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Edited Modesto N Peña y Gorrin
Sources CFI / Wikipedia / Project Management Framework
Feasibility Study
This essay should help the project finance applicant in the structuring of his application regarding the
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editing of the Feasibility Study, which is the heart of any application along with the Business Plan.
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A feasibility study is part of the initial design stage of any project/plan. It is conducted in order to objectively
uncover the strengths and weaknesses of a proposed project or an existing business. It can help to identify
and assess the opportunities and threats present in the natural environment, the resources required for the
project, and the prospects for success. It is conducted in order to find answers to the following questions:
+ Does the company possess the required resources and technology?
+ Will the company receive a sufficiently high return on its investment?
Another perspective and or argument is that a feasibility study looks at the viability of a business venture or
project with an emphasis on identifying potential problems. The study attempts to answer two main
questions:
1. Will the proposed business venture or project work,
2. and should you proceed with it?
There are feasibility studies applied to the business as a whole and to various composites of a business or
project. For instance, all businesses can critically examine the actions they take, whether the business is just
starting out or has been in operation for a while. Establishing the viability of an idea or action can ultimately
determine whether a business succeeds or not. The best tool for determining this is by conducting a
feasibility study.
The initial designing stage of a task or a project that brings together all the elements of knowledge and
estimates the level of expertise needed for it is conducted via a feasibility study.
It also offers a quantitative and qualitative assessment of other vital resources, timetable, cost estimate, and
identification of critical points.
When we look at the final outcome of a feasibility analysis we look at the key metrics to judge the project’s
merit. What should be included in the key metrics depends on the type of project, funding strategy and legal
structure. The most common metrics include Net Present Value (NPV), Internal Rate of Return (IRR),
Developer’s Margin and Return on Equity (RoE).
The project feasibility study is a comprehensive report that examines in detail the five frames of analysis of
a given project. It also takes into consideration its four Ps, its risks and POVs, and its constraints (calendar,
costs, and norms of quality). The goal is to determine whether the project should go ahead, be redesigned,
or else abandoned altogether. The five frames of analysis are: The frame of definition; the frame of
contextual risks; the frame of potentiality; the parametric frame; the frame of dominant and contingency
strategies.
The four Ps are traditionally defined as Plan, Processes, People, and Power. The risks are considered to be
external to the project (e.g., weather conditions) and are divided in eight categories: (Plan) financial and
organizational (e.g., government structure for a private project); (Processes) environmental and
technological; (People) marketing and sociocultural; and (Power) legal and political. POVs are Points of Page |
Vulnerability: they differ from risks in the sense that they are internal to the project and can be controlled 3
or else eliminated.
The constraints are the standard constraints of calendar, costs and norms of quality that can each be
objectively determined and measured along the entire project lifecycle. Depending on projects, portions of
the study may suffice to produce a feasibility study; smaller projects, for example, may not require an
exhaustive environmental assessment.
Steps in a Feasibility Study
Conducting a feasibility study involves the following steps:
Conduct preliminary analyses.
+ Prepare a projected income statement.
+ What are the possible revenues that the project can generate?
Conduct a market survey.
+ Does the project create a good or service that is in demand in the market? What price are consumers
willing to pay for the good or service?
+ Plan the organizational structure of the new project. What are the staffing requirements? How many
workers are needed? What other resources are needed?
+ Prepare an opening day balance of projected expenses and revenue
+ Review and analyze the points of vulnerability that are internal to the project and that can be
controlled or eliminated.
+ Decide whether to go on with the plan/project.
Contents of a Feasibility Report
A feasibility report should include the following sections:
+ Executive Summary
+ Description of the Product/Service
+ Technology Considerations
+ Product/ Service Marketplace
+ Identification of the Specific Market
+ Marketing Strategy
+ Organizational Structure
+ Schedule
+ Financial Projections
Appendixes:
You should organize other information, calculation, data etc. in this section. It up to you to decide what
should be part of the main report and what should go in the appendix. As a general practice you should put
the following in the appendix:
• Information & Market Data and its Source Page |
• Unleveraged IRR calculations 4
• Leveraged IRR Calculation and Funding Strategy
• Revenues Forecast
• Profit and Loss statement
• Replacement Reserve Calculations
Types of Feasibility Study
1. Technical and operational feasibility
+ Technical: Hardware and software
+ Existing or new technology
+ Manpower
+ Site analysis
+ Transportation
Operational feasibility is the measure of how well a proposed system solves the problems, and takes
advantage of the opportunities identified during scope definition and how it satisfies the requirements
identified in the requirements analysis phase of system development.[14]
The operational feasibility assessment focuses on the degree to which the proposed development project
fits in with the existing business environment and objectives with regard to development schedule, delivery
date, corporate culture and existing business processes.
