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Subject BUSINESS ECONOMICS

Paper No and Title 16: Project Appraisal and Impact Analysis

Module No and Title 6: Feasibility Study

Module Tag BSE_P16_M6

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Feasibility Study-Concept
4. Feasibility Study-Features
5. Elements of Good Feasibility Study
5.1 Scope of the Project
5.2 Current Analysis
5.3 Requirements as per the object of the Project
5.4 Recommended Course of Action
5.5 Cost Effectiveness of the Approach
5.6 Concluding Part
6. Major areas of Feasibility Studies
6.1 Technical feasibility
6.1.1 Aspects to be covered in Technical feasibility
6.2 Economic feasibility
6.3 Legal feasibility
6.4 Operational feasibility
6.5 Schedule feasibility
6.6 Market and real estate feasibility
6.7 Resource feasibility
6.8 Cultural feasibility
6.9 Financial feasibility
6.10 Market research study
7. Coverage under Pre-Feasibility Study
8. Feasibility Study in SDLC
9. Summary

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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1. Learning Outcomes
After studying this module, you shall be able to

 Know the process of feasibility analysis

 Identify the phases of feasibility studies
 Identify the elements of good feasibility studies
 Learn the major areas of feasibility studies
 Learn the feasibility studies in SDLC

2. Introduction
Feasibility analysis is a process undertaken to determine whether the project idea is worth
proceeding with or not. It evaluates the future of the project idea within the limitations imposed by
the environment upon it and also the constraints of the implementing body. Generally, the outcome
of the study can give a positive result under which the decision to proceed with the project is taken
otherwise the project can be abandoned. Sometimes, the data is not sufficient to arrive at any
decision and in that case further information is collected till a decision can be reached. The
feasibility analysis consists of three stages. These are pre-feasibility study, feasibility study and
Project report. This module has been designed to discuss the areas to be covered under feasibility
study, features of good study and also the elements of feasibility studies..

3. Feasibility Study-Concept
The future of project idea needs to be evaluated duly considering the constraints and limitations of
project implementing body and also the surrounding environment. The projects identified are
usually analyzed so as to establish the viability of the project from the point of view of technical,
marketing, financial, etc. The feasibility analysis involves detailed analysis and evaluation of the
project from all relevant angles. The comprehensive guidelines for project feasibility studies and
evaluation are published by several institutions:
 United Nations/UNIDO, Geneva
 OECD Development Centre, Paris
 World Bank Group, Washington, DC
 Asian Development Bank, Manila
 BPE, Government of India (Bureau of Public Enterprise)

Although the basic concepts, tools and techniques are the same but different guidelines, manuals
and authors have called project phases by different names. UNIDO has divided project cycles and
phases as follows:

1. PRE-INVESTMENT PHASE:
a. Identification of investment opportunities
b. Preliminary selection stage
c. Project Formulation Stage
d. Evaluation and Decision stage
BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS
ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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2. INVESTMENT PHASE:
a. Negotiation and contracting stage
b. Project design stage
c. Construction stage
d. Start-up stage

3. OPERATIONAL PHASE:
a. Short-term view
b. Long-term view

4. Feasibility Study: Features

The following are the important features of a Feasibility study:
a) After Pre-Feasibility Study: The feasibility study must be made only after pre-feasibility
study, if results are positive and affirmative.
b) Related to any Aspect: The feasibility study could be related to any aspects of the project. It
means it is not confined to starting a new venture. The feasibility study is that type of study
which can be conducted in different situations which are found by the investor. The project
includes:
 Modifications of existing product lines
 Adding new into existing one.
 Subsidiary or allied projects can be considered by the manufacturer.
So, expert should not ignore the importance of feasibility study. The feasibility study is
important both in case of existing company and in case of new venture.
c) Detailed, Reliable, Complete, etc.: The feasibility study is likely to be much detailed,
sophisticated, complete and covering almost same grounds as in case of pre-feasibility study.
The feasibility study will result into certain formats, specifications, reliability, estimation
about different data of the project. It is also likely to provide us much reliable information to
decide or test viability of the product.
d) Clarity of doubts: In feasibility study certain points may be doubtful. But after the feasibility
study no doubt remains about the soundness of the project. It is final decision that is why
projections developed under feasibility study should not be defective.
e) Persons involved: The feasibility study is done by different persons, depending upon the
situation. For example it can be by
 investor himself
 entrepreneur
 consultant
 planner
 development agencies

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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5. The Elements of a Good Feasibility Study

The fundamental activities involved in preparation of feasibility study are equally applicable to any
type of project since these activities are very generic in nature. The project may be for acquisition,
development of software, for systems or for any other project. In fact feasibility study includes

a) Defining the problem under consideration

b) Analyzing the current mode of operation
c) Defining the requirements
d) Evaluating the various alternatives and
e) An agreed upon and approved course of action.

