PROJECT FEASIBILITY (CONTD.):Scope of Feasibility Analysis, Project Impacts

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LESSON 09

PROJECT FEASIBILITY (CONTD.)

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:

Market issues

Organizational/technical issues

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

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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.

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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:

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?

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.

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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.

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.

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.

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.

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.

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:

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.

Need Analysis:

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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.

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.

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.

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

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

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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?

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.

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.

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.

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.

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