Feasibility study:

The Feasibility Study

The Feasibility study is an analysis of possible alternative solutions to a problem and a
recommendation on the best alternative. It can decide whether a process be carried out by a new
system more efficiently than the existing one.
The feasibility study should examine three main areas; - market issues, - technical and organizational
requirements, - financial overview. The results of this study are used to make a decision whether to
proceed with the project, or table it. If it indeed leads to a project being approved, it will - before the
real work of the proposed project starts - be used to ascertain the likelihood of the project's success.
• A feasibility study should provide management with enough information to decide:
1. Whether the project can be done;
2. Whether the final product will benefit its intended users;
3. What are the alternatives among which a solution will be chosen (during subsequent phases)?
4. Is there a preferred alternative?

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?

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.

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.

Why Are Feasibility Studies so Important?

The information you gather and present in your feasibility study will help you:

 List in detail all the things you need to make the business work;
 Identify logistical and other business-related problems and solutions;
 Develop marketing strategies to convince a bank or investor that your business is worth
considering as an investment; and
 Serve as a solid foundation for developing your business plan.

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.

 Objectives:
To find out if an system 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 the alternatives are (so that a selection can be made in subsequent phases)
Whether there is a preferred alternative
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

Content of a feasibility study

Things to be studied in the feasibility study:
• The present organizational system
• Stakeholders, users, policies, functions, objectives...
• Problems 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 problems
• Different levels/types of computerization for the solutions
• Advantages and disadvantages of the alternatives
Needs Analysis
A needs analysis should be the first undertaking of a feasibility study as it clearly defines the project
outline and the clients' requirements. Once these questions have been answered the person/s
undertaking the feasibility study will have outlined the project needs definition. The following
questions need to be asked to define the project needs definition: What is the end deliverable? What
purpose will it serve? What are the environmental effects? What are the rules and regulations? What
standards will we be measured against? What are the quality requirements? What is the minimal
quality requirements allowed? What sustainability can we expect? What carry over work can we
expect? What are the penalty clauses? How much do we need to outsource? How much do we need
to insource?

Who uses it?

Project Leader, Business Analyst, Configuration Manager, Development Manager, Project Manager, Technical
Architect, IT Manager, System Administrator, Test Manager, Documentation Manager, Technical Writers, System
Administrator.
PURPOSE OF FEASIBILITY STUDY

The Feasibility Study analyses potential solutions against a set of requirements, evaluates their ability to meet these
objectives, describe a recommended solution, and offer a justification for this selection. It should address issues that
could influence the success of a potential project and assess the advantages and disadvantages of each option so
they can be ranked.

SCOPE OF FEASIBIL;ITY ANALYSIS

In general terms, the elements of a feasibility analysis for a project should cover the following:

Need Analysis: Pertinent questions that should be asked include:

 Is the need significant enough to justify the proposed project?

 Will the need still exist by the time the project is completed?

 What are the alternate means of satisfying the need?

 What are the economic, social, environmental, and political impacts of the need?

Process Work: What will be required to satisfy the need?

Cost Estimate: Estimating project cost to an acceptable level of accuracy.

Financial Analysis: An analysis of the cash flow profile of the project.

Project Impacts: Environmental, social, cultural, political, and economic impacts may be some of the factors that will
determine how a project is perceived by the public.

Conclusions and Recommendations: Overall outcome of the project analysis.

Preparation of feasibility reports,

Since good planning is a pre-requisite for survival and success of any business, i’ll like to discuss
how to prepare a good Feasibility Report.
Without proper planning, a business may head towards failure if corrective measures are not
taken in time. A “Feasibility Report” is simply a business plan. Feasibility Report is a detailed
study that examines the profitability, feasibility and effectiveness of a proposed investment
opportunity.

The report, no matter how elaborate, should be prepared before one undertakes any business or
expands the existing one. Feasibility Report can be prepared by the prospective investor or
consultancy firms who charge fees depending on the value of the project and how elaborate is the
proposed investment opportunity.

Based on the Feasibility Report, the entrepreneur can decide to accept or reject the project. If the
project is viable and acceptable, the entrepreneur has to estimate initial capital outlay and decide
on where and how to raise the funds.

The Uses of Feasibility Report

The Feasibility Report can be used by the entrepreneur in the following areas:

 To meet the stipulated requirements of financial institutions. For instance, banks and
other financial institutions giving loans to start a business executives demands for a
Feasibility Report of the proposed investment.
 To provide the basic information for effective decision making with respect to the
proposed investment. By showing the market potentialities, technical and financial
implications of the proposed opportunities, the feasibility report enable the entrepreneur
to accept or reject the project.
 To assist the entrepreneur in developing future plans for the organization.
 To serve as the basic for measuring the performance of the proposed business.

Components of a Feasibility Report

No two feasibility studies have identical components. However, there are certain critical aspects
that must be present in a good feasibility report.

These aspects include: The nature of the business, Management, Teams, Financial and
Economic Analysis and Marketing plan. In other words, the major areas covered by a feasibility
study can be divided into nine major areas namely:

1. Introduction
2. Description of the business
3. Market consideration – A preliminary Evaluation
4. Management Team
5. Technical Specifications and Production plan
6. Marketing Plans
7. Examination of the critical risks and problems
8. Financial and Economic plans
9. Evaluation and conclusion

What are the features and qualities to be considered while preparing the project feasibility
report?

An inchoate screening of a project idea bequeaths several insights for an in depth

investigation. In order to scrutinize further the project proposal. Hence there is a need to
conduct a feasibility study and need to estimate the cost of such detailed study. The study is
conducted quite exhaustively by exploring many factors related to the project.
________________________________________________________________________
______

(a) Scope of the study:

Fundamentally before taking any project the scope of the project and the magnitude should
be clearly spelled out based on the requirement of the project. Hence without having a clear
vision of the project objective it is impossible to make a successful project. All the resource
needed for the project should be presented in the report clearly, scheduled completion date
etc.

(b) Procurement of data for the studies:

Though the investment and production costs should be estimated as accurately as possible,
the costs and time involved in obtaining the data are not always precise and it therefore
sometimes it is necessary for the project team to rely on assumptions.

(c) Verification of alternatives and assumptions:

This is one of the most crucial steps in project feasibility analysis. When various alternatives
are being provided with regarding choice of technology, capacity, financing etc. In fact the
foundations will be strong when the following alternatives are supplied along with the details
of the project profile:

1. Proposed cost structure.

2. Work schedules.
3. Exchange mechanism.
4. Continent factors.

(d) Proposed cost structure:

The spending for the project deliverables are always in terms of costs, irrespective of the
nature of the product such as research costs, labour costs, overhead cost etc. Therefore it
would be ideal to label all the necessary expenditure incurred during the project
implementation, which deserves to be treated as cost. The production cost depends on
availability of the information about the required resources, manpower, work programme,
type of technology, available resources, and distribution costs, skills of the labour.

(e) Scheduling the operations:

Deadline for the completion of the project is also an important factor in project feasibility
study. New techniques such as PERT, GERT, CPM, ZBB etc are used for effective time
management, in order to be precise in their completion date.

(f) Project team:

It is advisable to prepare the report under the supervision of experts since they are aware
time constraints, funds, and resource requirement for the project. To conduct a feasibility
study the ideal team members would comprise.
1. Industry economist.
2. Market analyst.
3. Management expert.
4. Technical head.
5. Project Manager.

(g) Project meant for expansion:

Feasibility studies for a new project might be slightly different from already existing projects
whose interest is to expand their scale of operation and the scope of coverage. Depending
upon the size of the project, it should be clear from the new proposal whether the existing
internal organizational structure and supporting facilities will be sufficient or need some
adjustments.

(h) Cost studies:

Calculation of pre-investment costs varies from project to project. Since cost are vital
determinants of various types of pre-investment studies it is preferable to indicate the
magnitude of the cost.

Selection of factory location,

One recent and most talked about example of the problem related to "Plant Location.":
Tata's Nano Singur plant, has come under fire from farmers and villagers for forceful acquisition
of agricultural land . This plant was established in Singur but due to opposition by a political
party , they suspended work at Singur plant - in which they invested $350m and shifted their
whole plant to Sanand, Gujrat.

Tata Motors, such a huge company, faced a problem regarding its plant location. It has a huge
capital base and such a reputation that they can purchase any land anywhere so have you ever
thought that why they first picked SINGUR for their factory and now Sanand? And why actually
they faced the problem ?

So following is the explanation for the same.

