a
complex and time consuming effort.
• Most ideas, whether from cooperative or investor-owned businesses,
do not develop into business operations.
• If these ideas make it to the operational stage, majority of them fail
within first six months.
• Projects involve business operations that differ from Individual
business.
• These operations involve risks of unfamiliar.
• Feasibility study allows groups developing a business idea to preview
potential project outcomes and decide if they want to continue
developing the project.
• Though the cost of conducting a study can seem high, almost always,
these costs are relatively minor when compared to the total project
cost.
• Small initial expenditure on a feasibility study by a group can help to
protect larger capital investments later.
• Feasibility study is a useful tool and is valid for many kinds of projects.
9.3 WHAT A FEASIBILITY STUDY IS NOT:

Feasibility studies are conducted on "real-world" projects. They are not

academic or research papers. Simulations or projection models, though
useful on some projects, do not replace a feasibility study. The study
should not be a "cookie cutter" approach to a project. The study should not
merely be a generic source of information. Once completed, a study
should permit a group to make better decisions for the strategic issues of
their specific project.

A feasibility study is not a business plan. A business plan is elaborated

later in the project development process than the feasibility study. The
main purpose of a business plan is to function as a blueprint for the
group’s business operations. The business plan presents the group's
intended responses to the critical issues raised in the feasibility study. The
feasibility study results forms the basis for developing a business plan.

The purpose of a feasibility study is not to identify new ideas or concepts

for a project. These ideas should be clearly identified before a study is
initiated. The group need accomplish a number of steps, before feasibility
study is instituted. The closer the assumptions lie to the "real-world", the
more value feasibility study will hold for the group.

A feasibility study should not be conducted as a forum merely to support

a desire that the project will be successful. The study should be an
objective evaluation of the project's chance for success. Negative results
can be just as useful for decision-makers as positive results.

Financers may require a feasibility study before providing loans, but this
should not be the only purpose of a study. A feasibility study should
enhance a banker's ability to evaluate a project; but the primarily goal
should be to aid a group's decision-making, not to secure financing.

A feasibility study will not determine whether or not a project should be

undertaken. The potential members have to decide if the economic returns
justify the risks involved in their continuing the project. The results of the
feasibility study assist them in this.

A feasibility study serves as an analytical tool to present the basic

assumptions of a project idea, shows how results vary when these
assumptions change, and provides guidance as to critical elements of a
project. It provides a group with project specific information to assist in
 making decisions. Groups using feasibility studies should lower the risks
in proceeding with a project.

9.4 SCOPE OF FEASIBILITY ANALYSIS:

In general terms, the elements of a feasibility analysis for a project should

cover the following:

1. Need Analysis:
This indicates recognition of a need for the project. The need may
affect the organization itself, another organization, the public, or
the government. A preliminary study is then conducted to confirm
and evaluate the need. A proposal of how the need may be
satisfied is then made. Pertinent questions that should be asked
include:

• Is the need significant enough to justify the proposed project?

• Will the need still exist by the time the project is completed?
• What are the alternate means of satisfying the need?
• What are the economic, social, environmental, and political
impacts of the need?

2. Process Work:
This is the preliminary analysis done to determine what will be
required to satisfy the need. The work may be performed by a
consultant who is an expert in the project field. The preliminary
study often involves system models or prototypes. For technology
oriented projects, artist's conception and scaled-down models may
be used for illustrating the general characteristics of a process. A
simulation of the proposed system can be carried out to predict the
outcome before the actual project starts.

3. Engineering and Design:

This involves a detailed technical study of the proposed project.
Written quotations are obtained from suppliers and subcontractors
as needed. Technology capabilities are evaluated as needed.
Product design, if needed, should be done at this time.

4. Cost Estimate:
This involves estimating project cost to an acceptable level of
accuracy. Levels of around -5% to +15% are common at this level
of a project plan. Both the initial and operating costs are included
 in the cost estimation. Estimates of capital investment and of
recurring and nonrecurring costs should also be contained in the
cost estimate document. Sensitivity analysis can be carried out on
the estimated cost values to see how sensitive the project plan is to
the estimated cost values.

5. Financial Analysis:
This involves an analysis of the cash flow profile of the project. The
analysis should consider rates of return, inflation, sources of
capital, payback periods, breakeven point, residual values, and
sensitivity. This is a critical analysis since it determines whether or
not and when funds will be available to the project. The project
cash flow profile helps to support the economic and financial
feasibility of the project.

6. Project Impacts:
This portion of the feasibility study provides an assessment of the
impact of the proposed project. Environmental, social, cultural,
political, and economic impacts may be some of the factors that will
determine how a project is perceived by the public. The value
added potential of the project should also be assessed. A value
added tax may be assessed based on the price of a product and the
cost of the raw material used in making the product. The tax so
collected may be viewed as a contribution to government coffers.

