Module 1:

Project Feasibility Study

Objective: At the end of this module, the student should be able to
1. Define and appreciate a project feasibility study
2. Describe the process of conducting a project feasibility study
3. Critic a project feasibility study’s viability

Definition
ü It involves an examination of the feasibility, practicality, and viability, of a new business
venture; major modifications of existing products, or product-line acquisitions.
ü It convinces the reader (financing entity) that the project is worth funding
ü Document relevant information and aspects regarding the project
ü Assess whether the project is relevant, viable and implementable
ü Enable the project proponent to prepare financing application and present the project to
sources of financing

Benefits of Project Feasibility Study

1. For the project promoter/proponent – better assessment of the demands for the projects, the
resources available, and establishes the project’s timeline. Having a project feasibility study
also improved the marketability of the project to investors and creditors.
2. For the investors and creditors – it helps them to deeply evaluate the project and the level of
risks involve.
3. For the government – Feasibility study will help assess the incentives may be given to the
project and ascertain its compliance with existing laws and regulation.
4. Management – the study will help in focusing the attention of management to more realistic
and viable opportunities and gives an insight on future challenges to permit preparation of
appropriate action plan.

Characteristics of a Well-Constructed Feasibility Study

1. Complete/Comprehensive – the study should be able to present all the relevant information
and aspects of the project to allow the users to make a well-informed judgment.
2. Concise – the content of the project feasibility report should be long enough to present all the
important details but short enough that it should not include any trivial or irrelevant
information that may cause confusion on the part of the users.
3. Balanced – the project study should be able to present both sides, the pros, and cons of the
project. It should be able to include the risks and available opportunities pertaining to the
project. The study should be presented in a way that it is not bias nor favorable only for the
approval of the project.
4. Logical Construction – the presentation of the information should be coherent and has a
direction that will minimize any misconception or misunderstanding about the project.
5. Consistency – the data present in the study should be reconcilable with each other, especially
the figures. Although, by its nature, the project is a forecast, all data should be connected and
can be traced within itself.

Limitations of a Project Feasibility Study

1. The study is basically a forecast which may or may not occur, it does not also account for
extraordinary situations like a pandemic, war, famine, natural calamities, etc. Hence, if
something will happen that were not included in the basis or assumptions, it might render the
study useless and irrelevant.
2. Since a project feasibility study is about a project that is yet to be executed, a lot of the
required data or information may not be available. This mean that indirect data or information
will be used that may not present the real scenario for the project. Also, if even indirect data
and information is not available or unreliable, assumptions that may not be representative of
the project’s reality will be used.
 3. The people constructing the project feasibility study may not have enough experience and
knowledge about the project. This could lead to a lot of errors and shortcoming in judgment
regarding the conduct of the study, which may lead to erroneous information being included in
the study.
4. In conducting a project feasibility study, it takes a lot of time, effort, and resources to conduct
and in the end, it might prove that the project is unworthy of pursuing or executing.
Sometimes, the costs outweigh the benefits in conducting project feasibility study.
5. Most of the time, whatever is written in the project feasibility report is very far from reality
since real practical and application problems may have not been considered resulting to the
total failure of the business project.

Stages of a Project Feasibility Study:

1. Identification of Investment Opportunity – the establishment of the objectives to be attained.
2. Pre-Selection Stage – should include:
a. A description of the market
b. An outline of the manufacturing process and information concerning availability of raw
materials and labor
c. An estimate of necessary investment and cost of operation.
d. An estimate of the return on investment
e. Statement of anticipated major problems and risks
3. Feasibility Study
a. Gathering and Collection of data
b. Evaluation and analysis of data collected
c. Formulation of conclusion and recommendation

Components of a Project Feasibility Study

A project feasibility study has four major components, the marketing and economic aspect, the
technical, organizational and management, and financial aspects.

Economic and Market Feasibility

This part contains a brief description of the market, analysis of past and present demand and
supply broken down as to sources or segments, estimated future demand for the product with
the estimate of the project’s share of the market. Also, it should be able to answer the 4 Ps of
marketing, the product description, the related prices, places of distribution, and promotional
activities.

This part of the study should be able to answer the following question:
a. What is the product or services and its value proposition?
b. Who are the target market and end users of the product and services that will be
offered?
c. Are there any direct and indirect competitors? How about substitute and
complementary products and/or services?
d. Who are the major suppliers and what is the current demand for the product
and/or services that will be offered? Is there an unsatisfied demand in the market?
e. What will be the forecasted demand and sales for the product and/or services?
f. What is the fair price that will be charge to customers?
g. How should the product and/or services be promoted? Branding? Modes? Channel?