To ensure success, desired operational outcomes must be imparted during design and development. These
include such design-dependent parameters as reliability, maintainability, supportability, usability,
producibility, disposability, sustainability, affordability and others. These parameters are required to be
considered at the early stages of design if desired operational behaviours are to be realised. A system design
and development requires appropriate and timely application of engineering and management efforts to
meet the previously mentioned parameters. A system may serve its intended purpose most effectively when
its technical and operating characteristics are engineered into the design. Therefore, operational feasibility
is a critical aspect of systems engineering that needs to be an integral part of the early design phases.
The technical assessment is based on an outline design of system requirements, to determine whether the
company has the technical expertise to handle the completion of the project. When writing a feasibility
report, the following should be taken to consideration:
A brief description of the business to assess more possible factors which could affect the study
+ The part of the business being examined
+ The human and economic factor
+ The possible solutions to the problem Page |
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At this level, the concern is whether the proposal is both technically and legally feasible (assuming moderate
cost).
The technical feasibility assessment is focused on gaining an understanding of the present technical
resources of the organization and their applicability to the expected needs of the proposed system. It is
an evaluation of the hardware and software and how it meets the need of the proposed system.
Method of production
The selection among a number of methods to produce the same commodity should be undertaken first.
Factors that make one method being preferred to another method in agricultural projects are the following:
+ Availability of inputs or raw materials and their quality and prices.
+ Availability of markets for outputs of each method and the expected prices for these outputs.
+ Various efficiency factors such as the expected increase in one additional unit of fertilizer or
productivity of a specified crop per one thing
Production technique
+ After we determine the appropriate method of production of a commodity, it is necessary to look
for the optimal technique to produce this commodity.
Project requirements
Once the method of production and its technique are determined, technical people have to determine the
projects' requirements during the investment and operating periods. These include:
+ Determination of tools and equipment needed for the project such as drinkers and feeders or pumps
or pipes ...etc.
+ Determination of projects' requirements of constructions such as buildings, storage, and roads ...etc.
in addition to internal designs for these requirements.
+ Determination of projects' requirements of skilled and unskilled labor and managerial and financial
labor.
+ Determination of construction period concerning the costs of designs and consultations and the
costs of constructions and other tools.
+ Determination of minimum storage of inputs, cash money to cope with operating and contingency
costs.
Project location
The most important factors that determine the selection of project location are the following:
+ Availability of land (proper acreage and reasonable costs). Page |
+ The impact of the project on the environment and the approval of the concerned institutions for a 6
license.
+ The costs of transporting inputs and outputs to the project's location (i.e., the distance from the
markets).
+ Availability of various services related to the project such as availability of extension services or
veterinary or water or electricity or good roads ...etc.
2. Financial feasibility
+ Initial investment
+ Resources to procure capital: Banks, investors, venture capitalists
+ Return on investment
This is the heart of the feasibility study report. Here you will do all the financial analysis and report the
various performance indicators. The information of this section should be organized under the following
heads:
+ Supply, Demand and Projected Absorption
+ Pricing Strategy
+ Estimated Required Investment (land cost, development cost, financing
+ cost etc.)
+ Unleveraged IRR or Project IRR
+ Leveraged IRR and Funding Strategy
+ Various Financial Performance Indicators
+ Scenario Analysis
+ Sensitivity Analysis
In case of a new project, financial viability can be judged on the following parameters:
+ Total estimated cost of the project
+ Financing of the project in terms of its capital structure, debt to equity ratio and promoter's share
of total cost
+ Existing investment by the promoter in any other business
+ Projected cash flow and profitability
The financial viability of a project should provide the following information:
+ Full details of the assets to be financed and how liquid those assets are.
+ Rate of conversion to cash-liquidity (i.e., how easily the various assets can be converted to cash).
+ Project's funding potential and repayment terms.
+ Sensitivity in the repayments capability to the following factors:
+ Mild slowing of sales.
+ Acute reduction/slowing of sales.
+ Small increase in cost.
+ Large increase in cost.
+ Adverse economic conditions. Page |
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3. Market feasibility
+ Type of industry
+ Prevailing market
+ Future market growth
+ Competitors and potential customers
+ Projection of sales
4. Organizational feasibility
+ The organizational structure of the business
+ Legal structure of the business or the specific project
+ Management team’s competency, professional skills, and experience
5. Time feasibility
A time feasibility study will take into account the period in which the project is going to take up to its
completion. 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. Time 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. It is necessary to determine whether the deadlines are mandatory or desirable.
Important and side note
The Feasibility Study is one of the four pillars at IMCI+ for processing a project finance application. It
supports the Business Plan and its strategic approach. In certain cases, it is even recommendable to start
the project with the Feasibility Study and then proceed to the Business Plan. In certain circumstances, also
link the Feasibility Study with the Marketing Study and Risk Management framework.
The IMCI+ Team is happy to support you in this process. For more information, please contact info@imci-
group.com
NMP 01.03.2022