Plant location is the location where an industry wants to start its operations. It is the selection of
suitable location or site .Various types of industries needs to consider various factors in this
respect. If the industry is engaged in "heavy manufacturing " i.e. these are the industries which
are relatively large and requires a lot of space. And as a result, they are expensive to construct.
Important factors in the location decision for these plants are construction cost, modes of
transportation , means of waste disposal and labour availability. And if it is a "light industry" i.e.
the industry which is engaged in producing electronic equipment and components, parts etc
.These type of industry doesn't require large storage capacity, so for them proximity to customer
is important. And if the industry is warehouse or distribution centre , then they just require huge
space .in addition to all the defined factors.

So we can summarize their selection criteria in following ways

o Government regulations (Excise duties, taxes )

o Labour(availability , cost and unions)
o Proximity to customers
o Construction cost
o Availability of land
o Environmental regulations
o Climate
o Raw material availability
o Transportation cost
o Topography of land (i.e. basic characteristic of land)

In addition to all these factors, if companies tries to locate a industry beyond national borders,
then they have to consider following factors also i.e.

o Government stability
o Political and Economic systems
o Exchange rates
o Culture
o Export and import regulations
o Available technology

But for the selection of one of the most favorable location for the plant, a search team is hired for
site selection for different facilities and this evaluation process requires large amount of data and
information relative to different location factors. Various location analysis techniques have been
established for the selection of location. Following are the cost oriented location analysis
techniques that can be used for identifying the plant site from the available set of sites

o Dimensional analysis : In this technique, relative merit of different cost are considered for
identifying the facility location.
o Brown and Gibson model : This model considers critical, objective and subjective factors for
the evaluation of sites.
o Factor rating method : This method is the most commonly used method. It involves factor
rating and location rating .
o Point rating method :This method consider to give the rating to each factor on the basis of
favourable , average and unfavourable .
o Break even analysis : It is a graphical representation that shows relationship between cost and
revenue.

So, after taking all these factors in relation to various sites and by the application of various
methods by the experts, a selection of a site is being done.

Selection of a site is not as simple as it seems to be.

Presentation Transcript
Plant location :
Plant location Meaning-the establishment of an industry at a particular place. It is of 2 types- Localization
/centralization-means concentration of similar type of industries at some particular place. E.g. textile in Mumbai.
Delocalization /Decentralization-means spreading of similar type of industries at different places. E.g. banking
industries.

Factors affecting location & site decisions :

Factors affecting location & site decisions Availability of raw material Nearness to the potential market Near to the
source of operating requirements like electricity, disposal of waste, drainage facilities. Supply of labor Transport &
communication facilities Integration with other group of companies Suitability of land & climate Availability of housing,
other amenities & services Local building & planning regulations Safety requirements Others like low interest on
loans, special grants, living standards

selection of the site for the factory :

selection of the site for the factory Known as location analysis where firstly some geographical area is selected &
from that area a particular site is selected for the establishment of the plant. Methods for the evaluation of plant
location- Involving quantitative factors- Comparative cost chart, b. dimensional analysis. 2. Comparison of qualitative
factors.

Comparative cost chart :

Comparative cost chart Is appropriate where the location problem concerns the placement of a single plant. This is
based on location cost summary chart. A comparative chart of total costs involved in setting up a plant of desired size
is prepared.

Slide 5:
The total cost is represented by the height of column for each location. we select a location for which total cost is
minimum. The cost summary chart has advantage of clarity in presentation. but analysis is restricted to certain
specified factors only. Least cost centre analysis- Here transportation cost associated with various location
alternatives is considered. Limitation of these techniques- 1.Choice of plant location assumed to be entirely
dependent upon minimization of operational costs. 2.Operational costs are assumed to be linearly related to distance
involved.
Dimensional analysis :
Dimensional analysis It involves calculation of the relative merits or cost ratios for each of the factors, giving each of
the cost factor an appropriate weightage by means of an index to which the cost ratio is raised & multiplying these
weighted ratios in order to arrive at a figure on the relative merits of alternative sites.

Slide 7:
Let Cm1,Cm2,Cm3,…..Cmz are the costs associated with site M for various cost factors. Cn1,Cn2,Cn3,…….Cnz are
of site N.W1,W2,W3,…….Wz are weightage for various factors. Merit of location M=(Cm1)W1*(Cm2)W2*…(Cmz)Wz
Merit of location N=(Cn1)W1*(Cn2)W2*…(Cnz)Wz Relative merits of sites M & N are- merit of M merit of N If this
value is > 1, then select site M & vice-versa. Advantages- it compares both subjective & objective factors & gives a
quantitative figure.

Comparison of qualitative factors. :

Comparison of qualitative factors. These are the factors to which cost values can’t be assigned. Like lack of good
schools, community attitude. These can be termed as good or excellent. Clearly location B appears to be better one.

Ranking & weight method :

Ranking & weight method Various locations are ranked acc. To their contribution Various factors are assigned
weights acc. To their importance Weights are then multiplied with rank assigned Total of these products for each
location is calculated Location having max. total is then selected.

Slide 10:
Advantages &disadvantages of urban, rural & sub-urban sites for a plant-

Backward area & industrial policy :

Backward area & industrial policy In the facilities location problems, the industrial policies of the governments are
very important inputs in the overall consideration. In India, the industrial development of backward areas for balanced
regional development of the country has always been emphasized. This has been attempted mainly through: 1.
Licensing policy (practice of leasing a legally protected property to another party ) 2. Location of public sector projects
3. Investment subsidy (money granted by the State to keep down the price of commodities) 4. Concessional finance
(by IDBI, IFCI , ICICI) 5. Concession on income tax import duty etc and 6. Setting up of industrial estates (property
consisting of much land )

Backward area & industrial policy contd. :

Backward area & industrial policy contd. All the districts in the country have been classified into four categories: A. No
industry districts,B. Moderately backward districtsC. Least backward districts, andD. Non-backward districts The A, B,
and C categories are eligible for subsidy on investment in fixed assets in an industrial unit, as given below: Category
Percent Subsidy Maximum Limit Per unit A 25 Rs 25 lakhB 15 Rs15 lakhC 10 Rs 10 lakhD not eligible for subsidy

Global locations :
Global locations World-wide locations are called global locations. E.g. MNC’s are setting up their branches in India &
Indian companies are extending their operations in other countries like - USA, EUROPE , CHINA. virtual proximity –
Social networking at a distance .with the advances in telecommunications technology , a firm can be in virtual
proximity to its customers.

Virtual Factory :
Virtual Factory Many firms based in USA and UK—in the service sector and in the manufacturing sector—often
outsource part of their business processes to foreign locations such as India. Thus, instead of one's own operations,
a firm could use its business associates' operations facilities. In a way, the Indian BPO firm is that foreign-based
company's 'virtual service factory'. So, one's business associate's operations facilities is called virtual factory.

REASONS FOR A FOREIGN LOCATION :

REASONS FOR A FOREIGN LOCATION Reaching the Customer -One obvious reason for locating a facility abroad
is that of capturing a share of the market expanding worldwide. Other Tangible Reasons- The host country may
have/offer substantial tax advantages compared to the home country. The costs of manufacturing and/or running
operations may be substantially less in that foreign country. This may be due to Low labor cost Low raw material cost
Better availability of inputs The co. may overcome the tariff (table of fixed charges) barriers by setting up a
manufacturing plant in foreign country rather than exporting the items to that country. 3. Intangible reasons-

Slide 16:
Customer-related reasons- firm’s customer may feel secure that firm is more accessible. Firm may be able to give a
personal touch. Firm may understand customer’s requirements better. It may discover other potential customers in
abroad. Organizational learning related reasons Firm can learn advanced technology Firm can learn from its
customers abroad It can also learn from its competitors operating in abroad. It may also learn from its suppliers
abroad.

Plant layout :
Plant layout Meaning- Plant layout is the physical arrangement of industrial facilities. It involves the allocation of
space & the arrangement of equipment in such a manner that overall operating costs are minimized.

Objectives of plant layout :

Objectives of plant layout An efficient layout can be instrumental in the accomplishment of the following objectives-
Economies in materials, facilitate manufacturing process & handling of semi-finished & finished goods. Proper &
efficient utilization of available floor space. To avoid congestion & bottlenecks. Provision of better supervision &
control of operations.

Objectives of plant layout cont. :

Objectives of plant layout cont. 5. Careful planning to avoid frequent changes in layout which may result in undue
increase in cost of production. 6. To provide adequate safety to the workers from accidents. 7. To meet the quality &
capacity requirements in the most economical manner. 8. Provision of medical facilities & cafeteria at suitable &
convenient places. 9. To provide efficient material handling system. 10. To suggest the improvements in production
process & work methods.
Principles of plant layout :
Principles of plant layout Principle of integration (of 5M’s) Principle of minimum distance Principle of cubic space
utilization( both horizontal & vertical space). Principle of flow( must be forward no backtracking) Principle of maximum
flexibility Principle of safety, security & satisfaction Principle of minimum handling.

