PROJECT FEASIBILITY STUDY

"Feasibility". Which comes from the word "feasible", means the capability of being accomplished or carried
out; suitability.

A project feasibility study is the systematic investigation, which ascertains whether the
business undertaking is viable and if so, the degree of its profitability.

Objectives of the project feasibility study

The primary objective of PFS is to guide project promoters, business managers, and
financial executives in determining the actions they must take on a project in order to bring about
its successful operations. However, the project's set of objectives varies from one user to another,
since it can be prepared for several parties, such as:

➢ To management of an existing firm

a. To determine feasibility of expansion programs
b. To determine the reasonable price of an existing business it is considering
taking over.

➢ To stockholders
a. To evaluate if an investment on a project or existing enterprise should be made
or not.
b. To decide to sell or buy an existing company and if so, at what price.

➢ To promoters or proponents of new project

a. To ascertain viability of new projects
b. To choose from among the alternative projects or project to be pushed through.
➢ To banks or lending/financing institutions
a. To ascertain whether financial assistance should be extended or not.
b. To determine the terms and conditions should the loan be given/granted.

➢ To government and its Agencies

a. To determine if the project is entitled to a government incentives and level of
such incentive.
b. To determine whether goals set in the economic plan and program can be
achieved through the emergence of these potential business undertakings.

Basic Steps in Preparing Project Feasibility Study

It generally involves:
➢ Collection of data which are relevant and necessary to all aspects of the undertaking.
➢ Evaluation and analysis of the data gathered
➢ Formulation of recommendation

Basic Considerations in a Project Feasibility Study

➢ Society and the government. It must be ascertained that at one point, there must be at
least a compromising effect on the needs of both sides. The needs of the society cannot
be contradictory to that of the needs of the government.

➢ Constant state of evolution or revisions - revisions are necessary to support the

determination of its viability to arrive at an honest evaluation of the undertaking.

➢ Time and cost involved - the time and cost involved depends largely on the type of
the industry, the size of the project, its purpose and the party engage in the
preparation of the study.
Scope and limitation of Project Feasibility Preparation

The study is primarily based on forecasts of

a. Demand
b. Prices
c. Supply
d. New products that will come out
e. Technological developments
f. Amendments to laws
g. Changes in tariff and trade agreements
h. Availability of financing

Such forecasts are based on available information, and on the opinion of the party
or person preparing the project study. As a result, the study would be subject to the
following limitations:

➢ Certain required information are usually or may not be available

➢ Error in judgment by the person preparing or making the project study either
due to his incompetence or inexperience may result in formulating wrong
conclusions/recommendations.
➢ Uncertainties - as study is basically a forecast, any significant change in actual
business conditions as compared to the assumptions used in making the forecast
will render the study useless.

Significance of the Project Feasibility Study

Notwithstanding the inherent limitations of a project feasibility study, it still offers the
advantage of presenting a more realistic basis of possible actions based on the given information.
This could be the basis of determining the maximum degree of probability of evaluating a
proposed undertaking. It helps in minimizing risk of business failures thus reducing the possible
wastage of valuable resources, such as money, other assets, efforts and time.

Most common factors of business venture failures are:

➢ Unforeseen presence of existing or new products which are more superior that the
projects products.
➢ Inability to perfect the manufacturing process
➢ Inability to price products or services rightly (right price)
➢ Inability to finance the current operations
➢ Inability to introduce products or services on time

Characteristics of a good Project Feasibility Study

➢ COMPREHENSIVENESS -
• The PFS must have adequate information to meet the needs of the users.
• Areas covered must be clearly defined and well investigated.
• Must have all the necessary facts to support the study and all the details must be
properly examine and considered to be helpful to the users

➢ PROPRIETY AND CLARITY OF LANGUAGE -

• PFS must present in the appropriate or proper language that business people are
using.
• Language used must be clear and easy to understand. Terminology used in the
study, which is not common, must be given meaning for the context it is used.

➢ CONCISENESS-
 • The word use for information and explanation should be clear and succinct/
concise.
• It must be brief but concise and a lot of sense.
• It must be specific but not too detailed.

➢ FINE VISUAL PRESENTATION-

• Information that could be quantified must be presented in figures such as tables,
graphs or pictures.
• Avoid too many narrative presentations

➢ COHERENCE-
• Information presented must be logically connected
• Tables or figures and reports must be in agreement with each other, say the
demand projected could be validated by the demand analysis.

