Chapter

Seven
Feasibility Studies
Reading Assignment
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An important work in project
evaluation in developing
countries

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 business success

 Establishing a feasibility study of projects is a

critical factor in business success.
 Many factors can be involved and invariably
luck can and probably will play a hand.

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 Key factor

A key factor in any feasibility study must be

ensuring that you are dealing with correct
facts, correct assumption, and up to date
financial data.

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Countless feasibility studies

 Any project which have passed a

countless feasibility studies, have been
sunk by unexpected events such as flood.
 Many projects fail because of incorrect
assumptions or because assumptions were
based on incorrect facts.

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 Preliminary investigation

 When complex problems or opportunities are

to be defined, it is generally desirable to
conduct a preliminary investigation called a
feasibility study.
 The primary objectives of the feasibility study
is to assess three types of feasibility

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 Types of feasibility Study

1. Technical feasibility
can a solution be supported with the existing
technology or not?
2. Economic feasibility
is the existing technology cost effective?
3. Operational feasibility
Will the solution work in the organization if
implemented?
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 The Components of a
Feasibility Study

1. Description of the Business: The product or

services to be offered and how they will be
delivered.
2. Market Feasibility: Includes a description of
the industry, current market, anticipated
future market potential, competition, sales
projections, potential buyers, etc.
3. Technical Feasibility: Details how you will
deliver a product or service (i.e., materials,
labor, transportation, where your business will
be located, technology needed, etc.).
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 continue
4. Financial Feasibility: Projects how much start-up
capital is needed, sources of capital, returns on
investment, etc.
5. Organizational Feasibility: Defines the legal and
corporate structure of the business (may also
include professional background information
about the founders and what skills they can
contribute to the business).
6. Conclusions: Discusses how the business can
succeed. Be honest in your assessment because
investors won’t just look at your conclusions they
will also look at the data and will question your
conclusions if they are unrealistic. 9
 Feasibility Study

A Feasibility Study is the analysis of a

problem to determine if it can be solved
effectively.
 The results determine whether the solution
should be implemented.
 This activity takes place during the project
initiation phase and is made before
significant expenses are engaged.
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 Definition of Feasibility
Studies
A feasibility study is an evaluation of a
proposal designed to determine the difficulty
in carrying out a designated task. Generally, a
feasibility study precedes technical
development and project implementation.

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 Definition of Feasibility
Studies
A feasibility study looks at the viability of
an idea with an emphasis on identifying
potential problems and attempts to answer
one main question: Will the idea work and
should you proceed with it?

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 Objective

 Thefeasibility study answers the basic

questions: is it realistic to address the
problem or the opportunity under
consideration?
 And it produce a final proposal for the
management, this final report might
includes:

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Feasibility includes

1. Project name
2. Problem or opportunity definition
3. Project description
4. Expected benefit
5. Consequence of rejection
6. Resource requirements
7. alternatives
8. Other consideration
9. Theorization
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 Five common factors
(TELOS)
1. Technology and system feasibility
2. Economic feasibility
3. Legal feasibility
4. Operational feasibility
5. Schedule feasibility

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 1. Technology and system
feasibility

 The assessment is based on an outline design of

system requirements in terms of Input, Processes,
Output, Fields, Programs, and Procedures. This can
be quantified in terms of volumes of data, trends,
frequency of updating, etc. in order to estimate
whether the new system will perform adequately or
not this means that feasibility is the study of the
based in outline.
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 2. Economic feasibility

 Economic analysis is the most frequently used method

for evaluating the effectiveness of a new system.
More commonly known as cost/benefit analysis, the
procedure is to determine the benefits and savings
that are expected from a candidate system and
compare them with costs. If benefits outweigh costs,
then the decision is made to design and implement
the system. An entrepreneur must accurately weigh
the cost versus benefits before taking an action. Time
Based: Contrast to the manual system management
can generate any report just by single click .
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 3. Legal feasibility

 Determines whether the proposed

system conflicts with legal
requirements, e.g. a data processing
system must comply with the local Data
Protection Acts.

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 4. Operational feasibility

 Is a measure of how well a proposed system solves the

problems, and takes advantages of the opportunities
identified during scope definition and how it satisfies
the requirements identified in the requirements
analysis phase of system development.[1]

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 5.schedule feasibility
 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. Schedule 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. You need to determine
whether the deadlines are mandatory or desirable.

