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Preparing A Feasibility Study: Expectations
Preparing A Feasibility Study: Expectations
Expectations
• What to expect?
• Think of a project now that you can apply all these concepts to.
• Sensitivity Analysis
Feasibility Study
Introduction
• What are the ‘bad’ things that can happen to businesses that do not undertake a feasibility
study?
• What is the difference between a feasibility study conducted for the private sector and for the
public sector? (Sectors: services, industry and infrastructure).
• What Should a Feasibility Study (also called Cost/benefit Study/Analysis, CB Study) include?
• Checklist
• The Final Report that determines the feasibility or lack thereof to your client/investor
• Many feasibility studies are conducted partially, where for example, the market study is avoided
completely because the sole buyer is guaranteed. This is referred to as a “Take-Off Agreement”.
• COMFAR II or III, UNIDO Product – Computer Model for Feasibility Analysis and Reporting.
• Sensitivity Analysis gives you depth in understanding the project and alerts the investor to issues
that surround the project and to the affect of changes that may occur in a number of variables.
Make new assumptions, decrease sales by a certain percentages, increase investment. In other
words, play with the numbers and the assumptions to discover the points at which the project is
at risk and in danger of being feasible and profitable.
• Does the business or project warrant further investment of time, money and further study, or is
it a non-starter?
• For a feasibility study, basic data is acquired from the client through a series of queries,
questions and meetings, wherein the client provides some of the research and other data and
facts to be gained from a variety of sources.
• The typical feasibility study contains, among other items, notes on financial projections, a
general description of the business, general details describing how the company or project will
be formed, managed and marketed, statements concerning the competition and a cash flow
projection based on averages.
• 2. Is it profitable or not?
• 4. Is it worth doing?
• Most studies are aborted at the Marketability stage. Investors discover that benefits will not be
actualized.
• The subject of feasibility studies is a very broad subject area that is applied in all fields that you
can possibility fathom. Applications and utility range from making a personal decision like
purchasing a home to building a hospital or adding new technology to your business. For the
most part, the area of feasibility study research is mostly tailored toward “small businesses”.
• The subject of feasibility studies is closely related to 2 other topics that will discuss briefly in this
course: Business Planning and Project Management.
• A small business has a 30% - 50% survival rate during the first 5 years of operation.
• What is the difference between a feasibility study and an on-going feasibility study?
• A feasibility study, the kind that we have been talking about is about a new idea, product, or
project and is hence built on assumptions about the anticipated project derived from similar
experiences or expectations.
• An on-going feasibility study of a project is based on real numbers and figures, not assumptions.
It is about revising the current status of the project and enhancing its performance and its
output.
The Environmental Study
Environment
al Study
Socio-
Financial Market
Economic
Study Study Study
Technical
Study
• Consider this part of the study as a general, descriptive, explorative outlook to get a bird’s eye
view of the project and its outputs.
• A simplified environmental study of your project will show the following environmental factors:
• If your project will have adverse affects on the environment. E.g. If it is an industrial project,
pollution may be an externality. What level of pollution is acceptable legally, and socially?
General Environment
• Environmental study is where the non-financial factors of the study are presented and factored
in to the study. Consider it a general, pre-feasibility or pilot study.
• Will cultural, religious or any other social norms reject the project or product?
• Is the market ready for the product? Is it appropriate technologically, and in principle? Is it
suitably fitted to the educational attainment of that society?
• Is funding available?
Specific Environment
• Are there any price ceilings (by govt.) or do supply and demand forces set prices?
• Is the preliminary information encouraging to go ahead with the project or more in depth study
is required?
• Introduction
The market study, whether it be for a product or a service will determine what is already available in the
market and what is required. Most importantly it will determine the size of demand. This is why this is
the initiation point of the feasibility study. This is where we acquire our initial figures and hence the
entire feasibility is built on this point. Subsequent steps will be based on these ground blocks, which
hence require prudence.
• Physical attributes of the product that include size, exterior dimensions, shape
• Channels of distribution
• End-users
• Pricing
• Acquiring data is often a problem, especially with respect to the competitive analysis where
competitors will not disclose their prices, agents, suppliers….., in which case, potential investors
need to rely on more inventive methods for data acquisition
• Hence it becomes very difficult to know your competition and one has to rely on:
• Statistical Publications,
• Market Intelligence.