➢ CLEAR-CUT SCOPE AND ASSUMPTIONS-

• PFS must show a precise range and basis for discussion, say a projection of five to
ten years.
• List of assumptions for every aspect must be enumerated, where such assumptions
are based on the common industry practices, if known. If such assumptions could
be different to what is observed, a justification must be presented.

➢ RELIABLE SOURCES AND APPROPRIATE METHODS OF DATA GATHERING-

• Sources must be reliable, say estimates on machine useful life must be done by the
experts or from the manufacturer of such machinery.
• Source of data must be valid, say the population data as the target market must be
from a reliable information agency.
• Statistical tool used in determining sample must be appropriate
• Questionnaire developed must be appropriate to the target respondents

➢ LOGICAL DERIVATION OF PROJECTIONS-

• As data are gathered and analyzed, projections will be logically presented in the
financial aspect.
• Projected financial statements, ratios, and other performance measurements must
be presented, such as, ROI's, breakeven analysis, turnovers, and other financial
measures.

➢ CONCLUSIONS ARE WELL PREMISED-

• Based on the financial measures presented, conclusions could be developed.
Though it is quantitatively supported, the decision maker must use PFS with
caution bearing in mind the limitations mentioned.

The Project Feasibility Study Format and its Major Parts

Part A - Summary of the study

I. Name of the firm or project
II. Location: Head office and factory site, if any.
III. Brief description of the project
a. Company background, if already existing, project rationale if entirely new
project.
b. Nature or kind of industry
c. Type of organization
IV. Project's general objectives
V. Specific objectives of the project
VI. Executive/Project summary (highlights of each aspect)
a. Market study
 b. Technical study
c. Management and legal study
d. Financial study
e. Socio-economic study

Part B - Detailed presentation of all aspects

(Note, every study must present its individual specific objectives and detailed list of
assumptions.)

I. Market study
The market study is virtually the lifeblood of every project feasibility study, though
profitability is generally the focal point of every venture. It must answer the question, "Is there a
demand for the project?" Obviously, there can be no discussion of profitability or other aspects
anymore if there is no demand, thus market study is the starting point of every project. It must
contain the following:

➢ The market study general objectives

To determine the general marketability of the product or service.

➢ The market study specific objectives regarding

a. the appropriate marketing program for the product or service
b. the supply situation, size of market, nature or type of market, growth of total demand
c. appropriate pricing strategies

➢ The product description must indicate the following:

a. Name of the product - popular and scientific (if any) and the reason for choosing such
name.
b. Product properties - physical, chemical, and or agronomic.
c. Uses of the product - as a finished commodity, as an input or raw materials of another
production activities
d. Major users of the product - individual or firm; be able to differentiate users and
buyers.

➢ The demand situation must indicate the following:

a. Who and where is the market?
b. Identify needs of consumers and determine their willingness to buy for the product.
c. Analysis of past demands and considers population growth, price variations, degree
of urbanization, tastes and preferences, and income distribution of the target market
d. The size, nature, and growth of total demand for the product
e. Market segmentation according to type, manner of use, income classification, location,
age, etc. For example, the product is automobile, segment the market by income
classification, if machinery segment market by type of industry growth
f. Total domestic demand and possible foreign market
g. Evaluation of demand growth patterns to come up with a projected demand by
applying appropriate projection methods or models.

➢ The supply situation must indicate the following:

a. Who and where are the direct competitors?
b. Classification of supply as to size, product quality, location, performance, and market
segment performance.
c. Existing type of competition. Are there big firms controlling the supply, or are there
many small firms in the industry?
d. Historical domestic supply as comprised by local production and importation.
e. Determine the historical supply patterns in the targeted countries, for foreign market
as comprised by their local production and importation for export project.
f. Evaluation of supply growth patterns and project future supply by applying
appropriate projection methods or models.
➢ The demand-supply situation.
It is now essential to combine the findings on the demand and supply situations. It
must indicate the following:
a. Comparison of the demand and supply trends.
b. The amount of demand unsatisfied, especially in the projections. If demand appears
to fairly satisfied by supply, it is important to consider either or both of the following:
1. Whether the factors affecting the market may disrupt the equilibrium as to
demand to grow faster than supply.
2. Whether the quality of the product is such that it may create additional
demand or redirect part of existing demand in its favor.
c. The share of the market by establishing the proposed production volume (could be
determined in the technical study) as against the total market size.

➢ The price strategies.