Feasibility study determines the worthiness of the project and also evaluates the future of the
project. This feasibility study should include the scope of the opportunity, the strength and
weaknesses of the project, the requirements as per the object of the Project, etc. The feasibility
study should also include the course of action, its review etc. The following are the main
components of an effective feasibility study:

a) Scope of the Project

b) Current Analysis
c) Requirements as per the object of the Project
d) Recommended course of action
e) The cost effectiveness of the approach
f) Concluding part

5.1 Scope of the Project

It is used to formulate a business problem. The scope should be very well defined and specific. It
is also important to define different parts of the business that are directly or indirectly affected by
the project. A very many projects which start with great promises but without well-defined scope
wither with time and do not reach their objectives.

5.2 Current Analysis

The existing method of implementation is required to be defined and understood under current
analysis. It may be in relation with system, product or any other parameter. After conducting the
current analysis it may be inferred that there is no need to completely modify the system and just
some mere modifications are required. There is a need to identify the strengths and weaknesses of
the existing system. It is always possible that certain elements under the current system and
product may still be useful equally in the new system also. It means that no new fresh efforts are
required on these elements. There may be few modifications and adaptations only. It will
certainly save precious time and money. The feasibility study may be completed well in time.
Had this analysis not been undertaken, these useful elements would have remained undiscovered.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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5.3 Requirements as per the object of the Project
The requirements of the project are to be identified and documented as per the basic object of the
project. These requirements may be in relation to infrastructure, technology, information system,
software, special operating system, utilities, heavy equipment, etc. This element of feasibility study
is as important as it is the nature and type of project on which the requirements are based. For
example a manufacturing project may require substantial land resources but software solution
project requires relatively lesser space but expert IT professionals.

5.4 Recommended Course of Action

It is quite obvious that out of various alternatives available, one or more are preferred and selected.
There is a need to explain the logic behind selection of a particular course of action. At this point,
the use of existing structures and commercial alternatives are considered.

5.5 Cost Effectiveness of the Approach

The approach selected should also be tested with respect to cost effectiveness. In this segment not
only the estimated total cost of the recommended project is considered but also the cost of other
alternatives in order to facilitate comparison. The approach to development projects is different in
the sense that a project schedule is prepared showing the entire project path i.e. from the very
beginning and up to the end showing clearly the sequence of all the activities. Thereafter a summary
is prepared which elucidates the cost benefit analysis as well the final return on investments.

5.6 Concluding Part

This is the assembly portion of the feasibility study wherein all the preceding elements are
considered with a formal review. There are two fundamental purposes of the review. The very first
being a thorough checks so as to substantiate its accuracy and the ultimate purpose is to take final
call on the acceptability of the project. It is important to note that it is not necessary to take an
affirmative decision always. It may be rejection of the project or may be required to be revised
before finalization of any decision.

In the case of approval of the project, the documentation should be completed in all respects
including the signatures of all the concerned parties indicating the final acceptance.

If the project is rejected then it is always desirable to explain the valid and persuasive reasons of
rejection. This should form part of entire documentation.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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6. Major Areas of Feasibility Study
The major areas of feasibility study are the following:
1. Technical Feasibility
2. Economic Feasibility
3. Legal Feasibility
4. Operational Feasibility
5. Scheduling Feasibility
6. Market and real estate feasibility
7. Resource feasibility
8. Cultural feasibility
9. Financial feasibility
10. Market research study

6.1 Technical feasibility

The technical Feasibility Study aims to determine whether or not the product is technically feasible.
This study determines how the technical requirements of the project can be fulfilled, which location
would be the most appropriate and what should be the size of the plant? This study and demand
and market feasibility study are the important pre-requisites for evaluating project prospects for
commercial profitability and national economic profitability upon which the final decision should
depend. The technical study also provides the basis for cost estimating.
6.1.1 Aspects to be covered in Technical feasibility
A suitable technical feasibility should cover the following steps:
1. Materials and Inputs
2. Production Technology
3. Product Mix
4. Location and Site
5. Plant Capacity
6. Structures and Civil works
7. Machinery and Equipment
8. Project Chart and Layouts
9. Work Schedule

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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6.2 Economic feasibility
The proposed project should provide favourable economic benefits to the entity. The economic
feasibility assessment is conducted to analyse this aspect. There is also a need to identify and
quantify the economic benefits that is expected to be provided by the project. This feasibility
necessarily involves comparative analysis of cost and benefits.