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Other feasibility factors

 Market and real estate feasibility

 Resource feasibility
 Cultural feasibility

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 Market and real estate
feasibility

 Market Feasibility Study typically involves testing geographic

locations for a real estate development project, and usually
involves parcels of real estate land. Developers often conduct
market studies to determine the best location within a
jurisdiction, and to test alternative land uses for a given
parcels. Jurisdictions often require developers to complete
feasibility studies before they will approve a permit
application for retail, commercial, industrial, manufacturing,
housing, office or mixed-use project. Market Feasibility takes
into account the importance of the business in the selected
area.
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 Resource feasibility

 Thisinvolves questions such as how much

time is available to build the new system,
when it can be built, whether it
interferes with normal business
operations, type and amount of resources
required, dependencies, etc. Contingency
and mitigation plans should also be stated
here.
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 Cultural feasibility

 Inthis stage, the project's alternatives are

evaluated for their impact on the local and
general culture. For example,
environmental factors need to be
considered and these factors are to be well
known. Further an enterprise's own culture
can clash with the results of the project.

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Description of the Project

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Identification and exploration of
business scenarios

 .Identify alternative scenarios or business

models of what the project will entail,
how it will be organized, and how it will
generate profits. These may come from
the idea assessment or market assessment
that you may have already completed.
 Eliminate scenarios that don’t make
sense.
 Flesh-out the scenario(s) that appear to
have potential for further exploration.
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 Define the project and
alternative scenarios
 Describe the type and quality of product(s) or
service(s) to be marketed.
 Outline the general business model (i.e. how
the business will make money).
 Include the technical processes including size,
location, kind of inputs, etc.
 Specify the time horizon from the time the
project is initiated until it is up and running at
capacity.
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 Relationship to the surrounding
geographical area.

 Outline
the economic and social
impact on local communities.
 Describethe environmental impact on
the surrounding area

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Market Feasibility

 This can be based on a market

assessment that you may have already
completed.

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Industry description

 Describe the size and scope of the industry, market

and/or market segment (s).
 Estimate the future direction of the industry, market
and/or market segment (s).
 Describe the nature of the industry, market and/or
market segment (s). Is it stable or going through rapid
change and restructuring?
 Identify the life-cycle of the industry, market and/or
market segment (s). Is it emerging, growing, mature,
declining?

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 Industry competitiveness

 Describe the industry concentration. Are there just a few

large producers or many small producers?
 Describe the major competitors? Will you compete directly
against them?
 Analyze the barriers to entry of new competitors into the
market or industry. Can new competitive enter easily?
 Analyze the concentration and competitiveness of input
suppliers and product/service buyers.
 Describe the price competitiveness of your
product/service.
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 Market potential

 Identify whether the product be sold into a commodity

market or a differentiated product/service market.
 Identify the demand and usage trends of the market or
market segment in which the product or service will
participate.
 Examine the potential for emerging, niche or segmented
market opportunities.
 Explore the opportunity and potential for a branded
product.
 Assess market usage and your potential share of the market
or market segment.
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Access to market outlets

 Identifythe potential buyers of the

product/service and the associated
marketing costs.
 Investigate the product/service
distribution system and the costs
involved.

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 Sales projection

 Estimate sales or usage.

 Carefullyidentify and assess the accuracy
of the underlying assumptions in the sales
projection.
 Project sales under various assumptions
(i.e. selling prices, services provided, etc.).

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 Technical Feasibility

 Facility needs.
 Estimate the size and type of production
facilities.
 Investigate the need for related
buildings, equipment, rolling-stock, etc.

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Suitability of production
technology

 Investigate and compare technology

providers.
 Determine reliability and
competitiveness of technology (proven
or unproven, state-of-the-art, etc.).
 Identify limitations or constraints of
the technology.
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 Availability and suitability of
site
1. Investigate access to:
2. raw materials
3. transportation
4. labor
5. production inputs (electricity, natural gas, water, etc.)
6. Investigate potential emissions problems.
7. Analyze other environmental impacts.
8. Identify regulatory requirements.
9. Explore economic development incentives.
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Raw materials

 Estimate the amount of raw materials needed.

 Investigate the current and future availability and
access to raw materials.
 Assess the quality and cost of raw materials.

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Other inputs

 Investigate the availability of labor including wage

rates, skill level, etc.
 Assess the potential to access and attract qualified
management personnel.