• Size of demand in the market for the proposed product or service, sources of D, how does D
occur ?
• Existing suppliers
– Sometimes, the analyst needs to help the investor define these parameters). This step is
very important and affects the technical and financial study – revenue definition .
• It is arguably the most important part of a feasibility study. This is because it forms the basis for
the rest of the study, since this is where the SIZE OF DEMAND IS DETERMINED.
• It has been the case in many LDC (less developed countries) that the Technical Study was
considered of paramount importance, for a number of reasons:
• Markets in these countries are immature and unsaturated and are in need of any new
projects/products/services.
• Lack of state of the art technologies, hence the hope of technology transfer, that these
economies will later internalize and develop further.
• The market analyst is the only person in a position to decide on the sufficiency and adequacy of
the data available, based on how it will be used .
Market Analysis
• What kind of product will be marketed and what is the required level of detail on it?
Type of Data
• Secondary Data (acquired from the market/field research, if accurate, it is extremely useful).
• Analysts will usually seek secondary data first, and will later seek primary data when the former
proves insufficient. However, it is important to note that both forms of data are important and
complement each other .
Secondary Data
• GNP, GDP
• Rates of Consumption
• Others
• The market analyst must be very well-versed and experienced with the local market and with
market information .
• Inaccuracy.
• Facts.
• Opinions.
• Preferences / motivations.
• Open and closed questions (these tools are later collected, analyzed and used for cross-
referencing and asking questions in various ways to correlate the answers. E.g. Income vs.
spending questions. (E.g. choosing a car, local vs. imported).
• Closed Questions include questions about age, monthly income, level of education, social status,
there is no room for opinion.
• Determine the present level of supply for this product and its substitute.
• Determine the nature of the product, is it a consumer product, an industrial product, is it new or
old?
– Technical and Pricing factors that distinguish this product from other substitutes.
– Elasticity of Demand: Is the product income related or is it a basic product that will be
purchased regardless of income.
– Is income the determining factor whether this product will be brought, at least at break
even levels or not ?
• The main objective of the market study is to show evidence that there is a reasonable
opportunity to market and sell the proposed product or service in acceptable quantities to the
investor, and that enable the project to remain on track in the long run with profitability.
• Acceptable Quantities: Quantities that will equal or exceed other investments that would have
consumed the same resources.
• Determination of the difference between the current supply and demand in the market for the
proposed product and for substitutes.
• A forecast of the supply and demand and prices for the next 5 years .
• Recommend a strategy.
Study Requirements
• A market analyst that is trained and experienced sufficiently in data analysis and running the
appropriate forecasting techniques.
Study Requirements
• A market analyst that is trained and experienced sufficiently in data analysis and running the
appropriate forecasting techniques.
• Based on that the appropriate technical methodology for production will be decided upon.
• Physical and technical attributes of the product will be agreed upon in light of current prices and
the production strategy .
• After determining the lines of production and the technology/know how that will be used,
REVENUES are ESTIMATED and hence this initiates and is in effect, the input for the financial
study, which will make the decisive decision as to whether this project is FEASIBLE OR NOT .
The team that is preparing the feasibility study or the analyst must decide on a number of things:
• Identify the market or markets that you will market your products in.
• Profile of consumers.
• Price structure.
• Competition.
• Extensively, demand may be defined as the quantity of a good or service that people want to
buy. The demand function relates demand to the factors determining it, which include
customers’ incomes, the good’s own price, and the prices of competing goods and of other
goods in general; factors affecting the demand of individuals, for example, their family
circumstances; and factors affecting demand at particular times, for example, weather
conditions. The demand curve relates demand for a good to its own price, holding all other
factors constant.
• Price elasticity of demand is the proportional increase in quantity demanded divided by the
proportional reduction in price.
• Income elasticity of demand is the proportional increase in quantity demanded at a given price
divided by the proportional rise in income.
• Aggregate demand is the total demand for goods and services in the economy.
• Nominal demand which is what people would demand if all markets were in equilibrium.
• So, demand, in other words, is the quantity demanded of a particular product or service to users
in a market, and it is also demand that may be created for a new product or service where new
uses have arisen, whether it be for its technical superiority, price effectiveness, and hence
consumers prefer it.