Technical Feasibility
The main objective of this part is to illustrate the processes, techniques, and requirements to
execute the project effectively and efficiently. This part should include the manufacturing
process, plant sizes, lay-out and location, production schedule, machinery and equipment
required, study of the availability of raw materials, utilities, and labor required, determination
of type and quantity of wasted to be disposed of, and estimated of the production cost of the
product.

This part of the study should be able to answer the following question:
a. What are the steps in producing the product or rendering the service?
 b. What are the required materials and equipment for the process?
c. What are the labor requirements and the time needed to produce the product or
render the service?
d. What are the specifications for the production area? The lay-out design, the
utilities required, waste disposal, etc.?
e. How much will be the projected production cost per unit?

Organization or Management Feasibility

This part should be able to present how the business operation will be managed. It should be
able to identify who are the key decision makers and who are the direct and indirect personnel
that will be affected. It should contain, but not limited to, form of business organization,
management structure, human resource policy on hiring, promoting, and terminating
employees, salary and compensation scheme, compatibility with industry

This part of the study should be able to answer the following question:
a. What will be the form of the business organization? (Sole proprietor, partnership,
corporation, or cooperative) What will be the contribution or financing structure?
b. Who are the key personnel and their subordinates? What are their specific duties
and responsibilities?
c. What is the hiring, advancement, training, and termination policies of the
business?
d. What are the operating schedule and policies of the business?
e. What are the benefits to be given to management and personnel?
Financial Feasibility
This study is dependent to all previous part of the feasibility study, since the financial
projections will be either taken or based on the data that are presented in the three previous
studies. This study should contain, but not limited to, the audited Financial Statements for the
existing company, statement of total project costs, financial projections, or budget, supporting
schedules, financial analysis showing ROI, ROE, BEP and Price Analysis, and Sensitivity
Analysis if necessary.

Other Feasibility
Project feasibility study should also include the Social Desirability Analysis that will be used to
evaluate the project’s contribution to the community and the economy. Legal and Registration
Analysis that will contain the different government registration and permits that are needed to
be acquired before the start of the project. Finally, project scheduling, that should show how
the project will be executive and the target date of completion of the different tasks.

A deeper look at the Financial Feasibility Study

Since the topic is being taken up by finance and accounting major, the major role of accountants and
finance executive, if they will be involved in the cross functional team that will construct the project
feasibility study, is the financial aspect. It is worth mentioning that a project feasibility study should
be constructed by a team that is composed of different personnel coming from different discipline.
Engineers, Management and HR Experts, Marketing and Promotion Professionals, Accountants and
Finance executives, should be part of the team to provide a balanced and focused approach in the
conduct of the study. The following are the steps in conducting a financial feasibility study:

Step 1: Identification of the Financial Objective of the Project

This will include the determination of the target balances, amounts and ratios that is needed to be
achieved by the project for such to be considered as viable. Common financial objectives include
target ROI, ROE, Payback Period, Net Present Value, etc.

Step 2: Determining the Assumptions that will be used in the Financial Projections
To construct a projected or budgeted financial statements, assumptions about the future behavior
of accounts and balances should be established. Assumptions about the following, but not limited
to, will be needed to be established:
1. Annual percentage increase in sales
2. Relationship and behavior of expenses to sales
 3. Collection pattern of credit sales
4. Payment pattern of expenses and other liabilities
5. Depreciation method, the salvage value, and useful life of property, plant, and
equipment.
6. Inventory policies and target levels
7. Financing costs schedules

Step 3: Taking data from other studies for the financial projection
This will be involve reading and studying the contents of the other aspects. The following
information should be taken from the respective study;
1. Marketing Aspect: Projected Sales and Selling Expenses
2. Technical Aspect: Projected Cost of Sales and Required Assets
3. Organizational or Management Aspect: Administrative Expenses
4. Other Aspect: Taxes, Permits and Licenses, Other Expenses, etc.

Step 4: Calculates the project’s financial:

q Revenues
q Only the project contributed revenues, i.e. water/wastewater sales to the
utility are estimated:
q The project revenues are determined for different groups of users
q Costs
q Investment costs: Capital costs: land, civil works, equipment, studies,
Education programs, lab equipment & training, Institutional Development
(consulting services, capacity building programs)
q Operation and maintenance costs: labor, electricity, chemicals, materials,
overheads, raw water charges, insurance, etc.
q Residual values (of project assets at the end of the project life)
q Net benefits (of revenues over the costs)
q Project revenues, costs and net benefits are determined on a with-project and without project
basis.

