Feasibility study

• what is a feasibility study?

• what to study and conclude?
• types of feasibility: technical, economic,
schedule, operational
• quantifying benefits and costs: payback
analysis, net present value analysis, return on
investment analysis

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 The feasibility study phase

 Objective of a feasibility study;

 To find out if a development project can be done
 … is it possible?
 … is it justified?

 To suggest possible alternative solutions

 To provide management with enough information to know:
 Whether the project can be done
 Whether the final product will benefit its intended users
 What are the alternatives are
 Whether there is a preferred alternative

 A feasibility study is a management-oriented activity

 After a feasibility study, management makes a “go/no-go”
decision
 Need to examine the problem in the context of broader business
strategy 2
 Content of a feasibility study
Things to be studied in the feasibility study
 The present organizational system
 Stakeholders, users, policies, functions, objectives
 Problem with the present system
 Inconsistencies, inadequacies in functionality,
performance………
 Possible solution alternatives
 “Sticking with the current system” is always an alternative
 Different business processes for solving the problem
 Different levels/types of computerization for the solutions
 Advantages and disadvantages of the alternatives
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Rainbow diagram for classifying
stakeholders

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Four types of feasibility
Technical feasibility
Economic feasibility
Schedule feasibility
Operational feasibility

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Technical Feasibility
 Based on the existing expertise and technical
knowledge of the construction experts in the
area or globally, as the case may be,
technical feasibility is concerned with the
evaluation of the buildability and
construction ability of the project under
consideration.

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Technical feasibility
 Is the proposed technology or solution practical?
 Do we currently possess the necessary technology?

 Do we possess the necessary technical expertise, and is the

schedule feasible?
 Is relevant technology mature enough to be easily applied
to our problem?
 What kind of technology will be need?
 Some organizations like to use state-of-art technology
….but most prefer to use mature and proven technology
 A mature technology has a larger customer base for
obtaining advice concerning problems and improvements
 Is the required technology available “in house”?
 Is the technology is available….. Does it have the capacity
to handle the solution?
 If the technology is not available……..can it be acquired?

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Risk Analysis
 Potential of all threats and opportunities which can
affect (adversely or favorably) the achievement of
objectives for an investment. (Institute of Civil
Engineers 1998)
Risk Identification Risk Qualification

Risk Quantification

Risk Mitigation &

Impact Analysis

Risk Response Plan

Risk Impact using
Simulation
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Economic Feasibility
 The economic feasibility is related to fiscal
and monetary policy as well as the prevailing
financial conditions of the expected
customer, buyer or user in the local, national
and international environment where the
project is to be located.

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Financial Feasibility
 The financial feasibility is not the same as
economic feasibility . The financial feasibility
examines the monetary situation and capital
required and expected at the start of the
project while the economic feasibility is more
concerned with the economic importance of
the project which usually takes effect from
the beginning to the completion and close-
out of the project.
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Economic feasibility
 Cost-benefit analysis
 Purpose-answer questions such as:
 Is the project justified(i.e. will benefits overweight costs)?
 Can the project be done, within given cost constraints?

 What is the minimal cost to attain a certain system?

 Which alternative offers the best return on investment?

 Selection among alternative financing

arrangements(rent/lease/purchase)
 Difficulties
 Benefits and costs can both be intangible, hidden
and/or hard to estimate
 Ranking multi-criteria alternatives

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Types of benefits
 Examples of particular benefits: cost reduction, error
reduction, increased flexibility of operation, improved
operation, better and more timely information
 Benefits may be classified into one of the following
categories
 Monetary
 Tangible
 intangible
 How to identify benefits
 By organizational level
 By department

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Types of costs
Project related costs
Preliminary planning costs:
(internally or contracted out)
Construction costs: all resources
Operational costs(on-going)
Maintenance
Personal

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Accounting methods
 Assuming that both benefits and costs can be
identified and evaluated, how do we compare
them to determine project feasibility?