Types of plant layout :

Types of plant layout Product layout Process layout Fixed Position/ Stationary layout Product layout- Layout that uses
standardized processing operations to achieve smooth, rapid, high-volume flow Here machines are arranged acc. To
the needs of product & in the same sequence as the operations are necessary for manufacture. E.g. ‘back office’ of
services such as banks and insurance companies.

Product Layout :
Raw materials or customer Finished item Station 2 Station 3 Station 4 Material and/or labor Station 1 Material and/or
labor Material and/or labor Material and/or labor Used for Repetitive or Continuous Processing Product Layout

Advantages of Product Layout :

High rate of output Low unit cost Labor specialization Low material handling cost High utilization of labor and
equipment Established routing and scheduling Short processing time Advantages of Product Layout

Disadvantages of Product Layout :

Creates dull, repetitive jobs Poorly skilled workers may not maintain equipment or quality of output Fairly inflexible to
changes in volume Highly susceptible to shutdowns Needs preventive maintenance Require large capital investment
Disadvantages of Product Layout

A U-Shaped Production Line :

A U-Shaped Production Line

Slide 26:
Process layout- Layout that can handle varied processing requirements Here all machines performing similar type of
operations are grouped together at one location in the process layout. Thus here facilities are grouped together acc.
To their functions. E.g. all drilling machines are located at one place known as drilling section.

Process Layout :
Used for Intermittent processing Job Shop or Batch Process Layout (functional) Process Layout

Product Layout :
Product Layout (sequential) Used for Repetitive Processing Repetitive or Continuous Product Layout
Advantages of Process Layouts :
Can handle a variety of processing requirements Machines breakdown doesn’t result in shutdown. Equipment used is
less costly Wide flexibility in production facilities. Each production unit of system works independently. High utilization
of facilities Variety makes the job interesting. Advantages of Process Layouts

Disadvantages of Process Layouts :

In-process inventory costs can be high Challenging routing and scheduling Equipment utilization rates are low
Material handling is slow and inefficient & is more. More space is required Longer processing time Back tracking may
occur. Disadvantages of Process Layouts

Comparison of product & process layout :

Comparison of product & process layout

Slide 32:
Stationary layout- Layout in which the product or project remains stationary, and workers, materials, and equipment
are moved as needed. E.g. construction of DAMS. The product, because of its size and/or weight, remains in one
location and processes are brought to it.

Factors affecting plant layout :

Factors affecting plant layout Nature of product- e.g. some products need air-conditioned plants. Size of output- For
bulk-product/line layout For small-functional layout Nature of manufacturing system- For intermittent-functional layout
For continuous-product/line layout Localization of plant- e.g. there will be different transportation arrangement if site is
located near railway line. Machines or equipment- e.g. heavy machines need stationary layout Climatic conditions,
need of light, temperature also affect design of layout.

CRAFT: COMPUTER PROGRAM TO SOLVE PROCESS LAYOUT PROBLEMS :

CRAFT: COMPUTER PROGRAM TO SOLVE PROCESS LAYOUT PROBLEMS CRAFT- Computerized Relative
Allocation of Facilities Technique A CRAFT program basically has the following elements: It reads the load summary
(the number of loads carried between pairs of departments), the costs per unit load per unit distance for the handling
of materials between various pairs of departments. It computes the centres of the departments and computes the
various inter-departmental distances. On the basis of the above it computes the total material handling costs per unit
period for the layout.

Slide 35:
4. It makes paired and/or three-way exchanges between the different departmental locations so as to produce a valid
and improved layout pattern. The improvement is in terms of reducing the total material handling costs. 5. The
computer prints out the scaled layout pattern and the corresponding cost. The ultimate aim of the CRAFT program is
to minimize the material handling costs for the entire plant.

Capacity Planning :
Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic
questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?
Types of Capacity :
Types of Capacity Design capacity maximum output rate or service capacity an operation, process, or facility is
designed for Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output rate of output actually achieved--cannot exceed effective capacity.

Efficiency and Utilization :

Efficiency and Utilization Both measures expressed as percentages

Efficiency/Utilization Example :
Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36
units/day = 72% Design capacity 50 units/day Efficiency/Utilization Example Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day Actual output = 36 units/day

Objectives of capacity planning :

Objectives of capacity planning To satisfy the future demand of products without any shortage To find the optimal
capacity of the facility so that the sum of costs of under-capacity & over- capacity is the minimum. To keep the initial
investment in the facility as low as possible to achieve lower break-even volume Investment in facility capacity are
long-term & can’t be reversed easily.

Variations in Demand Relative to Capacity :

Variations in Demand Relative to Capacity

Determinants of Effective Capacity :

Determinants of Effective Capacity Facilities Product and service factors Process factors Human factors Operational
factors Supply chain factors External factors

Steps for Capacity Planning :

Steps for Capacity Planning Estimate future capacity requirements Evaluate existing capacity Identify alternatives
Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor
results

Strategies for Shifting Demand to Match Capacity :

Strategies for Shifting Demand to Match Capacity Use signage to communicate busy days and times Offer incentives
to customers for usage during non-peak times Take care of loyal or regular customers first Advertise peak usage
times and benefits of non-peak use Charge full price for the service--no discounts Use sales and advertising to
increase business from current market segments Modify the service offering to appeal to new market segments Offer
discounts or price reductions Modify hours of operation Bring the service to the customer Demand Too High Demand
Too Low Shift Demand
Strategies for Flexing Capacity to Match Demand :
Strategies for Flexing Capacity to Match Demand Stretch time, labor, facilities and equipment Cross-train employees
Hire part-time employees Request overtime work from employees Rent or share facilities Rent or share equipment
Subcontract or outsource activities Perform maintenance renovations Schedule vacations Schedule employee
training Lay off employees Demand Too High Demand Too Low Flex Capacity

Production planning & control :

Production planning & control Production planning implies formulation, co-ordination & determination of activities in a
manufacturing system necessary for the accomplishment of desired objectives Production control is the process of
maintaining a balance between various activities evolves during production planning providing most effective &
efficient utilization of resources.

Objectives of PPC :
Objectives of PPC Determining the nature & magnitude of various input factors to manufacture desired output. To co-
ordinate labor, machines in the most economic manner Setting targets & checking these against performance.
Ensuring smooth flow of material by eliminating bottlenecks if any Utilization of under employed resources To
produce desired output of right quality & quantity at right time.

Importance of time horizon :

Importance of time horizon Depending on the time horizon, the plan is of 3 types- Long-term Planning: Strategic
Planning – normally more than an year’s time. Medium-term Planning: Aggregate Planning – up to an year’s time.
Short-term Planning: Routine Planning – monthly/weekly. Dovetailing (fit together) of Plans- Shorter-range plans are
always made within the framework of the longer-range plans. Production planning as it is generally understood, is
really the intermediate-range and short-range plan. That is why. production planning is said to follow from the
marketing plan. The production plan is the translation of the market demands into production orders. The market
demands have to be matched with the production capacities

Slide 49:
Need for Detailed Plans- At a gross level, one must balance the gross demand into gross level availability of
resources in machine-hours or man-hours, etc. At the detailed level one needs to balance the requirements of indi-
vidual products with the availability of individual machines/equipments and labor of different skill categories.
Centralization & decentralization- concentrate of authority (esp. administration) at a single centre & transfer (power
etc.) from central to local authority.

AGGREGATE PLANNING DEFINED :

AGGREGATE PLANNING DEFINED Aggregate Planning may be defined as ‘Intermediate Planning’ which is
normally done for a period of up to one year’s time. The word ‘Aggregate’ symbolizes that the planning is done at the
broadest level. AGGREGATE PLANNING PROCESS – Sales forecast for each product: the quantities to be sold in
each time period (weeks, months, or quarters) over the planning horizon (6 -18 months) Total all the individual
product or service forecasts into one aggregate demand

Slide 51:
Transform the aggregate demand for each time period into production resource requirements (workers, materials,
machines, etc.) 4. Develop alternative resource plans to support the cumulative aggregate demand and compute the
cost for each. 5. Select the best alternative which satisfies aggregate demand and best meets the organization’s
objectives Goals for aggregate planning- there are number of goals to be satisfied – It has to provide the overall
levels of output, inventory and backlogs Proper utilization of the plant capacity. The aggregate plan should be
consistent with the company’s goals and policies regarding its employee Make sure enough capacity available to
satisfy expected demand

Assembly line balancing :

Assembly line balancing The sequence of machines & equipments arranged to produce the desired product is called
assembly lines. The amount produced by machine depends on No. of operations performed on machine Time
required for each operation There can be a situation that different machines may produce varying amount of product
during same period. This property is known as unbalanced assembly line

Example of ALB :
Example of ALB Clearly, assembly line is unbalanced. Alternatively if in system we arrange 3 machines of type A, 4
of B & 6 of C, then output/hr. will

Slide 54:
Such type of arrangement is called balanced assembly/production line. To balance the production line by increasing
the machines may not be in the interest of organization due to increased capital investment. So another method is to
increase the working hours for machines. E.g.