In economic theory, price is determined mainly by the demand-supply situation. An
increase in demand with supply constant will increase prices. The reverse would result in
lowering of prices. There are, however, other factors which exert some influences on the price
setting. Without any change in demand or supply, price may go up if raw materials and other
production input costs increase; if there are government interventions. Keeping all of these
in mind, price setting or strategies must consider the following:
a. The selling prices of all similar and substitute products
b. History of price variations (including range of fluctuations) and establish factors that
most influence their fluctuations over time.
c. Responsiveness of demand to price changes (price elasticity). Will there be great,
slight, or negligible changes (increase or decrease) in demand if prices are lowered or
raised.
d. Set the selling price taking into consideration the above plus the operating costs and
expenses and estimate increases as foreseen in the subsequent period.

➢ The appropriate marketing program or strategy.

The marketing program must be the end product of a market study. After deciding
market and price targets, the marketing program comes in as the implementing arm. In
designing the marketing program, the following items must be considered:
a. The type of marketing programs prevalent in the industry and gauges their respective
effectiveness.
b. Draw up a marketing plan indicating the
1. Target market
2. Selling price
3. packaging of the product,
4. distribution net work
1. sales management mechanism
2. advertising program

c. In drawing up the marketing plan, the proponents must also consider the marketing
experts suggestions and should view the four Ps in terms of the customers four Cs:
4 Ps 4 Cs
1. Product Customer needs and wants
2. Price Cost to the customers
3. Place Convenience to customers
4. Promotion Communication to customers

Technical study

The technical study determines the feasible combination of manufacturing process,

machinery design, labor requirements, materials to be used, utilities requirements, water supply,
plant location, plant layout, and other technical factors that will enable a project to operate at
minimum cost and/or maximum profit. Care must be observed in the technical study as the
consequences of error or miscalculation can be extremely serious and the project may suffer major
capital losses.

➢ Manufacturing process
The choice of the process presents no problem if only one method of manufacturing
the product is known. However, some industries have two or more ways of making a
product. Say in the cement industry, it could be done in wet or dry process. The choice must
be justified quantitatively and qualitatively. The selected process must be described in full,
particularly the steps in converting the raw materials to the marketable product. It must be
carefully narrated or if possible presented in a manufacturing flow chart.

➢ Machinery requirements
The machine design, specifications, rated capacity, spare parts, expected useful life,
labor, power and water supply requirements, overall plant capacity, and costs of the
machinery, as well as the arrangements with the suppliers must be well presented in this
section.

➢ Plant capacity
The key factor in determining the plant size or capacity is the initial sales volume
projected and its changes over the years as presented in the market study. Careful analysis
must be made to insufficient capacity or idle capacity.

➢ Estimate of total cost

The total cost for the machinery requirements, probable supplier's terms and
conditions to project cash flows.

➢ Plant location
The selection of the plant location takes into account the various factors affecting the
costs of a project, these are:

a. Availability and cost of transporting raw materials from source to the plant
b. Availability and cost of transporting finished goods from plant to distribution
center or to customers
c. Availability and cost of power supply (electricity and water)
d. Availability and cost of labor in the area
e. General weather condition in the area

➢ Plant layout
The layout refers to the arrangement inside the plant which will minimize the time
and effort applied in various phases of the operations. A good plant and machinery layout
results in a smooth flow of materials and minimum of backtracking. On the other hand, an
inefficient layout can hamper the productivity of the workers, require extra materials
handling equipment, and causes a high rate of breakage or rejects. Aside from positioning
the machinery, the layout must provide allowances for future production expansion

➢ Production schedule
In making a decision about the production schedule, budgeting can be a very helpful
tool. That is, prepare the sales budget, followed by production schedule, and materials
purchase schedule. This includes the volume requirements per year and if the product is
seasonal, a monthly schedule is better to avoid work delays for non availability of raw
materials and stock-out for non production.

➢ Raw materials
The study must indicate the following
a. exact specifications and quality of the raw materials
b. quantity or volume of requirements in relation to storage problem for inventory
 c. selection of sources, local or imported
d. selection of suppliers as to terms and condition of payment as well as reliability of
deliveries on time
e. selection of method of transportation or delivery

➢ Utility requirements
The plant utilities cover the power, water, and waste disposal system. The study must
fully indicate the power and water requirements for machinery and office use, and waste
disposal system must be carefully laid out in accordance with the prescribed rules and
regulation of the locality or city and must consider the environmental effects to the nature
and the community.