 Payback analysis

 Return on Investment analysis

 Net Present analysis

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Discount rates
 Money value today is worth more than tomorrow
 Money values used in this type of analysis should be
normalized to refer to current year money value
 For this, we need a number, the discount rate, which
measures the opportunity cost of investing money in
other project, rather than the proposed project. This
number is company-and industry-specific
 To calculate the present value, i.e., the real money value
given the discount rate i, n years from now we use the
formula
present value= 1
(1  i) n
 For example, if the discount rate is 12%, then
 Present value(1)=1/(1+0.12)1=0.893
 Present value(2)=1/(1+0.12)2=0.797

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Net Present Value
 Net present value (NPV) is a method of determining the
current value of all future cash flows generated by a project
after accounting for the initial capital investment.
 NPV is the present value of future revenues minus the
present value of future costs.
 Each cash inflow/outflow is discounted back to its present
value (PV). Then all are summed.
 Any cash flow within 12 months will not be discounted for
NPV purpose.

Present Value=Future Value 1

(1  i) n
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Net Present Value
Example : Project X requires an initial investment of
$35,000 but is expected to generate revenues of
$10,000, $27,000 and $19,000 for the first, second
and third years, respectively. The target rate of
return is 12%. Draw the cash flow diagram and
calculate the NPV.

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Net Present Value
Answer:

NPV = {$10,000 / (1 + 0.12)1} + {$27,000 / (1 + 0.12)2} +

{$19,000 / (1 + 0.12)3} - $35,000
NPV = $8,929 + $21,524 + $13,524 - $35,000
NPV = $8,977

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 Payback Analysis
 Simple payback is the amount of time it will take
to recover development/construction costs based
on annual cost savings.
 Shorter payback period is more prefer;
 The investment costs are recovered sooner and are
available again for further use
 A shorter payback period is viewed as less risky
 There can be more than one payback period for a given
cash flow stream
 Payback period can be considered as a decision
making criteria for management

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 Payback Period calculation
Consider the following example
 Cash outflows: the initial cost of the investment is
a cash outflow of $ 800 in year 1, followed by a cost
of $ 150 in year 2. there are no expected costs in
year 3-5
 Cash inflows: the investment will bring $300 cash
flow each year, for years 1-5
 Net Cash flow: the net of cash inflows and cash
outflows for each year
 Cumulative Cash flow: the sum of all cash inflows
and out
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 Payback Period calculation

Investment Year 1 Year 2 Year 3 Year 4 Year 5

Cash Flow

Cash 300 300 300 300 300

Inflows
Cash – 800 –150 0 0 0
Outflows
Net Cash – 500 150 300 300 300
Flow
Cumulative – 500 – 350 – 50 250 550
Cash Flow

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Payback Period calculation

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 Payback Period calculation
A
Payback period=  y
B
Where;
y= the number of years before final payback year
A=total remaining to be paid back at the start of the payback year , to bring
cumulative cash flow to 0
B=total (net) paid back in the entire payback year
50
payback  3 
300
payback  3  0.17

=3.17 years

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24
 Payback Period calculation
with discount rate
Investment Year 1 Year 2 Year 3 Year 4 Year 5
Cash Flow

Cash 300 300 300 300 300

Inflows
126.95
Cash – 800 –150 0 0 0 payback  3 
(126.95  86.15)
Outflows
payback  3  0.596
Net Cash – 500 150 300 300 300
Flow
Discount 1 0.893 0.797 0.712 0.636
factor

Discounted -500 133.95 239.1 213.6 190.8

cash flow
Cumulative -500 -366.05 -126.95 86.15 276.95
Cash flow

Considering 12% discount rate 25

 Example: Payback Period
Consider one organization has two alternative to invest
money. Following table gives the cash flow
information. Decide which option is more suitable for
investment. Consider two cases ;without discounting
and discounting

Year Alternative A Alternative B

0 -5000 -2000
1 500 500
2 1000 1500
3 1000 1500
4 1500 1500
5 2500 1500

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 Example: Payback Period
solution

Year 0 1 2 3 4 5
Cash flow-alt A -5000 500 1000 1000 1500 2500
Cumulative cash -5000 -4500 -3500 -2500 -1000 1500
flow

Cash flow alt B -2000 500 1500 1500 1500 1500

Cumulative cash -2000 -1500 0 1500 3000 4500
flow
1000 0
4 2 
Payback period for A = 2500 Payback period for B= 1500
4  0.40 2
4.4