Production planning procedures :

Production planning procedures It can be divided in 3 parts- Routing Scheduling Loading Routing- It means
determination of path or route over which each piece is to travel in being transformed from raw-material into finished
product.

Slide 56:
In general routing consists of seven decisions, namely Whether to make/buy The form & shape of material Division of
work to be done into operations The choice of machines on which each operation should be done. The sequence in
which operations are to be performed The division of operations into work elements The choice of special tooling.

Slide 57:
Advantages of routing Efficient use of resources Reduction in manufacturing costs Improvement in quantity & quality
of output Provides a basis for scheduling & loading. Scheduling- it means A description of when & where each
operation is to be executed. Establishment of timetable at which to begin/ complete each operation.

Slide 58:
Objectives of scheduling- Items are delivered on due date Production cost is minimum To minimize idle time of
machines To prevent unbalanced allocation of time among various departments Types of schedules- Operations
schedule- determine total time required to do a piece of work with given machine Master schedule- is a list showing
how many of each item to make in each period of time in future.
Scheduling devices :
Scheduling devices Gantt charts- portrays planned production & actual performance over a period of time. It is a
rectangular chart divided by horizontal & vertical lines. PERT & CPM method- job is first broken in basic elements &
network is constructed which is then analyzed to prepare schedule. The Run Out approach

Productivity :
Productivity Productivity A measure of the effective use of resources, usually expressed as the ratio of output to input

All Productivity measures :

All Productivity measures Productivity = Number of units of output Number of persons employed to produce that
output Productivity= no. of units produced no. of man-hours worked Productivity= output at standard price Amount of
wages paid in order to produce that output Capital productivity = Value Added Capital employed Capital Productivity=
Total sales in Rupees Depreciation of capital assets MULTI FACTOR PRODUCTIVITY = Production at standard
price Labor + materials + overhead + k (capital invested) where, labor, materials overhead and capital constitute all
the input factors

Methods to increase productivity :

Methods to increase productivity By increasing output, keeping input constant By decreasing inputs for same output
By Better utilization of resources By using efficient & effective methods of working By using good layouts By reducing
material handling By selecting new technology By proper maintenance By good working conditions to workers By
good incentive schemes By better quality of purchase By Training to employees Be customer oriented. Assign right
people for right jobs. Keep things simple

Slide 63:
Difference between efficiency & effectiveness-

Slide 64:
BUSINESS PROCESS REENGINEERING- Business Process Reengineering is about revamping or overhauling the
existing processes and redesigning them from a clean slate, in order to achieve significant improvements in critical
measures of performance. Benchmarking- Internal Competitive Functional generic

TATA BUSINESS EXCELLENCE MODEL :

TATA BUSINESS EXCELLENCE MODEL The TBEM criteria for performance excellence are built upon a
set of core values and concepts that are embodied in seven categories: Leadership Strategic Planning
3. Customer and Market Focus 4. Measurement Analysis and Knowledge Management 5. Human
Resource Focus 6. Process Management 7. Business Results
Merits of Urban & Rural
Areas
Urban Area Rural Area
•Possible to find existing building to
house factory.
•Cost of land is less & scope of future
expansion is more.
•Easier to sell building if later. •Healthy & pleasant
atmosphere.
•Power & water easily available. •Cheapness of land
allows freedom for
most economic design for building.
•Good market for small mftrs. •Lesser taxes &
restriction.
•Housing, banks, fire protection,
railways & education available.
•Housing can be provided by pvt.
Enterprise or local authority.
•Transportation is easy & cheap. •Road or rail
connection can be
arranged easily.
•Workers find easy to change job &
area has good labour market.
•Less labour trouble & labour is cheap.
•Repairing facility available with
existing industries.
•Opportunity to exchange knowledge
from nearby industries.

Demerits of Urban & Rural Areas

Urban area Rural area
•Climate is not healthy due to
congestion.
•Sufficient power & water may not
be available.
•Arranging equipment is not
possible due to limited area.
•Enough facilities for expansion
may not be available.
•High taxes. •No recreational facilities.
•Cost of land is high & scope of
expansion is less.
•Transport & housing facilities
may not be satisfactory.
•More problems about labour &
employee relations
•Government facilities may not be
sufficient.
•Cost of building factory will be
high.
•Skilled workers are not easily
available.
•Higher wages of labour due to
high standard of living.
•Educational facilities may not be
available
Demand analysis,

Market potential measurement,

Market Measurement and Forecasting

A few years ago one of the industrial group’s application for financial assistance
was not accepted by a leading financial institution .The reason given was that the
demand forecast for the product was over-estimated . In another case the same
financial institution felt that the environment factors considered for expansion
were too optimistic.

The marketing director took the credit when his company’s actual sales were 25%
more than the budgeted or planned sales for the year But the market, as a whole,
had grown by about 20% in the same year. This was brought to his notice. He had
no alternative but to accept the fact that his sales forecast did not reflect the
reality.

Demand forecasting and sales forecasting are important for any marketing
planning and control as it serves the basis for comparison over a period of time.
Forecasting helps in identifying and solving marketing and sales problems. Further
,they are also used for setting performance standards.

If the marketer knows the different tools and their application and is familiar with
the market forces, most often, 90-95% of the forecast is good. Besides, it is
increasingly felt that the forecast should generally be in a range rather than just
having a single point forecast.

Forecasting exercise involve understanding market potential .Consider the

example of a product such as a T.V set .To estimate the market potential for T.V
sets in India, we have to know the number of households .Assuming that each
household will have a T.V set ,we can sat that that the market potential for T.V
sets is equal to the number of households in the country .And if we assume that
six people constitute a household, we have about 142 million households Ideally,
this is the market5 .But then ,we know that 25% of Indian population is below the
poverty line and hence will not be able to buy T.V sets Besides ,almost 40% of
Indians are in low income group and given the prices of T.V sets ,they too may not
be able to afford it .So, one is left with only 35% of the total population which is
the real market that needs to be targeted .

One might ask why this is so? The answer lies in the fact that the size of any
market is based on the number of buyers who might exist for a particular
marketing offer. These buyers need to have three characteristics:

· Interest in the product

· Income to be able to afford the product

· Access to the product

Based on these characteristics .we have arrived at 35% of the total Indian
population to be the size of the total market. Market potential is the limit
approached by the market demand as industry’s marketing expenditures
approach infinity , for a given environment ,In other words, market potential
refers to the upper limit of market demand .It is important for us to understand
that there are three key terms involved in defining the market potential. These
are

· Market demand

· Marketing expenditure by the industry

· Defined market environment

.

Market demand refers to the total volume that could be bought by a defined
customer group in a defined geographical area in a defined time period in a
defined marketing environment under a defined marketing programme.It is
important to note that demand could be measured in physical or monetary terms.
Demand is always for a specific time frame.

An important dimension to be understood is also the fact that market demand is

not a fixed number but a function of specific conditions. It is for this reason that it
is called market demand function of market response function,

In the above example of T.V sets, as more income is generated in the Indian
economy following higher economic growth rate, the demand for T.V sets will
increase .The demand for Color T.V sets boomed in 1982-84 as Doordarshan
started color telecast, went commercial and beamed popular soap operas.
We know that at any given time there is only one level of industry marketing

expenditure. The market demand corresponding to this level is called market

forecast.

· Marketing demand as a function of industry marketing expenditure (assumes a

given marketing environment)

· Marketing demand in two different marketing environments

This refers to a company’s share of the total market demand ,It is subject to all
the determinants of the market demand ,plus the determinants of the company’s
market share.

Company Potential is the limit approached by company demand as its marketing

effort increases relative to its competitors .The absolute limit to this potential is
the market potential and this will be so only in a monopolistic situation.

Sales Forecast refers to the estimates of future sales of company’s products .

Market Demand

The marketer’s first step in evaluating marketing opportunities is to estimate

total market demand. Market demand for a product is the total volume that would
be bought by a defined customer group in a defined geographical area in a defined
time period in a defined marketing environment under a defined marketing
program.

Market demand is not a fixed number, but rather a function of stated condition. For
this reason, it can be called the Market demand function.

Some base sales (called the market minimum) would take place without any
demand stimulating expenditure. Higher level of industry marketing expenditure
would yield higher level of demand, first at an increasing rate and then at a
decreasing rate. Marketing expenditure beyond a certain value would not stimulate
much further demand, thus, suggesting a upper limit to market demand called the
market potential.