• Approaches differ from study to study, based on the nature and size of the project. For small
industrial projects, analysts may make use of official statistics about the product to be produced,
especially those related to imports and exports. It is through tracking the discrepancy between
imports and exports of a particular product in the previous years, apparent demand is
estimated.
• When conducting a market study about a product where reliable information, data and statistics
is unavailable, one may resort to the following methods:
• Correlating data with an already existing product that has reliable, credible data on it.
(Cross-referencing)
• E.g. I want to market water faucets but I cannot find any direct stats. on this specific product,
however, I can form an indirect relationship or correlation between faucets and boilers and rely
on the data that is available for water boilers or licensing from the Ministry of Public Works.
• Using surveys to forecast annual demand for a product by distributing surveys to shops
that sell ,.e.g. water coolers and calculating the total of all stores that sell this product OR
/ surveying a sample group of consumers and calculating how many coolers were
produced within a specific period OR/ monitoring purchasing patterns in outlets. A field
survey and evaluating what has been sold over a 2 week period, taking into account
seasonal influences.
Forecasting
• Quantitative Techniques
• Causal Models
Quantitative Techniques
This includes:
• Surveys
• Estimations
• Market Research
• Historical Correlation
• OLS
• These methods are especially useful in cases when data is deficient about your product or when
a product is newly introduced in the market.
Competition Analysis
• Competition analysis is a very important part of the study, because it helps the analyst or the
investor form a good idea about the size of market share that their product will be able to
claim .However, this part of the study is usually challenged by poor, inaccurate and incredible
data, especially in LDCs. However, the core data that is required to conduct the competitiveness
analysis includes the following:
• The market analyst must also be interested in the current status of the competition in the
market, at the time of the onset of the project and five years into the project. This will aid
him/her in determining the project’s productive capacity (minimum and maximum) and enable
him/her to make recommendations as to graduating levels of production, in light of the size of
demand and the competition.
• This part of the study may reveal the project’s expected market share, however, analysts must
be careful when making such estimates, so that their numbers are not over-optimistic and
hence over-estimated, which will exaggerate sales and revenues, and all of the other financial
indicators will follow suit.
• Do not be over-optimistic.
Market Overview
• Segmentation of the market (dividing it into homogenous groups of customers that have
common characteristics for marketing exploitation).
• Summarize the key characteristics of the market
– Major products, markets (or segments), which are likely to provide the business
opportunities suitable for the organization.
– Brief description of what is happening in the market (present this thoroughly by using
bar charts, pie charts…..)
SWOT Analysis
• SWOT Analysis is a very effective way of identifying your Strengths and Weaknesses, and of
examining the Opportunities and Threats you face. Carrying out an analysis using the SWOT
framework helps you to focus your activities into areas where you are strong and where the
greatest opportunities lie.
Strengths
Weaknesses
Opportunities
• Local Events
Threats
• Are the required specifications for your job, products or services changing?
• Carrying out this analysis will often be illuminating - both in terms of pointing out what needs to
be done, and in putting problems into perspective.
• You can also apply SWOT analysis to your competitors. This may produce some
interesting insights!
• Factors that determine success = performance, breadth of services, speed of services, low costs
and so on .
– Summary of financial projections to show financial implications over the full year’s
planning period.
• Value
• Volume
• market Share
Business Directions
• Enter
• Improve
• Exit (Divest due to weak competitive position / cost of staying is too prohibitive)
• Commercial Growth
• Change is inevitable, hence commercial growth may emanate from two fronts:
– Product Development
– Market Development
Market Objectives
• Market penetration.
Market Strategies
• Standardize design.
• Prices
• Market Share
• Revenue/Income
• Studies will differ based on the size of the project, the type of project, whether industrial, real-
estate, commercial…, each product or service has its own idiosyncrasies and hence different
factors may require a different level of attention and depth of study, based on the market in
which they will be marketed and operate .
• Hence, the credibility and accuracy of the market study will always depend on these factors
along with the level of care that was given to the data, in its collection and treatment .
• After confirmation that there is a market for the product that you wish to sell, determining the
current and future demand, determining the size of demand and the descriptive and technical
attributes of the product, the technical study can do the following ;
• Annual production capacity, production plan and quantities to be produced are also determined
here in the technical study, based on sales forecasts.
• 2 types of capacities: name plate capacity (or design capacity) and permissible capacity.
• Permissible Capacity: is the productive capacity that is achievable under standard conditions,
taking in to consideration not only machinery and technical operating conditions but also
managerial style .
