Feasibility studies

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Feasibility Studies

By Prof Mohammed I Migdad

Feb 2013

A course for a master

degree of economic

development

An important work in project

evaluation in developing

countries

1 Manual for OECD

 Manual of industrial project analysis

For

Little & Mirrlees 1969 & 1974

 Project appraisal and planning for developing countries , For

Little & Mirrlees 1982

2 Manual for UNIDO

 UNIDO guideline for project evaluation in 1972.

 Manual for the preparation of the industrial feasibility

studies UNIDO 1991 including: Computer model for

feasibility analysis and reporting (CMFAR III Expert) in 1995.

 Guide to practical project appraisal: social benefit-cost

analysis in developing countries

3 World Bank Guidelines

 World Bank Guidelines in 1975.

 Economic analysis of projects

by: Squire, L & Van Der Tak 1984.

business success

 Establishing a feasibility study of projects is a

critical factor in business success.

 Many factors can be involved and invariably luck can and probably will play a hand

Countless feasibility studies

 Any project which have passed a countless

feasibility studies, have been sunk by unexpected events such as flood.

 Many projects fail because of incorrect assumptions

or because assumptions were based on incorrect

facts

Preliminary investigation

 When complex problems or opportunities are to be defined, it is generally desirable to conduct a

preliminary investigation called a feasibility study.

 The primary objectives of the feasibility study is to assess three types of feasibility

The Components of a Feasibility Study

1. Description of the Business: The product or services to be

offered and how they will be delivered

2. Market Feasibility: Includes a description of the industry, current market, anticipated future market potential, competition, sales projections, potential buyers, etc

3. Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor, transportation, where your

business will be located, technology needed, etc.)

continue

4. Financial Feasibility: Projects how much start-up capital is

needed, sources of capital, returns on investment, etc

5. Organizational Feasibility: Defines the legal and corporate

structure of the business (may also include professional

background information about the founders and what skills they can contribute to the business)

6. Conclusions: Discusses how the business can succeed Be

honest in your assessment because investors won’t just look at your conclusions they will also look at the data and will question your conclusions if they are unrealistic

Definition of Feasibility

Studies

 A feasibility study is an evaluation of a proposal

designed to determine the difficulty in carrying out a designated task Generally, a feasibility study

precedes technical development and project

implementation.

Definition of Feasibility

Studies

 A feasibility study looks at the viability of an idea

with an emphasis on identifying potential problems and attempts to answer one main question: Will the idea work and should you proceed with it?

Objective

 The feasibility study answers the basic questions: is

it realistic to address the problem or the opportunity under consideration?

 And it produce a final proposal for the management, this final report might includes:

1 Technology and system

feasibility

 The assessment is based on an outline

design of system requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures This can be quantified in terms of volumes of data, trends, frequency

of updating, etc in order to estimate

whether the new system will perform

adequately or not this means that feasibility

is the study of the based in outline.

2 Economic feasibility

 Economic analysis is the most frequently used method for evaluating the effectiveness of a new system More commonly known as cost/benefit analysis, the

procedure is to determine the benefits and savings that are expected from a candidate system and compare

them with costs If benefits outweigh costs, then the

decision is made to design and implement the system

An entrepreneur must accurately weigh the cost versus benefits before taking an action Time Based: Contrast

to the manual system management can generate any report just by single click

3 Legal feasibility

 Determines whether the proposed system conflicts with legal requirements, e.g a data processing

system must comply with the local Data Protection Acts.

5.schedule feasibility

 A project will fail if it takes too long to be completed before it

is useful Typically this means estimating how long the

system will take to develop, and if it can be completed in a given time period using some methods like payback period Schedule feasibility is a measure of how reasonable the

project timetable is Given our technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines You need to determine whether the deadlines are mandatory or desirable.

Other feasibility factors

 Market and real estate feasibility

 Resource feasibility

 Cultural feasibility

Market and real estate

feasibility

 Market Feasibility Study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land Developers often conduct market studies to

determine the best location within a jurisdiction, and

to test alternative land uses for a given parcels

Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial,

manufacturing, housing, office or mixed-use project Market Feasibility takes into account the importance

of the business in the selected area.

Resource feasibility

 This involves questions such as how much time is available to build the new system, when it can be

built, whether it interferes with normal business

operations, type and amount of resources required, dependencies, etc Contingency and mitigation plans should also be stated here.

Cultural feasibility

 In this stage, the project's alternatives are evaluated for their impact on the local and general culture For example, environmental factors need to be

considered and these factors are to be well known Further an enterprise's own culture can clash with the results of the project.

Description of the Project

Identification and exploration of business scenarios

 .Identify alternative scenarios or business models of what the project will entail, how it will be organized, and how it will generate profits These may come from the idea

assessment or market assessment that you may have already completed.

 Eliminate scenarios that don’t make sense

 Flesh-out the scenario(s) that appear to

have potential for further exploration

 Outline the general business model (i.e how the

business will make money)

 Include the technical processes including size,

location, kind of inputs, etc

 Specify the time horizon from the time the project is initiated until it is up and running at capacity

Relationship to the surrounding geographical area

Market Feasibility

 This can be based on a market assessment that you may have already completed.

rapid change and restructuring?

 Identify the life-cycle of the industry, market and/or market segment (s) Is it emerging, growing, mature, declining?