Difference between the marketing minimum and the market potential shows the
overall marketing sensitivity of demand. We can think of two extreme types of
Market, the expansible, and the non-expansible. An expansible market such as the
market for racquet balls is very much affected in its total size by the level of
industry marketing expenditure. Organizations selling in an non-expansible market
must accept the market’s size (the level pf primary demand for the product
class) and direct their efforts to winning a larger market share for their product (the
level of selective demand for the company’s product).

It pays to compare the current level of market demand to the potential demand
level. The result is called the market penetration index. A low market penetration
index indicates substantial growth for all the firms. A high market penetration
index suggests that there will be increased costs in attracting the few remaining
prospects. Generally, price competition increases and margins fall when the market
penetration index is already high.

A company should also compare its current market to its potential market share.
The result is called the company’s share penetration index. A low share
penetration index indicates that the company can greatly expand its share.

The underlying factors holding it back could be many: low brand awareness, low
brand availability, benefits deficiencies, and too high a price. A firm should
calculate the share penetration increases that would occur with investment to
remove each deficiency to see which investments would produce the greatest
improvement in share penetration.

Market Forecast

Only one level of industry marketing expenditure will actually occur. The market
demand corresponding to this level is called the market forecast.

Market Potential

The market forecast shows expected market demand, not maximum market
demand. For the latter, we have to visualize the level of market demand resulting
from a “very high� level of industry marketing expenditure, where further
increases in marketing effort would have little effect in stimulating further demand.
Market potential is the limit approached by market demand as industry marketing
expenditures approach infinity for a given marketing environment.

The phrase “for a given market environment� is crucial. Consider the market
potential for automobiles in a period of recession versus a period of prosperity. The
market potential is higher during prosperity. The dependence of market potential
on the environment is illustrated. Market analysts distinguish between the position
of the market demand function and movement along it. Companies cannot do
anything about the position of the market demand function, which is determined by
the marketing environment. However, companies influence their particular location
on the function when they decide how much to spend on marketing.

Companies interested in market potential have a special interest in the product

penetration percentage, which is the percentage of ownership or use of a product or
service in a population. Here are some US percentage: television (98%), health
insurance (84%), car (81%), home ownership (67%), PC (54%), stock ownership
(48%), gun ownership (41%) , and fax (21%) . Companies assume that the lower
the product penetration percentage, the higher the market potential, although this
assumes that everyone will eventually is in the market for every product. The
economic potential of EMs is already well established. As a group, they comprise
more than half the world population and account for a large share of global output.
They offer promising opportunities for trade as their need increases for capital
equipment, machinery, power transmission equipment, transportation equipment,
and high-technology products.

EMs pose special challenges for Western firms. Many have an inadequate
commercial infrastructure, such as banking and transportation. Distribution
channels are usually underdeveloped and inefficient. Western firms often have
difficulty identifying qualified, competent intermediaries. The government sector
is often the primary economic actor. In many cases, a state-owned enterprise is
slow in decision making, and large national debt has produced an inflationary
economy--a situation with which many Western managers are unfamiliar.
Moreover, environmental awareness is rising in EMs, and ethical issues are under
increasing scrutiny.

Despite these challenges, no growth-minded company can overlook the potential

EMs hold out. What strategies are appropriate for capitalizing on this potential?
Three issues must be considered: (1) market potential estimation and access; (2)
market entry; and (3) market establishment. Although each step in foreign market
expansion is critical, the initial assessment of opportunities is especially important.
Various techniques can be used, such as gathering background information (desk
research), evaluating unsolicited inquiries from foreign customers, and monitoring
competitor activity. A formal and systematic analysis of aggregate market potential
can be particularly fruitful; such is the focus of this article. Verifying market
potential and quantifying opportunity in a foreign market can be vital to a firm's
success. Sufficient consideration must also be given to qualifying market
opportunity. Managerial guidelines for the three phases of a foreign marketing
strategy are offered in Figure 1.

Figure 1 Guidelines For Doing Business In Emerging Markets

PHASE 1: Market Potential Assessment and Access

* Engage in formal market potential analysis

* Gather market intelligence

* Employ early monitoring and be a "first mover"

* Tie into informal networks of influence

* Offer financing as well as technical expertise and solutions

* Explore government incentives and procurement

PHASE 2: Market Entry

* Choose qualified partners carefully; build their capabilities

* Invest in long-term relationships

* Be culturally sensitive

* Consider adapting product features, selling approach, etc.

* Be prepared to deal with inadequate commercial infrastructure

PHASE 3: Market Establishment

* Adjust to operating in a high inflation/debt environment, leading to commercial

and currency risk
* Learn to deal with labor force productivity and motivation issues

* Be prepared to deal with government bureaucracy and regulations

* Look for opportunities in sourcing

 Expand networks and alliances

Market Potential and Market
Sizing Analysis

Market analysis services from Mapping Analytics help you know the economic opportunity
available to you in any geographic market. Whether you sell to consumers, to businesses, or
both, market sizing provides intelligence you need to deploy sales and marketing resources
effectively.

Benefits of Market Potential Analysis

 Understand market potential for a single store, network of stores or a new market
 Deploy resources effectively by ranking markets in priority order
 Forecast total opportunity in terms of number of customers and revenue potential
 Estimate your market share

Market Potential Analysis: What We Can Do for You

Market potential analysis is a primary analytic service performed by Mapping Analytics.

We have the people, experience, tools, and data required to perform sophisticated and
accurate market sizing.

A market potential analysis from Mapping Analytics may include:

 A customer profile to understand where to find more like them

 Market penetration and market share reports showing performance in existing markets and
expected performance in new markets
 Market ranking reports allowing you to prioritize resource deployment into new markets
 A geographic view of market opportunity on detailed maps

Capital saving $ project costing,

 Establishing a project budget can be as simple as calculating what it will cost to perform each task in the work

breakdown structure and adding them to get a total budget. However, as any project manager who has created a

project budget knows, creating a project budget is rarely simple or straightforward (and usually not totally in your

control!).

The complicating factors include clients who want as much functionality as possible for the lowest cost, business

development and sales staff who wants to win contracts, and senior managers who want to maximize profits. In

addition, everyone wants the product to work well and be easy to use. The person in the middle of this vested-

interest conflict is the project manager.

And for those certified PMPs, there is a whole section in the PMBOK® that talks about this topic.  Planning in

chapter 3 talks about estimating costs and then budget as a part of the planning process and then chapter 7

“Project Cost Management” discusses the techniques and best practices for preparing budgets and managing the

costs.

Just because creating an acceptable project budget is not simple does not mean you will not have to do it. So, how

can a project manager protect the hoped for success of the project and manage risks by not agreeing to do more

than can be done?

Not the Dilbert way – of course. Checking out PMBOK, Chapter 7, they suggest beginning with project scope, which

may require the addition of design detail to create defendable cost numbers. You also need the project schedule

and information on staff availability. Once you know what needs to be done, how quickly and by whom, cost

estimating can begin.

PMBOK lists several cost estimating methods that may be done alone or in complementary fashion.

 Expert judgment – your experience on similar tasks and projects, input from consultants

 Analogous estimating – other similar organization projects cost history data

 Parametric estimating – Parametric Cost Estimating Handbook from NASA offers guidance, though

somewhat dated. COCOMO II is used in traditional waterfall style software development. According to S.

Chandrasekaran from St.Joseph’s College of Engineering, Agile software development requires a different cost

estimating model which he describes in his paper, “Multi-criteria Approach for Agile Software Cost Estimating

Model,” which can be found with other cost estimating articles at 2Dix.

 Bottom up

 Three point estimating – most likely, optimistic, pessimistic

 Reserve analysis – with a contingency fund to cover uncertainty in estimates

 Cost of quality – add in

My advice to you is “back up your estimates with data”. Be prepared to justify costs and explain risks – in non-

technical terms — of making too optimistic assumptions. Try to achieve reduction in scope commensurate with

lowered budgets. Do not feel too badly if you lose some of the cost estimating battles.  The real key is to document

your assumptions (like there are 7 modules to design, or we will perform 2 week long tests).

What has been your experience with cost estimating software projects in the real world? Do you pad your

estimates knowing you may have to settle for less?  Or do you just add some contingency to duration and costs?

Working capital requirement,

Q.1. Discuss the various factors that you as a finance manager would have to take into
consideration before assessing the working capital requirements of your firm?
Answer. The working capital requirements of a corporate differ from company to company.
There are no rules or formulas to determine the working capital requirements of a firm. The
management has to consider a number of factors to determine the level of working capital. The
following are some important factors:
1) Nature of business: The nature and volume of business is an important factor in deciding the
needed working capital. Public utility service (like railway companies) as compared to
manufacturing concerns requires a lesser amount of working capital. A larger amount of working
capital is required for trading or merchandising institutions. Similarly, basic and key industries or
those engaged in the manufacture of producer’s goods, usually have less proportion of working
capital to fixed capital than industries producing consumer’s goods.