• Maximum Name Plate Capacity: is the production capacity that is technically achievable
according to the machinery and facilities in place .Maximum name plate capacity may be
considered a benchmark with which to operating efficiency is measured throughout its
productive life .
• standard measure of a project’s productive capacity = 8 hour work days, 300 days per year.
– Note that some factories operate eternally 24 hours, 365 days a year, without
shutdowns, 15 days is usually accounted for spare/security, so 350 days per year.
• After having decided on the design of the product, the productive capacity and the technical
characteristics of the product, companies specialized in manufacturing machines are sourced to
fit the production line required. Companies then submit their financial and technical offers, bids.
These offers are then compared technically and financially and the best one is chosen.
• It is best at this point to consult with your financial experts and with your technicians when
making this choice.
• An estimation of the investment costs that are required to complete the project is carried out
here. It includes:
• Fixed assets
• Buildings
• Cost of machinery + cost of freight and port costs + transportation to the factory/project site,
• Any related tasks that include electrical set ups, mechanical or civil works.
• Furniture
• Cars.
Production Costs
• Based on the type and the nature of the line of production chosen for the project, the analyst
will estimate the factory’s annual needs of:
• Direct Labor
• Marketing costs
• Training
• Interest
• Depreciation $ from here is included as liquidity for the plant; can go to profits for
reinvestment.
Pre-operating Expenses
• Patents
• Licensing Costs
• Visits
• Govt. Fees,
• Many concepts used to conduct a feasibility study will appear in different parts of the study and
may be conducted in different parts of the study.
• Break Even analysis, for example, may be conducted here in the market study or in the
economic study. Both cases are acceptable. For the purposes of this course, it shall be discussed
in the market study section of the course.
Break-Even Analysis
• Break even analysis looks at the effects or probability of changes in the project's cost, volume of
output and selling price . It is used to determine the lowest production and/ or sales levels at
which the project can operate without impairing its viability. The technique is also useful for
profit planning and decisions on pricing and production capacity .
• The analyst segregates the project's costs into the projects cost into the fixed elements, which
are independent of the volume of production, and the variable elements, which change with the
volume of production.
(Costs, Revenues)
$ Total Revenue
(TR)
Variable
Cost
(Production, Selling
Levels) units
• The analyst estimates the volume of output at which sale revenues equals total cost (break-even
point).
• The analyst also compares break even sales with the project's production levels until it reaches
steady state , to determine whether profits or losses will be incurred in the early years .
Expected output during theses years can be expressed as a percentage of the breakeven.
• The use of break-even analysis as a tool is recommended in the feasibility study, but the analyst
should note its limitations.
Limitations
• Fixed costs are not indefinitely constant . They may become variable at a certain volume.
• It is not always easy to divide costs neatly into fixed and variable components.
• Selling prices may change when a large volume of sales is made.
• Once the analyst has identified prices and variable cost per unit, he should calculate the
breakeven point, where sales revenues equal the total of fixed and variable costs. These
allow a measurement of the breakeven point as a specific level of sales volume. The
break-even point may also be defined as that point at which fixed cost equal variable
margin (sales less variable cost).
• To calculate the breakeven point the analyst needs to have the following data that we have
discussed them such as:
• So breakeven point indicates the production level where total revenue equals total cost as
follow:
• Let us assume that Production level which must be produced to equilibrate the total cost
with total revenues is X and variable cost equals to Production Level times Variable cost per
unit, then Break-even Point in units is:
Fixed Cost
• X
Once your analyses of environmental, marketing and technical have been completed, the next step of a
feasibility analysis is to take a look at key financial and economic issues.
The Basics
• Assess the capital needs of the business project and how these needs will be met.
• Estimate initial investment needs and Start up costs (capital requirements for facilities,
equipment and inventories)
Initial Investment
This is the investment made at the beginning of the project. The value is usually negative, since most
projects involve an initial cash outflow. The initial investment can include licensing fees and startup
costs.
Working Capital =
Working capital measures how much in liquid assets a company must have to build its business. It also a
measure of both a company's efficiency and its short-term financial health . Working capital is the
amount of money that a company has tied up in funding its day to day operations
Current assets are those assets that are expected to be used (sold or consumed) within a year, unlike
fixed assets. Current assets are shown on the balance sheet, and are listed in order of increasing liquidity
(i.e. how easy they are to convert to cash) .