➢ Project scheduling
This refers to the identification and analysis of the activities - from the project planning
stage up to the start of normal operations. This could be best presented in a GANTT CHART.
The purpose of project scheduling is to:

a. determine the probable starting time of normal operations

b. pinpoint activities which should be expedited faster so that the starting time of the
normal operations may be advanced or just in time
c. identify dates when certain phases of the construction work should be completed, and
thus materials be made available

Scheduling – involves specifying the time at which each activity will take place.
Detailed scheduling is very elaborate and requires an excellent communications system in
order to permit knowledge of what is to be done and what has already been done. Accurate
time standards are also necessary.

➢ Total Project cost

This refers to the total cost of the project necessary to start operation. This is in terms
of needed investment cost, capital costs and initial operating costs.

Management and legal study

This study applicable to an entirely new firms entering in the business. If the project
feasibility study is for an existing firm only related rules and policies for the particular venture
would be indicated. Assuming that the project feasibility is for an entirely new firm, the
management study must include the following:

➢ Organization chart
The organization chart tailored made to the first number of projected operational
years. An allowance for expansion could be presented.

➢ Management and employees duties and functions

Summarized duties and responsibilities must be highlighted to determine any job
overlapping or work overload by each officer and employee.

➢ Internal control
Administrative and accounting controls must be presented in summarized form as
highlighted in the officers and employees duties and functions.

➢ Company rules and policies

These are guides or basic rules formulated by management to govern actions at all
levels in the organization and are intended to achieve predetermined objectives. The policies
to be indicated are the basics only. Detailed ones could be ignored and just presented in the
comprehensive "Company Rules and Policies". The basic policies must be related to:
 a. Personnel (selection and hiring, salary scale and payroll distribution, overtime and
absences or tardiness treatments, etc.)
b. Production (purchasing procedures, production rules, etc.)
c. Credit and collection (sales approval limits and terms of collection, credit limits,
discounts grants, etc.)
d. Financial policies - (loans application approval, asset acquisition and disposition
approval, etc.)

➢ Legal and taxation aspects

The company's rules and policies must be in accordance with the existing government
laws, practices not contrary to moral and values observed in the place of where it is
situated. References must be to the following:
a. Labor laws (minimum wage orders, women and child labor laws, workmen's
compensation laws, etc.)
b. Social Security Act and other related employee benefits
c. Local tax codes in the respective locality
d. Business and income tax laws

Financial study

The final test for the feasibility of the project is consolidated and shown in the financial
study. This includes the following:

➢ Projected financial statements for the number of years projected.

a. Balance sheet
b. Income statement
c. Cash flows statement

➢ Supporting schedules - (in tabular and graphical form)

To prove the correctness of the financial statements based on the projections made as
presented in the market study, technical study and management study, such as
a. sales schedule
b. production schedule
c. purchases schedule
d. labor costs schedule (including employee benefits schedules)
e. operating costs schedule
f. business tax computations
g. any other schedule deemed necessary in the project, such as cost per unit, time
required to produce one unit or to serve one customer, etc.

➢ Financial evaluation measures

Just like any actual operating results, the management evaluates the performance of
the company using different financial evaluation measures to come up with a decision, in this
case is to go or not to go for the project:
a. Rate of returns (returns on investment, on sales, total assets, etc.)
b. Turnovers (accounts receivable, inventory, assets, etc.)
c. Ratios (current asset ratio, acid test ratio, debt ratio, equity ratio, etc.)
d. Cost structure /common size statement
e. Trend analysis for the total number of years projected
f. Breakeven analysis
g. Capital budgeting evaluation measure
1. payback period
2. accounting rate of return
3. net present value
4. profitability index
Using these financial evaluation measures, the project could be concluded
as feasible or not.
Socio- economic study

In any business undertakings, management should also consider not only its financial
empowerment but also its responsibility as part of Philippine society. The study must indicate
whether the project is to operate and earn according to the vision and mission of the government
in the realization of the government's thrust in the present time. This must indicate whether the
project will:

a. enhance the standards of living of the community where the project is located and
to the Filipino people as a whole
b. help preserve the environment
c. help the nation in the form of taxes payment
d. give the society's needs

Characteristics of Good Project Feasibility Defense

To have an effective project feasibility study defense, the proponent, whether by a group
or individual must observe the following:

a. Effective planning and division of labor, if by a group

b. Impressive panel presentation
c. Enthusiasm of the proponents in defending their project
d. The ability to defend the findings and their recommendations