2) Size of business unit: It is an important factor for determining the proportion of working
capital. The general principal in this connection is that the bigger the size of the unit, the more
will be the amount of working capital required. But it is quite likely that the bigger sized
business unit, i.e., consumer goods industry may require a larger amount of fixed capital than
working capital.

3) Time consumed manufacture: The longer the period of manufacture, the larger the inventory
required. However, if the flow of product is quite steady, although the value of goods in process
is large, the working capital will not vary much from time to time.

4) Need to stock pile raw materials: Those concerns where there is the need to stock pile raw
materials require larger amount of working capital. The necessity for stock piling increases the
extent of funds tied up in inventories.

5) Need to store finished goods: In business like retail stores, where unit is required to store
finished goods, (because in the absence of adequate stocks, customer may return disappointed)
naturally more working capital is required.
6) Cost and time involved in the manufacturing process: If the manufacturing process in an
industry entails high cost because of its complex nature, more working capital will be required to
finance that process and also for other expense which vary with the cost of production.
Moreover, the longer the period of manufacture, higher the amount of cash needed.

7) Turnover of circulating capital: Turnover of circulating capital plays an important and

decisive role in judging the adequacy of working capital. The speed with which the circulating
capital completes its round, i.e., conversion of cash into book debts or bills receivables, and book
debts or bills receivables into cash again plays an important role.

8) Terms and conditions of purchase and sale: The place given to credit by a concern in its
dealings with creditors and debtors may also be considered to assess the adequacy of working
capital. A business unit, making purchase on credit basis and selling its finished products on cash
basis, will require lower amount of working capital than a concern having no credit facilities and
which may further be forced to grant credit to its customers.

9) Conversions of current assets into cash: A company having ample stock of liquid current
assets will require lesser amount of working capital, because adequate funds can easily be
procured by disposed of current assets are much more than the current liabilities.

10) Impact of cyclical and seasonal variation: In periods of the boom and depression, more
working capital is needed than during the other stages of cyclical fluctuations.

For arriving at a satisfactory working capital position in time of prosperity the firm should
conserve current capital by avoiding wasteful expenditure. When inflationary pressure has been
created during a period of emergency like a war, unnecessary hoarding should be avoided
because such periods of rising prizes are temporary.

Profit $ tax planning

Taxpayers can elect to amortize business start-up or investigatory expenditures prorated equally over a period
of not less than 60 months.

(1) If the election is not made, no deduction is allowed for such expenditures.

(2) Start-up expenditures eligible for amortization do not include any amounts for which a deduction would not
be allowable to an existing trade or business for the taxable year in which the expenditure was paid or incurred.
Thus, items such as securities registration expenses, underwriters' commissions and the acquisition costs of a
trade or business do not constitute start-up expenditures.

(3)Start-Up Expenditures:
The definition of a start-up expenditure, according to Section 195(c), is any amount, other than a capital
expenditure, paid or incurred in connection with:

1. Investigating the creation or acquisitionof an active trade or business,

2. Creating an active trade or business, or

3. Any activity engaged in for profit and for the production of income before an active trade or business

begins in anticipation of the activity becoming an active trade or business. Amounts for which a deduction is
allowable for interest under Section 163(a), taxes under Section 164 or research and experimental expenditures
under Section 174 are not start-up expenditures.

Investigatory Costs:

Start-up expenditures include investigatory costs incurred in reviewing a prospective business prior to reaching
a final decision to acquire or to enter that business. Specifically qualifying are costs incurred for the analysis or
survey of potential markets, products, labor supply and transportation facilities.

(4) The taxpayer must carry on the trade or business that is acquired or created. According to the Senate
explanation: "In addition to the active business requirement applicable to the entity, in the case of investigatory
expenditures incurred by a taxpayer with respect to the acquisition of an existing trade or business, the
taxpayer will be considered to have entered into a trade or business only if the taxpayer has an equity interest
in and actively participates in the management of the trade or business."

(5)A sole proprietor always would be considered to have an equity interest. Investigatory expenses to acquire
corporate stock generally are not start-up expenses because an investment interest is acquired. However, a
corporate taxpayer would be considered to have acquired the trade or business assets of an acquired
corporation, rather than having made a portfolio investment in stock, if the acquired corporation becomes a
member of an affiliated group which includes the taxpayer incurring the investigatory expenses and a
consolidated return is filed for that group. An equity interest does not result from the purchase of a bond or
other debt instrument, even if convertible, preferred stock or a limited partnership interest. Start-up
expenditures involved with the acquisition of a general partnership interest qualify for amortization to the
extent the taxpayer actively participates in the management of the trade or business.

(6)Pre-opening Costs

Costs which are incurred subsequent to a decision to establish a particular business and prior to the time the
business begins may constitute start-up expenditures. Specifically qualifying are advertising, salaries and
wages paid to employees who are being trained and to their instructors. Also subject to amortization are travel
and other expenses incurred in lining up prospective distributors, suppliers or customers and salaries or fees
paid or incurred for executives, consultants and similar professional services.

(7)Election to Amortize

The election to amortize start-up expenditures must be made no later than the due date, including extensions,
of the tax return for the first year of business.
(8) The election statement is attached to the tax return and should include the date the business began, the
amortization period elected, not less than 60 months, and the amount, description and date of the start-up
expenditures.

(9) Once the election is made, it is binding and covers all start-up expenditures.

(10)In event a start-up expenditure is omitted from the statement, the election preserves the right to amortize it
when the statement is corrected. However, because amortization starts in the year the trade or business begins,
the statute of limitations closes the amortization years. If the Service determines that business entities began in
a year before the election to amortize start-up expenditures is made, the right to deduct such expenditures is
lost. The Tax Court has specifically denied amortization of start-up expenditures because an election was not
made.

(11)When a trade or business is completely disposed of by the taxpayer before the end of the amortization
period any start-up expenditures not amortized may qualify to be deducted as a loss under Section 165. Where
a subsidiary with unamortized start-up expenditures was liquidated into its parent in a tax-free transaction, a
loss deduction was not permitted as complete disposal was not present. The parent which continued the
subsidiary's business operations was to continue amortization on the schedule of the subsidiary.

(12) Thus, not only is correctly identifying start-up expenditures important, but also accurately determining the
time a trade or business begins is essential.

Initiation of Active Trade or Business

For a new business, the question of when an active trade or business began is crucial to the handling of start-up
expenditures. The sooner an active trade or business begins, the smaller the amount of start-up expenditures
that would be subject to amortization. The determination as to when an active trade or business begins is to be
made in accordance with as yet unissued regulations.

(13) However, the courts and the Service have addressed the issue in a number of instances.

In his concurring opinion in a decision of the Supreme Court, Justice Frankfurter stated "Carrying on any trade
or business involves holding one's self out to others as engaged in the selling of goods or services."

(14) More recently the Supreme Court has held that the offering of goods or services is not required and that a
full-time gambler who made wagers solely for his own account was engaged in the trade or business of
gambling.

(15) The distinguishing characteristic seems to be that the business has begun to function as a going concern.

Deduction for research and development expenditures has been denied because such expenditures could not be
"in connection with a business which did not exist." The Tax Court further held: "It is clear that the statutory
phrase |trade or business' presupposes an existing business with which the taxpayer is directly connected."

(16) In another instance, the deduction of research and development expenditures was also denied due to the
lack of "a going trade or business."

(17)A decision by the Court of Appeals for the Fourth Circuit holding that "even though a taxpayer has made a
firm decision to enter into a business and over a considerable period of time spent money in preparation for
entering that business, he still has not |engaged in carrying on any trade or business' until such time as the
business has begun to function as a going concern and performed those activities for which it was organized"
appears to have been adopted as precedent.

(18) Such a going concern concept has been utilized in the instance of a limited partnership which was
organized to construct an offshore drilling rig and to engage in contract drilling. The business was not
considered as beginning until the rig was completed and placed in operation.

(19) The Tax Court has also applied the going concern test and has held that business has not begun, although
contracts may have been entered into, payments may have been made out of corporate funds and component
parts for devices to be manufactured may have been acquired, if it has not "begun to function as a going
concern and performed those activities for which it was organized."

(20) The Service has added its support to the going concern test by stating that a taxpayer is not carrying on a
trade or business "until it started to market . . . works."

(21)From such instruction, the critical factors which identify when an active trade or business begins seem to
be the necessity for a going trade or business which is involved in the marketing of services or products for
which it was organized and the production of revenues.

Expansion of an Existing Trade or Business Ordinary and necessary expenses for expanding an existing trade
or business are deductible.

(22) Also deductible are the ordinary and necessary expenses for searching and investigating additional trades
or businesses that are closely related to the trade or business in which the taxpayer is currently engaged,
whether or not an expansion actually takes place. It is important for the taxpayer to show that the business
contemplated and the one already conducted are closely related as well as that the expenditures are ordinary
and necessary expenses of the business being conducted when the expenses were paid or incurred, rather than
capital expenditures.