The current asset position of a company is important, both for assessing its financial strength
financial position and for gauging its operational efficiency. Current Assets as Cash, Account Receivables
and Inventory
Current liabilities are very important in gauging a company's financial health as the company needs
to have the money to meet these commitments in the short term.
Financial Needs
• Identify the Sources of Financing, the project is either internally financed (self financed) or
externally financed.
• Assess alternative sources for financing; banks, government (i.e. direct loans or loan
guarantees), grants, local and state economic development incentives.
• Assess expected financing needs and alternative sources; what are the interest rates, terms,
conditions, etc.
“Indicators”
There are endless financial and economic indicators that can be developed and derived, based on the
needs of tour particular project. We will identify the most important and critical ones.
• Net Profit
• Industrial Profit
• Future Value - FV
Profitability Indicators
Income Indicators
• Capital Expenditure
• Estimate the returns under various scenarios with different levels of production, price and sales.
• Create a benchmark against industry averages and/or competitors (cost, margin, profits, ROI,
etc.).
• Report the project’s financial statements, balance sheet when reaching full operation. Calculate
some financial ratios.
Revenue Projections
Estimate the sales or revenue that your business will generate annually. The sales estimation
was done in the marketing analysis .The following results of the market study will be used for revenues
estimation:
• The demand on the product or the service the project will provide which represents the annual
expected sales of the project.
Financial Statement
• Financial statements (or financial reports) are formal records of a business' financial
activities. These statements provide an overview of a business' profitability and financial
condition in both short and long term. There are three basic financial statements: (Three
to Five years highlight)
• Income Statement: also referred to as Profit or loss statement, reports on a company's results
of operations over a period of time.
• Balance Sheet: Income Statements and Cash flow can be used to perform many analyses, which
is called Ratio Analysis
– Undercapitalization
– Inadequate Planning
– A Competitive Edge
– Mushy Marketing
– Inadequate Flexibility
– Uncontrolled Growth
Sensitivity Analysis
Estimate the returns and costs with different scenarios under various production, price and sales
levels and their impact on the net profit or return on capital.
For Example:
• Strategic planning and management is the art and science of planning, formulating,
implementing and evaluating cross-functional decisions that will enable an organization to
achieve its objectives.
• This is the highest level of managerial activity ( job of the CEO)
• 1. Situation analysis
• 2. Self evaluation
• 3. Competitor analysis
Competition
5 competitive forces:
2. Threat of substitutes
Porter’s Theory
• The Theory of Competitive Advantage and it utility and application expounded to the world in
Michael Porter’s book in 1985:
Evaluate your firm’s competitive position and implement the specific actions necessary to
improve it.
Sustaining Competitiveness
• Cost leadership.
• Identifying what creates value for the buyer and hence differentiation.
• A high level model of how businesses receive raw materials as input, add value to the raw
materials through various processes, and sell finished products to customers.
• Value Chain analysis looks at every step a business goes through, from raw materials to the
eventual end-user. The goal is to deliver maximum value for the least possible total cost.
GAP Analysis
• Gap analysis is a business resource assessment tool enabling a company to compare its actual
performance with its potential performance.
• It is a formal study of what a business is doing currently and where it wants to go in the future. It
can be conducted, in different perspectives, as follows:
• Business direction
• Business processes
• Information technology
• This goal of the gap analysis is to identify the gap between the optimized allocation and
integration of the inputs and the current level of allocation.
• Benchmarking
• Existing usage
• Market potential
• Product Gap
• Competitive Gap
Business Planning and Competitiveness
• If a project is seen to be feasible the next logical step is to commission a business plan.
• A business plan is designed to plan in advance how a business or a project will be started,
implemented and managed; in short, a working ‘blue print’ of the entire business or
project.
• The Purpose of it :
• To improve confidence that the recommended action is the most viable solution to the problem.
• Debt financing
• Bank loans
• Personal funds
• Private investors
• Partners
• Stock sales
• Accounting methods
• Cash basis
• Accrual basis
In Retrospect
• Let us go back and consider the projects we had in mind at the start of the workshop.
• Which areas do you think you need to focus on with greater depth depending on the type of
business, product or service you wish to launch?
• What are the areas that need greater and more sophisticated analysis?