7. Conclusions and Recommendations:

The feasibility study should end with the overall outcome of the
project analysis. This may indicate an endorsement or disapproval
of the project. Recommendations on what should be done should
be included in this section of the feasibility report.

9.5 ELEMENTS OF A FEASIBILITY ASSESSMENT:

As a first step, a feasibility assessment should define the business idea, be

it a new project, product or service. The project or business idea feasibility
can then be determined. The feasibility needs to account for the current
circumstances of the proponent. For example, for a business intender it
should take into account personal readiness, skills, resources, knowledge
and goals. For established businesses, linkages to existing lines of
business, customers, suppliers, employees and other stakeholders need to
be accounted for.

A feasibility report should have the following structure:

1. Executive Summary:
It provides a quick overview of the main points of the assessment,
helping to form a picture of the proposal along with the
recommendations. It should be concise and include the major
findings covered in the main body of the report.

2. Need Analysis:
Need Analysis information provide a context to the business
proposition. It analyzes the justification of the idea, with a study of
possible alternatives. It links the business idea to the current
circumstances and helps to inform evaluation of the business idea.

3. Engineering:
Description of the technical aspects of the business idea, including
any changes needed to be made to existing processes or the need to
add items to existing range of products and services.

4. Advantages and Disadvantages:

Advantages and disadvantages of the business idea compared to
alternatives, such as competing products; or for a new concept, its
relevance to current practices, and to unmet or potential demand.

5. Market for the Product Offerings:

State the number of customers, expected frequency and size of
average purchase, and any reduction in costs across the business
arising from the new product or service. Any assumptions about
customer purchase behavior should be identified so that they can
be evaluated in terms of likelihood of being achieved or exceeded.
For changes in business operations, the payoff may come from
competitive advantages such as increased market share, cost
savings or higher prices. Research should focus on:

• Customers:
You need to be clear about the type of customer you will target,
and why they will respond to your offering.
Identify your target market segments or groups: What
knowledge do you have of your market segments or groups?
How many are there? What will they buy? How often will they
buy? What will be their average purchase?
• Products and Services:
Create a list showing the products/services you will be offering
to each segment; how much customers will pay for each
product or service.

• Competition:
List your competitors and note their perceived strengths and
weaknesses. You need to understand why they are competition
to your proposed business.
Ask the question: How can you attract customers from them
(i.e. your competitors)? Price should not be the only answer;
whole of life value, product features, distribution and
promotion strategies, and after sales options may all be part of
the purchase decision.

• Map:
Obtain a map and define on it your market boundaries, your
location, access routes, your competitors, your suppliers, and
demographic information on your market such as population
and distribution.

• Costing:
Costing for the implementation of the business idea is done.
Assess how long it will take you or your staff to produce or
obtain the proposed products or services and to deliver them to
your customers and work out the cost of that time. Determine
how much it will cost to buy, assemble or produce them. This
approach should account for all costs over and above the
existing activity. For existing businesses this section should
clearly specify if marginal or average costs have been used to
determine costing. Assumptions should be stated, for example,
assumed raw material prices, availability of supplies, staff skills,
plant and equipment etc. Costs of alternative
production/implementation strategies should also be
considered in the analysis.

• Suppliers:
Identify preferred and alternative suppliers; collect their
catalogues and price lists.
 • Location:
Identify your site, is it rented, owned or at home? Do you need
more room than existing business? Why locate there? What are
the advantages and disadvantages?

• Resources:
Resources such as assets and equipment that will be required,
cost of acquiring them, alternative methods of acquisition etc.
are assessed. For example, outright purchase versus hire
purchase or other forms of leasing.

• Staff:
What staff will you need? What skills will they need? What will
you need to pay them?

6. Financial analysis:
Work out the profits from a given level of operations, the capital
required and how the capital will be found to commence operating.

7. Risk analysis of the Preferred Solution:

Risk analysis may take the form of basic break-even analysis, i.e.
the level of business operation that will ensure that the business
does not incur a loss. Sophisticated analysis may consider various
business scenarios based on the assumptions made in costing and
market analyses.

8. Comparative Analysis:
Comparative analysis of alternatives should reflect the objectives of
the project. For example, decision making may be based on
maximizing profit or minimizing of loss for various business
scenarios. Some alternatives may be riskier, which will be reflected
in higher financial payoffs under certain scenarios and potential
losses under other scenarios; while some may be less risky with low
financial profits or losses under a wide variety of circumstances.
The choice between a “high payoff but high risk of failure” option
instead of a “low payoff with associated low risk” option is one that
you can then make in the context of your objectives, your market
and your financial situation.

9. Recommendations:
Recommendations of the preferred alternative with an associated
plan of action; or a decision not to proceed, should be covered in
this section. Possible plans of action will be – going back to the
 drawing board, developing more promising alternatives, further
research to minimize possibility of failure or moving forward to
develop detailed business plan.

NOTE: “Project Feasibility” is continued in Lecture 10