6.3 Legal feasibility

Every entity is bound to fulfill the legal requirements. There is a need to study the legal scenario
and to see the legal implications of the project. It necessarily involves ethical considerations. So it
is also called as Ethical Feasibility. Before the actual execution of the project undertaken, it has to
be ensured that it meets all ethical and legal requirements.

6.4 Operational feasibility

In the execution of the project, the entity is expected to face some problems and also there may be
some opportunities arising in the course of the project. The operational feasibility is a measure of
this fact only i.e. the ability to solve problems and taking advantage of opportunities. The
assessment under this study emphasizes on the degree to which the proposed project fits in existing
scenario and also the objectives with regards to following:
1. Development schedule
2. Delivery date
3. Corporate culture and
4. Existing business processes
To ensure success, there are certain parameters to be considered at very early stage of design. These
include the following:
1. Reliability
2. Maintainability
3. Supportability
4. Usability
5. Productivity
6. Disposability
7. Sustainability
8. Affordability.
In fact this feasibility is a critical aspect of systems engineering and also needs to be an integral
part of the early design phases. It is so because a system becomes most effective for the desired
purposes when its design includes the technical and operating characteristics.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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6.5 Schedule feasibility
The time element of a project has its own importance. It is so because a project will fail or is
unsuccessful if it takes too much time to complete. It means there is a need to estimate the time
required to develop the system. The deadline for the project needs to be initiated. It is also necessary
to decide the desirability or whether the deadlines are mandatory? It is also ascertained whether the
company currently has the required time resources for undertaking the project? The possibility of
completion of project in the available time is also checked.

6.6 Market and real estate feasibility

The demand and market study is the thorough analysis of the market for the product to be
manufactured by the industrial project. It helps us to know the market penetration, capacity to enter
into market as compared to total market. It is important that if, after the pre-feasibility study, on
the basis of demand and market study it is finding that market is not sufficient then project idea
should be abandoned immediately. The information determined under demand and market study
includes the following:

1. The size and composition of present demand in the market.

2. Market segments identified.
3. Demand projections of overall market.
4. Market penetration.
5. Broad pricing structure

The Real Estate Feasibility answers the questions like:

1. The type and kind of property required
2. The availability of the requirement in the market
3. The related legal aspect
4. The impact of business on the area.

6.7 Resource feasibility

The execution of the project requires availability of required resources. It is required to be seen
whether we have enough resources or the facilities necessary for the project? This feasibility finds
out the type and amount of resources required the dependency on others, the alternatives in hand
or the sources in case of emergency, etc.
6.8 Cultural feasibility
The impact of the project on both local and general cultures needs to be analyzed in advance. Such
types of environmental implications are studied in this feasibility study. The culture of the entity
should not be clashed for the success of the project.
6.9 Financial feasibility
The financial feasibility tries to make projections about earning prospects of an industrial project.
The following four aspects are considered in this study:
1. The total investment cost
BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS
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2. Sales revenue
3. Operating cost
4. Cash Flows
6.10 Market research study
The product or services to be sold or rendered should be marketable. This study examines this
important aspect. It will assess the potential sales of the product; its absorption and market capture
rates of the project.

7. Coverage under Pre-Feasibility Study

The following points should be covered by Planners of the concern while making Pre-Feasibility
Study.
1. Product Description: The characteristics of the product should be equally described, along with
possible substitutes which are available in the market. The subsidiary or allied products should also
be identified which can be manufactured along with the main product.

2. Description of the Market: The present and projected potential market and its competitive nature
must be specified, with reference to the following aspects:
i) The status of present location of manufacturing
ii) How many competitors are operating in the market and their corresponding specialization,
if any?
iii) What are the national production, imports and exports?
iv) Are there any Governmental controls or incentives?
v) What is the estimated consumption?
vi) What is the price structure?
vii) What is the estimated product durability for future consumption?

3. Technology: The technology choices for the manufacture of the product should be described
briefly. Also, the key plant location factors, listed below, should be identified:
i) Labour
ii) Proximity or nearness to market and raw material
iii) Transportation facilities and cost
iv) Water availability

4. Cost Estimates: The estimates should be meet of the necessary investment cost and production
cost.

5. Estimated Profit: The information collected should include estimates of profit of business firms
manufacturing similar products or an actual estimated profit for the project under study.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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6. Other Factors: In certain cases, the following aspects may be the most important in the judgment
of suitability of the project, especially in case of new project:
i) Local attitude towards industry
ii) Education, recreational and civic background
iii) Availability of the local sites
The pre-feasibility study can be considered a combination of different steps which permit
determination of the fact whether or not a complete and detailed feasibility study should be
undertaken. The pre-feasibility is an essential and not a wasteful exercise. It should be noted that
since the pre-feasibility study is a screening device, it can be discontinued at any point, where
information gathered indicates the rejection of project idea.