(23)However, because the trade or business activities of one entity are not attributed to those of another entity,
the trade or business expansion cannot result in a separate taxable entity.

(24) In the instance of an individual proprietorship, otherwise deductible expansion expenses cannot be for a
trade or business that is to be operated as a partnership or a corporation.

(25) A corporation generally cannot deduct expansion expenses for a trade or business that is to be operated as
a subsidiary, a partnership or as a joint venture.

(26)The expansion of a trade or business involving industrial real estate development was found to be closely
related or "intramural" in the instance of an individual who was engaged in developing and managing
residential and commercial real estate. Thus, the costs of professional consultation and advice incurred before
engaging in the industrial real estate development business were ordinary and necessary expenses of his
existing business.

(27) Likewise, the Court of Appeals for the Fourth Circuit held that a hotel project by a partnership engaged in
residential development is not supported by common experience as being a different and separate type of
business.
(28) Qualitative differences in size and scope also were not found to be sufficient to make the business a
different one.

(29) The Service has ruled that expenses incurred by a restaurant chain in opening new restaurants were
currently deductible, except where the restaurants were set up within new corporate entities.

(30) There are different interpretations as to whether expenses for investigating and for feasibility studies for
establishing additional bank branches and pre-opening expenses of new bank branches must be capitalized or
may be deducted as ordinary and necessary expenses for the year paid or incurred. The stance of the Fourth
Circuit is that such costs and expenses are incurred in selling the same existing product, bank services, and are
currently deductible as business expenses.

(31) However, according to the Service "an expenditure that secures to a taxpayer the right to conduct a certain
type of business (such as the cost of a franchise, license, lease or approval from a regulatory agency) is a
capitalizable expenditure under Section 263."

(32) Thus, establishing a branch bank could involve obtaining regulatory approval which would create various
intangible rights which are new separate assets. The Fifth Circuit also considers costs of bank expansion as
nondeductible as they are incurred or paid for the creation of a separate and distinct capital asset.

(33) Pre-opening expenses incurred or paid in the expansion of a trade or business that do not require a permit,
license or regulatory approval appear to be currently deductible. The Service, will likely look for capitalization
where such intangible costs are material in amount. The courts have held the expansion of a trade or business
failed the closely related test and was denied deduction when a frozen egg business expanded into a dried egg
business

(34) and a conventional energy generating utility (fossil fuel) expanded into nuclear energy.

(35) However, employee training costs with respect to a new fossil fuel generating plant were deductible as
they were closely related, being "common place facets" of an existing business.

(36) Planning Single Trade or Business Expansion of an existing trade or business into new activities which
are similar to current activities does not result in start-up expenditures which must be amortized. To the extent
such expenditures are ordinary and necessary business expenses, current deduction in accordance with Section
162(a) would be appropriate. Care must be exercised to operate the new activity, at least initially, within the
same entity as the existing business, i.e., corporation. However, the separate entity concept was ignored in the
expansion of an existing entertainment and social club business throughout the United States using new
subsidiaries. Pre-opening expenses incurred in connection with selling memberships, incurred prior to the
opening of the new clubs, were found deductible under Section 162(a) on the basis that the subsidiaries were
all formed to engage in the same business enterprise as the parent.

(37) It has been suggested that "in Playboy the continuity of a single enterprise was shown by the fact that
membership in the subsidiary's club entitled a person to membership in any existing clubs."

(38) Initiation of an Undertaking Start-up expenditures requiring capitalization can be minimized when a new
trade or business is undertaken by beginning with what could be a small part of the total anticipated business
activity. After the new business has become a going concern, costs associated with subsequent expansion into
the same or into related activities, as discussed previously, should come under the single trade or business
rubric and thus be fully deductible in accordance with Section 162(a). Avoiding Separate Entities. A partner in
a new real estate partnership who had already carried on real estate development in his individual capacity was
found to have entered a new business.

(39) Likewise, the marina business of a new subsidiary was treated as a new business rather than a
continuation of an existing subsidiary's marina business even though the corporations filed a consolidated
return.

(40) Expenditures with respect to new restaurants operated within an existing corporation were not start-up
expenditures because start-up expenditures "are not incurred in an established business operation when the new
activities are similar to current business activities." However, the Service classified amounts expended by the
same taxpayer who founded two subsidiaries in order to meet local ownership requirements for obtaining
liquor licenses as start-up expenditures.

(41) The partnership was treated as a separate and distinct entity from the proprietorship, and the
subsidiarieswere clearly treated as separate and distinct corporations. A single continuing ownership form
could be employed initially in order to enhance the current deductibility of expansion costs and to avoid
separate entity limitations. In the instance of the partnership which was held to be a new business, expansion of
real estate activities by the existing proprietorship with a later division to form a partnership could have
minimized the separate entity question. Expansion of a business by a corporation related to a business already
being carried on by the corporation should eliminate the question of deductibility of start-up expenditures, as a
separate entity would not be present. Subsequently, a new subsidiary could be formed to operate the expansion
business to the extent such a structure is desired.

Timely Election: The election to amortize start-up expenditures must be made on Part II of Form 4562 not later
than the due date of the taxpayer's federal income tax return, including extensions, for the taxable year in
which the business begins. Failure to make an election has been held to bar amortization.

(42) Lack of a timely election to amortize start-up expenditures has also led to the denial of a loss deduction
under Section 165 for such expenditures in the year of termination of a business.

(43) Uncertainties may exist as to when the business became a going concern so the election should be made in
the year the costs are paid or incurred or in the first year there is reason to believe the Service might claim that
the trade or business began. The right to make the election would be lost if the Service were successful in
claiming that the trade or business actually began in a year prior to the year of election by the taxpayer.

Conclusion

Proper identification of all costs which constitute qualified start-up expenditures is required for planning
purposes. After such a measurement has been made, it is necessary to determine whether the expenditures were
incurred in connection with the expansion of an existing trade or business or whether a new trade or business is
being undertaken. To the extent an existing trade or business is being expanded, it may be desirable and
acceptable to structure the transaction so the expenditures are currently deductible as ordinary and necessary
expenses. When a new trade or business is formed, it is necessary to establish when the activity begins to
function as a going concern to permit the filing of a timely election for amortization of start-up expenditures.
 Assuming a valid election has been made to amortize start-up expenditures, unamortized amounts can
ordinarily be deducted as a loss when a trade or business is terminated.

Economic, technical, financial $managerial

responsibility of project
Types of Feasibility

The feasibility study includes complete initial analysis of all related system. Therefore the study must
be conducted in a manner that will reflect the operational, economic as well as technical and
scheduling feasibility of the system proposal. These are the four main types of feasibility study.

Operational

This aspect defines the urgency of the problem and the acceptability of any solution. It shows if the
system is developed, will it be used. The operational study includes people-oriented and social
issues: internal issues, such as manpower problems, labor objections, manager resistance,
organizational conflicts and policies; also external issues, including social acceptability, legal aspects
and government regulations. It takes in consideration whether the current work practices and
procedures support a new system and social factors of how the organizational changes will affect the
working lives of those affected by the system.

Operational -The PIECES Framework

The PIECES framework can help in identifying operational problems to be solved, and their urgency:

Performance -- Does current mode of operation provide adequate throughput and response time?

Information -- Does current mode provide end users and managers with timely, pertinent, accurate
and usefully formatted information?

Economy -- Does current mode of operation provide cost-effective information services to the
business? Could there be a reduction in costs and/or an increase in benefits?

Control -- Does current mode of operation offer effective controls to protect against fraud and to
guarantee accuracy and security of data and information?

Efficiency - Does current mode of operation make maximum use of available resources, including
people, time, flow of forms,...?

Services -- Does current mode of operation provide reliable service? Is it flexible and expandable?
(4) 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?
Which users or managers may resist (or not use) the system?
People tend to resist change.
Can this problem be overcome? If so, how?
How will the working environment of the end users change?
Can or will end users and management adapt to the change?

Technical

The technical aspect explores—if the project feasibility is within the limits of current technology and
does the technology exist at all, or if it is available within given resource constraints (i.e., budget,
schedule,...). In the technical feasibility the system analyst look between the requirements of the
organization, such as, (I) input device which can enter a large amount of data in the effective time
(II) Output devices which can produce output in a bulk in an effective time (III) The choice of
processing unit depends upon the type of processing required in the organization.

The analyst will ask:

• 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 reasonable?

• Is relevant technology mature enough to be easily applied to our problem?

Some firms like to use state-of-the-art technology, but most firms prefer to use mature and proven
technology. A mature technology has a larger customer base for obtaining advice concerning
problems and improvements.