Step 5: Preparation of projected financial statements

Projected Financial Statement Assumption Required
1. Projected Income - Increase in units sold and unit
Statement selling price
- Variability of Expenses with sales
2. Projected Cash Budget - Mode of sales and collection
pattern
- Mode of payments and payment
patter
3. Projected Balance Sheet - Average collection period for
receivables
- Average holding period for
inventories
- Depreciation method for PPE
- Average deferral period for
Payables
- Pay-out ratio for retained
earnings

Step 6: Analysis of financial projections

1. Financial Statement Analysis – ratio analysis in particular;
a. Capital Structure (Debt and Equity Ratio)
b. Liquidity and Solvency (Current and Acid Test ratio, and Times Interest Earned)
c. Activity Ratio (Inventory and Receivable Turnovers)
d. Performance (Return on Assets, Return on Equity, Earnings per share)
2. Break-Even Analysis
a. Break-even point in units and peso sales
b. Margin of safety
 c. Degree of operating leverage.
3. Capital Budgeting Techniques
a. Net Present Value
b. Profitability Index
c. Payback Period

Step 7: Determination if the project was able to meet its financial objectives
This is about checking whether the ratios and percentages computed was able to meet the
objectives that were set at the beginning of the study. If the objectives were met, then the study
is concluded, however, if the ratios and percentages are needed to be adjusted, the related
changes in the other aspects should also be done. Always remember that the financial aspect is
dependent to the other aspects, hence, any changes in the financial projections should also be
reflected in the other aspects.

Pre-Feasibility Study Report Format

This is to be discussed, done, and submitted by each group
Part 1: Identification of the service to be offered
1. What is the problem that you want to solve?
2. Who are the people that experience such problem?
3. How do you want to solve it?
4. Why is it the better solution?
Part 2: Pre-Feasibility Study
1. Market or Buyer: Demographical Description
2. Major Competitor/Substitutes/Complimentary Products and Services
3. Basic Requirements in Rendering the Service (i.e. Building Spaces, Equipment,
Furnitures, Labor, etc.)
4. Initial Investment Cost and Expected Rate of Return
Part 3: Risk Factors and Action Plan (At least 3 factors)
Risk Factors Action Plan
For a tutorial center, nobody wants to enroll Partner with existing learning centers.

Project Feasibility Study Format

A. Summary of the Project

• Project Rationale (Mission/ Vision)
• Name of the Firm
• Location
i. Head Office
ii. Plant Site (if there’s any)
• Brief Description of the Project
• Project Summary
o Market Feasibility
o Technical Feasibility
o Financial Feasibility

B. Introduction/ Background of the Study

• Brief Background of the Study
• Objectives of the Study
• Definition of Operational terms (if applicable)
• Scope and Limitation

C. Market Study
• Objectives of the Study
 • Methodology
• Target Market
• Competitors
• Demand and Supply
o Demand and Supply Analysis
• Projected Sales
o Projected Sales in Units
o Projected Sales in Amount
• Marketing Strategies/ Program
o Product’s Value Proposition
o Pricing
o Place of Distribution
o Promotions/ Advertising

D. Technical Study
• Objectives of the Study
• Product
o Description of the product
o Uses of the product
• Manufacturing/Operational Process
o Description of the process
• Production Schedule
• Machinery and Equipment
o Production
o Miscellaneous
o Administrative
o Operations
• Plant location, Geographical location of competing companies
• Plant Size Layout
• Raw Materials and Supplies
• Utilities
• Waste Disposal
• Direct and Indirect Labor Requirements

E. Management Study
• Objectives of the Study
• Form of Business Ownership
• Capitalization
• Organizational Structure
• Manpower Requirements and Compensation
• Organizational Policies
• Legal Requirement

F. Financial Study
• Objectives of the Study
• Total Project Cost / Initial Capital
• Sources of Financing
• Projected Financial Statements
o Assumptions
o Projected Income Statement
o Projected Cash Flow Statement
o Projected Balance Sheet
• Financial Analysis
o Ratios
 § Liquidity Ratio
§ Profitability Ratio
§ Solvency Ratio
o Break-even Point Analysis
o Capital Recovery (Payback Period)
o Net Present Value

G. Appendix (Legal Requirements, i.e. Business Registration Requirements)