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Financial/Economic
Feasibility

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Estimate the total capital
requirements
1. Assess the “seed capital” needs of the business
project during the investigation process and
start-up, and how these needs will be met.
2. Estimate capital requirements for facilities,
equipment and inventories.
3. Estimate working capital needs.
4. Estimate start-up capital needs until revenues
are realized at full capacity.
5. Estimate contingency capital needs due to
construction delays, technology malfunction,
market access delays, etc.
6. Estimate other capital needs.

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Estimate equity and credit
needs

 Estimate equity needs.

 Identify alternative equity sources and
capital availability - family, producers, local
investors, angle investors, venture capitalists,
etc.
 Estimate credit needs.
 Identify and assess alternative credit sources
- banks, government (i.e. direct loans or loan
guarantees), grants and local and state
economic development incentives.
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 Budget expected costs and
returns of various alternatives
 Estimate the expected revenue, costs, profit margin and expected net
profit.
 Estimate the sales or usage needed to break-even.
 Estimate the returns under various production, price and sales levels. This
may involve identifying “best case”, “typical”, and “worst case” scenarios
or more sophisticated analysis like a Monte Carlo simulation.

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 Assess the reliability of the underlying assumptions

of the analysis (prices, production, efficiencies,
market access, market penetration, etc.)
 Benchmark against industry averages and/or
competitors (cost, margin, profits, ROI, etc.).
 Identify limitations or constraints of the economic
analysis.
 Calculate expected cash flows during the start-up
period and when the business reaches capacity.
 Prepare pro forma income statement, balance
sheet, and other statements of when the business
is fully operating.
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Organizational/Managerial
Feasibility

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Business structure

 Identify the proposed legal structure of the business.

 Outline the staffing and governance structure of the
business along with lines of authority and decision
making structure.
 Identify any potential joint venture partners,
alliances or other important stakeholders.
 Identify the availability of skilled and experienced
business managers.
 Identify the availability of consultants and service
providers with the skills needed to realize the
project, including legal, accounting, industry
experts, etc.
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Business founders

 Character matters - are the people

involved of outstanding character?
 Do the founders have the “fire in the belly”
required to take the project to completion?
 Do the founders have the skills and ability
to complete the project?
 What key individuals will lead the project?
 Is there a reward system for the founders?
Is it based on business performance?
 Have the founders organized other
successful businesses?
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Study Conclusions

 Identify and describe alternative business scenarios and

models.
 Compare and contrast scenarios based on goals of the
producer group.
 Outline criteria for decision making among alternatives.

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Why Are Feasibility Studies
so Important?
1. The information you gather and present
in your feasibility study will help you:
2. List in detail all the things you need to
make the business work;
3. Identify logistical and other business-
related problems and solutions;
4. Develop marketing strategies to convince
a bank or investor that your business is
worth considering as an investment; and
5. Serve as a solid foundation for
developing your business plan.
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 Even if you have a great business idea you still have to

find a cost-effective way to market and sell your
products and services. This is especially important for
store-front retail businesses where location could make
or break your business.
 For example, most commercial space leases place
restrictions on businesses that can have a dramatic
impact on income. A lease may limit business
hours/days, parking spaces, restrict the product or
service you can offer, and in some cases, even limit the
number of customers a business can receive each day.
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Feasibility studies V
business plans
 A feasibility study is designed to discover if a
business is "feasible" or not. It will answer
questions such as "will your idea work?" [new
window] It is an essential first step before
spending money and time on more detailed
plans. The information gathered is not wasted
as it can be incorporated into the Business
Plan.
 On the other hand a Business Plan is a more
detailed and in depth document that
incorporates the information gained from a
feasibility study plus specific timelines,
detailed budgets with forecasts and a
detailed financial strategy.
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Feasibility before business
plan
 Before you begin writing your business plan you need to identify how,
where, and to whom you intend to sell a service or product. You also
need to assess your competition and figure out how much money you
need to start your business and keep it running until it is established.

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Feasibility is a tool for a
business plan
 Feasibility studies address things like where and how
the business will operate. They provide in-depth details
about the business to determine if and how it can
succeed, and serve as a valuable tool for developing a
winning business plan.

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The feasibility study
framework
 The document should include sections on:
 Personal details
 The Business Idea
 Critical factors
 Market analysis
 Resource requirements
 Financial viability
 Capital requirements

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