 Analyze the concentration and competitiveness of input suppliers and product/service buyers

 Describe the price competitiveness of your

product/service

Market potential

 Identify whether the product be sold into a

commodity market or a differentiated product/service market

 Identify the demand and usage trends of the market

or market segment in which the product or service will participate

 Examine the potential for emerging, niche or

segmented market opportunities

 Explore the opportunity and potential for a branded product

 Assess market usage and your potential share of the market or market segment

Access to market outlets

 Identify the potential buyers of the product/service and the associated marketing costs

 Investigate the product/service distribution system and the costs involved

Sales projection

 Estimate sales or usage

 Carefully identify and assess the accuracy of the

underlying assumptions in the sales projection

 Project sales under various assumptions (i.e selling prices, services provided, etc.)

Technical Feasibility

 Facility needs

 Estimate the size and type of production facilities

 Investigate the need for related buildings, equipment, rolling-stock, etc

Suitability of production

technology

 Investigate and compare technology providers

 Determine reliability and competitiveness of

technology (proven or unproven, state-of-the-art,

etc.)

 Identify limitations or constraints of the technology

6. Investigate potential emissions problems

7. Analyze other environmental impacts

8. Identify regulatory requirements

9. Explore economic development incentives.

Raw materials

 Estimate the amount of raw materials needed

 Investigate the current and future availability and

access to raw materials

 Assess the quality and cost of raw materials

Financial/Economic Feasibility

Estimate the total capital

requirements

1. Assess the “seed capital” needs of the business

project during the investigation process and

start-up, and how these needs will be met

2. Estimate capital requirements for facilities,

equipment and inventories

3. Estimate working capital needs

4. Estimate start-up capital needs until revenues are

realized at full capacity

5. Estimate contingency capital needs due to

construction delays, technology malfunction,

market access delays, etc

6. Estimate other capital needs

Estimate equity and credit

needs

 Estimate equity needs

 Identify alternative equity sources and

capital availability - family, producers, local investors, angle investors, venture

capitalists, etc

 Estimate credit needs

 Identify and assess alternative credit

sources - banks, government (i.e direct

loans or loan guarantees), grants and local

Budget expected costs and returns of various alternatives

 Estimate the expected revenue, costs, profit margin and

expected net profit

 Estimate the sales or usage needed to break-even

 Estimate the returns under various production, price and sales levels This may involve identifying “best case”, “typical”, and

“worst case” scenarios or more sophisticated analysis like a Monte Carlo simulation

 Assess the reliability of the underlying assumptions

of the analysis (prices, production, efficiencies,

market access, market penetration, etc.)

 Benchmark against industry averages and/or

competitors (cost, margin, profits, ROI, etc.)

 Identify limitations or constraints of the economic analysis

 Calculate expected cash flows during the start-up period and when the business reaches capacity

 Prepare pro forma income statement, balance sheet, and other statements of when the business is fully operating

Organizational/Managerial

Feasibility

Business structure

 Identify the proposed legal structure of the business

 Outline the staffing and governance structure of the business along with lines of authority and decision making structure

 Identify any potential joint venture partners, alliances

or other important stakeholders

 Identify the availability of skilled and experienced

business managers

 Identify the availability of consultants and service

providers with the skills needed to realize the

project, including legal, accounting, industry experts, etc

 What key individuals will lead the project?

 Is there a reward system for the founders?

Is it based on business performance?

 Have the founders organized other

successful businesses?

Why Are Feasibility Studies

so Important

?

1. The information you gather and present in

your feasibility study will help you:

2. List in detail all the things you need to

make the business work;

3. Identify logistical and other

business-related problems and solutions;

4. Develop marketing strategies to convince a

bank or investor that your business is

worth considering as an investment; and

5. Serve as a solid foundation for developing

your business plan

 Even if you have a great business idea you still have

to find a cost-effective way to market and sell your products and services This is especially important for store-front retail businesses where location could make or break your business

 For example, most commercial space leases place restrictions on businesses that can have a dramatic impact on income A lease may limit business

hours/days, parking spaces, restrict the product or service you can offer, and in some cases, even limit the number of customers a business can receive

questions such as "will your idea

work?" [new window] It is an essential first step before spending money and time on

more detailed plans The information gathered

is not wasted as it can be incorporated into the Business Plan.

 On the other hand a Business Plan is a more detailed and in depth document that

incorporates the information gained from a

feasibility study plus specific timelines,

detailed budgets with forecasts and a detailed financial strategy.

Feasibility before business

plan

 Before you begin writing your business plan you need to identify how, where, and to whom you intend to sell a

service or product You also need to assess your

competition and figure out how much money you need to start your business and keep it running until it is

established

Feasibility is a tool for a

business plan

 Feasibility studies address things like where and

how the business will operate They provide in-depth details about the business to determine if and how it can succeed, and serve as a valuable tool for

developing a winning business plan

Before you get started

 Are you suited to working in a small business environment? Answer this checklist [new window 69 kb] or

take the business readiness quiz

[new window] to get an idea if this

is what you really want and whether you have the personality, skills and temperament to succeed.

Use this template to:

 Perform a preliminary study to determine a project's viability.

 Analyze an existing system to see if it is worth

upgrading

 Determine if there is sufficient time to build the new system, when it can be built, whether it interferes

with operations, type and amount of resources

required, dependencies, etc.

 Establish the cost-effectiveness of the proposed

system.

 Determine if the system conflicts with legal

requirements.