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 6000
Cumulative
cashflow
4000

2000

A
0
B
0 1 2 3 4 5

-2000

-4000

-6000

years
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Example: Payback Period with discount factor
solution
Year 0 1 2 3 4 5
Cash flow-alt A -5000 500 1000 1000 1500 2500
Discount factor 1 0.893 0.797 0.712 0.636 0.567
Discounted -5000 446 797 712 954 1417
cashflow
Cumulative cash -5000 -4554 -3757 -3045 -2091 -674
flow

Cash flow alt B -2000 500 1500 1500 1500 1500

Discount factor 1 0.893 0.797 0.712 0.636 0.567
Discounted -2000 446 1195 1068 954 850
cashflow
Cumulative cash -2000 -1554 -359 709 1663 2513
flow

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Example: Payback Period with discount factor

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Return on Investment Analysis
 Return on investment (ROI) is the ratio of a profit or
loss made in a fiscal year expressed in terms of an
investment.
 It is expressed in terms of a percentage of increase or
decrease in the value of the investment during the year
in question.
 For example, if you invested $100 in a share of stock
and its value rises to $110 by the end of the fiscal year,
the return on the investment is a healthy 10%,
assuming no dividends were paid.

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ROI formula
ROI = Net Profit / Total Investment * 100
Example : You are a house flipper. You purchased a
house at the courthouse auction for $75,000 and spent
$35,000 in renovations. After sales, expenses, and
commission, you netted $160,000 on the sale of the
renovated house. What is the ROI?

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ROI Contd.
Answer:
Your net profit is going to be what you netted ($160,000) minus what you spent
($75,000 + $35,000), so it is $50,000. Your total investment is also what you spent
($75,000 + $35,000), which is $110,000.
ROI = Net Profit / Total Investment * 100
ROI = 50,000 / 110,000 * 100
ROI = .45 * 100
ROI = 45%
If only house flipping was that easy. Keep in mind that you can certainly lose
money on an investment. If there is a loss, the formula will yield a negative
number. Here's a simple example:
ROI = -1,000 / 5,000 * 100
ROI = -0.2 * 100
ROI = -20%

Source: (https://study.com/)

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Schedule Feasibility
 Process of assessing the degree to which the
potential time frame and completion dates
for all major activities within a project meet
all organizational deadlines and constraints
for affecting change.

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Schedule feasibility
 How long will it take to get the technical expertise?
 We may have the technology, but that doesn’t mean we
have the skills required to properly apply that technology
 May need to hire new people or re-train existing staff
 Whether hiring or training, it will impact schedule
 Asses the schedule risk
 Given our technical expertise, are the project deadlines
desirable?
 If there are specific deadlines, are they mandatory or
desirable?
 If the deadlines are not mandatory, the analyst can propose
several alternative schedules
 What are the real constraints on project deadlines?
 If the project overruns, what are the consequences?
 Missed schedules are bad, but inadequate systems are
worse!
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Operational Feasibility
 Operational feasibility is a measure of how
well a solution meets the identified system
requirements to solve the problems and take
advantage of the opportunities envisioned for
the system.

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Operational feasibility
 How do end-users and managers feel about?
The problem you identified
The alternative solutions you are exploring
 You must evaluate
Not just whether a system can work…
…but also whether a system will work
 Any solution might meet with resistance:
Does management support the project?
How do the end-users feel about their role in the
new system?
How will the working environment of the end-
users and management adapt to the change?
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Feasibility Report
1. Purpose and the scope of the study 5. Possible alternatives
 Objectives of the study
• ….including ‘do nothing’
 Who commissioned it and who
did it 6. Criteria for comparison
 Sources of information • Definitions for criteria
 Process used for the study 7. Analysis of alternatives
 How long did it take
• Description of each alternative
2. Description of present situation
 Organizational settings, current
• Evaluation with respect to
systems criteria
 Related factors and constraints • Cost/benefits analysis and
3. Problems and requirements special implications
 What’s wrong with the present 8. Recommendations
situation • What is recommended and
 What changes are needed implications
4. Objectives of the new project • What to do next
 Goals and relationship between
them 9. Appendices
• To include any supporting
materials

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