8. Feasibility Study in SDLC

The project analysis and its impact may be studied in relation to all types of projects, whether these
are related with manufacturing, marketing or even in case of development of information system
for the organization. This necessarily involves some special considerations like input devices,
transaction processing, communication channels, data base management, etc. rather than raw
material, labour, machinery, etc. which are considered in a pure manufacturing project. These types
of projects are under different legal umbrella including Information Technology Act, Cyber laws,
etc. This portion of module discusses the overall related aspects and issues.
The system development projects basically involve SDLC. The System Development Life Cycle
(SDLC) includes set of activities which are conducted by system analysts, designers and users to
develop and implement the required information system. The SDLC can also be viewed as
systematic process oriented system development framework. There are mainly seven activities
which together form the SDLC. These are:

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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The testing of feasibility is performed after the identification of options. These options are tested
for the following:
1. Technical Feasibility
2. Economic Feasibility
3. Operational Feasibility
4. Behavioral Feasibility
5. Resource Feasibility
6. Legal Feasibility
7. Schedule Feasibility

Technical Feasibility
This feasibility is related to analysis of ability and capability of different types of hardware and
software for viable options. In this, analyst also evaluates whether the proposed system is feasible
with existing or expected computer hardware and software technologies. The analysts analyze
various issues like:
 Is existing technology more viable or new technology will be better for option under
consideration?
 Can the technology under consideration handle the required volume of data efficiently?
 Will this system under consideration expandable as per the future requirements?
 Will there be sufficient efficiency, accuracy and reliability in operation when the
considered technology used

Some of the key technology consideration in above analysis is:

Consideration Alternatives
1. Types of input devices for data entry Key Boards, Scanner, Touch Screen
2. Output Medium Display Device, Printer, etc.
3. Types of Transaction Processing Batch or Direct
4. Communication Channels for Data Telephone Line, Cable, etc.
Communication
5. Types of Database Management File System or DBMS
6. Type of Central Processor Micro, Mini or Mainframe

A technically feasible system may not be economically viable or the staff may not be technically
competent to operate the system.

Economic Feasibility

This feasibility considers all incremental costs and benefits if the system option is implemented. It
has many intangible benefits therefore it is difficult to compute. The cost of hardware, software and
investigations are considered whereas benefits will include reduced costs and other benefits.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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Operational Feasibility
This feasibility is related with the operational parameters, in terms of use of computer facilities by
users i.e. employees, customers and suppliers, etc. It involves following analysis:
 Is there sufficient support from the users and management for the system to be developed?
 Are the users involved in the planning and development of the project? If yes, then there
will be less resistance and more adaptability for better technology.
 Are the current business methods are acceptable to users?
 Will there be loss of control, slower processing in some areas if the system implemented
etc.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY
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Behavioral Feasibility
In this feasibility, the issues related to the system environment, primarily; collection of inputs is
analysed whether the required inputs will be available on time for processing, mainly when inputs
are to be provided by external entities (supplier, banks, etc.)

Resource Feasibility
Although the issues addressed in this feasibility are covered, to some extent, in the operational and
technical feasibilities. In this feasibility, primarily the issues related to availability of human
resources are determined; mainly when system is to be maintained in non-metro locations.

Legal Feasibility
This is mainly performed to determine whether there will be any conflict between new proposed
system and organization legal obligations.

Schedule Feasibility
This feasibility is related with the time estimates that an option under analysis will take.
Management may take decision on this basis whether proposed time is acceptable for system
development or not.

9. Summary

 Feasibility analysis is a process undertaken to determine whether the project idea is worth
proceeding with or not.
 The feasibility analysis involves detailed analysis and evaluation of the project from all
relevant angles.
 UNIDO has divided project cycles and phases as Pre-investment phase, Investment phase
and Operational Phase.
 The feasibility study must be made only after pre-feasibility study, if results are positive
and affirmative
 The fundamental activities involved in preparation of feasibility study are equally
applicable to any type of project since these activities are very generic in nature.
 The major areas of feasibility study are Technical, Economic, Legal, Operational ,
Scheduling, Market and real estate feasibility, Resource feasibility, Cultural feasibility,
Financial feasibility and Market research study.

BUSINESS PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS

ECONOMICS MODULE NO. 6 : FEASIBILITY STUDY