• Assuming that required technology is practical, is it available in the information systems shop?

• If the technology is available, does it have the capacity to handle the solution.

• If the technology is not available in, can it be acquired

(1) 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 reasonable for this team?
Is relevant technology mature enough to be easily applied to our problem?
What kinds of technology will we need?
Some organizations like to use state-of-the-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”?
If the technology is available:
…does it have the capacity to handle the solution?
If the technology is not available:
…can it be acquired?
Schedule Feasibility

Given his technical expertise, the analyst should determine if the project deadlines are reasonable
whether constraints placed on the project schedule can be reasonably met. Some projects are initiated
with specific deadlines. You need to determine whether the deadlines are mandatory or desirable. If
the deadlines are desirable rather than mandatory, the analyst can propose alternative schedules. It is
preferable (unless the deadline is absolutely mandatory) to deliver a properly functioning information
system two months late than to deliver an error-prone, useless information system on time! Missed
schedules are bad, but inadequate systems are worse!

We may have the technology, but that doesn't mean we have the skills required to properly apply that
technology. True, all information systems professionals can learn new technologies. However, that
learning curve will impact the technical feasibility of the project, specifically, it will impact the
schedule.

(3) 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 systems staff
Whether hiring or training, it will impact the schedule.
 Assess the schedule risk:
Given our technical expertise, are the project deadlines reasonable?
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?
Deliver a properly functioning information system two months late…
…or deliver an error-prone, useless information system on time?
Missed schedules are bad, but inadequate systems are worse!

Economic Feasibility

The bottom line in many projects is economic feasibility. During the early phases of the project,
economic feasibility analysis amounts to little more than judging whether the possible benefits of
solving the problem are worthwhile. As soon as specific requirements and solutions have been
identified, the analyst can weigh the costs and benefits of each alternative. This is called a cost-
benefit analysis.

(2) Economic Feasibility

 Can the bottom line be quantified yet?
Very early in the project…
a judgment of whether solving the problem is worthwhile.
Once specific requirements and solutions have been identified…
…the costs and benefits of each alternative can be calculated
 Cost-benefit analysis
Purpose - answer questions such as:
Is the project justified (i.e. will benefits outweigh costs)?
What is the minimal cost to attain a certain system?
How soon will the benefits accrue?
Which alternative offers the best return on investment?
Examples of things to consider:
Hardware/software selection
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

Benefits Costs
 Tangible Benefits
Readily quantified as $ values
Examples:
increased sales
cost/error reductions
increased throughput/efficiency
increased margin on sales
more effective use of staff time
 Intangible benefits
Difficult to quantify
But maybe more important!
business analysts help estimate $ values
Examples:
increased flexibility of operation
higher quality products/services
better customer relations
improved staff morale
 How will the benefits accrue?
When - over what timescale?
Where in the organization?
 Development costs (OTO)
Development and purchasing costs:
Cost of development team
Consultant fees
software used (buy or build)?
hardware (what to buy, buy/lease)?
facilities (site, communications, power,...)
Installation and conversion costs:
installing the system,
training personnel,
file conversion,....
 Operational costs (on-going)
System Maintenance:
hardware (repairs, lease, supplies,...),
software (licenses and contracts),
facilities
Personnel:
For operation (data entry, backups,…)
For support (user support, hardware and
software maintenance, supplies,…)
On-going training costs

Analyzing Costs vs. Benefits

 Identify costs and benefits
Tangible and intangible, one-time and recurring
Assign values to costs and benefits
 Determine Cash Flow
Project the costs and benefits over time, e.g. 3-5 years
Calculate Net Present Value for all future costs/benefits
determines future costs/benefits of the project in terms of today's dollar values
A dollar earned today is worth more than a (potential) dollar earned next year
 Do cost/benefit analysis
Calculate Return on Investment:
Allows comparison of lifetime profitability of alternative solutions.
ROI = Total Profit = Lifetime benefits - Lifetime costs
Total Cost Lifetime costs
Calculate Break-Even point:
how long will it take (in years) to pay back the accrued costs:

Economic Feasibility
The bottom line for many projects!
Economic feasibility amounts to judging whether
possible benefits of the project are worthwhile.
As soon as a specific solution has been identified, the
analyst can weigh the costs and benefits of each
alternative.
This is called cost-benefit analysis.

Cost/Benefit Analysis
The purpose of a cost/benefit analysis is to answer
questions such as:
Is the project justified (benefits outweigh costs)?
Can the project be done, within cost constraints?
What is the minimal cost to attain a certain system?
Difficulties -- discovering and assessing benefits and
costs; they can both be intangible, hidden and/or
hard to estimate, it's also hard to rank multi-criteria
alternatives

Types of Benefits
Benefits may be classified into one of the following
categories:
Monetary -- when $-values can be calculated;
Tangible (Quantified) -- when benefits can be
quantified, but $-values can't be calculated;
Intangible -- when neither of the above applies.
How to identify benefits? By organizational level
(operational, lower/middle/higher management) or by
department (production, purchasing, sales,...)

Types of Costs
Project-related costs
Development and purchasing costs;
Installation, training and conversion costs.
Operational costs (on-going)
Maintenance: hardware, software, facilities
Personnel: operation, maintenance.
For a small business that wants to introduce a PC-based
information system, these cost categories amount to:
Project costs: purchase hardware, software, furniture;
customize software, train, install, file conversion
On-going costs: operating the system (data entry,
backups, helping users, vendors etc.), maintenance
(software) and user support, hardware and software
maintenance, supplies,...

Cost/Benefit Analysis

The purpose of a cost/benefit analysis is to answer questions such as:

• Is the project justified (because benefits outweigh costs)?

• Can the project be done, within given cost constraints?

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

• What is the preferred alternative, among candidate solutions?

Examples of things to consider:

• Hardware/software selection
• How to convince management to develop the new system

• Selection among alternative financing arrangements (rent/lease/purchase)

Difficulties -- discovering and assessing benefits and costs; they can both be intangible, hidden and/or
hard to estimate, it's also hard to rank multi-criteria alternatives

Examples of particular benefits: cost reductions, error reductions, increased flexibility of operation,
improved operation, better (e.g., more accurate) and more timely information.

Benefits may be classified into one of the following categories:

• Monetary : when $-values can be calculated e.g. Increased sales through increased production.

• Tangible (Quantified) : when benefits can be quantified, but $-values can't be calculated e.g.
cost/error reductions, increased throughput/efficiency, increased margin on sales, more effective use
of staff

• Intangible: when neither of the above applies, it is difficult to quantify, but maybe more important!
-- business analysts help estimate $ values. e.g., increased flexibility of operation, higher quality
products/services, better customer relations, improved staff morale.

The analyst report will also show how will the benefits accrue, when and over what timescale and
how to identify benefits. (Benefits are identified at organizational level (operational,
lower/middle/higher management) and by department (production, purchasing, sales)

Costs are classified as:

• Project-related costs

• Development and purchasing costs: who builds the system (internally or contracted out)? software
used (buy or build)? hardware (what to buy, buy/lease)? facilities (site, communications, power,...)

• Installation and conversion costs: installing the system, training of personnel, file conversion,....

• Operational costs (on-going)

• Maintenance: hardware (maintenance, lease, materials,...), software (maintenance fees and

contracts), facilities

• Personnel: operation, maintenance

• For a small business that wants to introduce a PC-based information system, these cost categories
translate to the following:

• Project costs: purchasing (hardware, software, office furniture), customizing software, training,
system installation and file conversion
• On-going costs: operating the system (data entry, backups, helping users, vendors etc.),
maintenance (software) and user support, hardware and software maintenance, supplies,...

Determine Cash Flow

• Project the costs and benefits over time, e.g. 3-5 years

• Calculate Net Present Value for all future costs/benefits

• determines future costs/benefits of the project in terms of today's dollar values

o A dollar earned today is worth more than a (potential) dollar earned next year

Do cost/benefit analysis
• Calculate Return on Investment:

• Allows comparison of lifetime profitability of alternative solutions.

o ROI = Total Profit - Lifetime benefits - Lifetime costs

Total Cost Lifetime Costs

Calculate Break-Even point:

• how long will it take (in years) to pay back the accrued costs:

@ (Accrued Benefit > Accrued Cost)

EVALUATING THE FEASIBILITY STUDY

The feasibility study is germane to the determination of whether there should be any further plans:
The conclusion might be, “We’ve looked at the proposal thoroughly, and have concluded that it does
not profitably serve our needs in the foreseeable future.” But if the conclusions of the study are
positive, it should provide you with a clear understanding of what the implementation plan entails in
terms of change, cost, benefit, risk, and time. The feasibility study them serves two functions:

• The study makes the case for funding the implementation project

• The outputs of the study provide the inputs for the implementation plan