Feasibility Study: Chapter-Three

Chapter-Three
Feasibility study
In the idea screening step, your objective
was to eliminate the ideas that were either
not a strong fit for your organization or
did not provide a significant business or
social impact.
Now the formal feasibility study can test
the key assumptions that determine
whether this enterprise actually would
have a good chance to succeed.
12/25/2021 prepared by: Temesgen Belayneh (PhD) 1

Cont’d…
The study is an opportunity to refine and
explain the concept, and to test market
reaction.
Generally speaking you will want to:
consult potential customers and funders,
and evaluate competitors; and do some
preliminary market research, such as a
focus group or survey, to gain confidence
in the value of the concept.

Cont’d…
Organizations do their feasibility studies
in various ways. You may wish to apply
for funding to hire a consultant to conduct
the study, or you may have someone in
your organization who can do it.

Cont’d…
You can choose to do a feasibility study
on one idea (usually the idea that scored
the highest on the assessment scorecard),
or you can decide to do a feasibility study
on two or more ideas. That depends on
your resources.
It would be reasonable to spend the
equivalent of three to six full-time person
days preparing a single feasibility study.

Elements considered while doing Project
Analysis/feasibility study
Project analysis refers to analyzing a project
from various perspectives so as to determine its
viability and sustainability. Project analysis
consists of :
Market/demand analysis
Technical analysis
Financial analysis
Economic Analysis (Environmental and social
cost benefit analysis)
Risk Analysis

1. Market/Demand Analysis
This step in project analysis aims to estimate the

potential size of the market for the product
proposed to be manufactured (or service planned
to be offered) and to get an idea about the market
share that is likely to be captured. Hence, the two
broad issues raised are:
What is the likely aggregate demand for the
product/ service?
What will be the share of the market for the
proposed product/service?

Cont’d...
Answers to these two questions call for an
in-depth study of various factors like:
 patterns of consumption growth,
income and price elasticity of demand,
composition of the market, nature of
competition,
availability of substitutes,
reach of distribution channels, etc.

The objectives of market/demand analysis
Market/demand analysis for new/improved products
development has objectives of the following questions:
 Who are the buyers?
 What is the total current demand for the product?
 How is demand distributed geographically?
 What is the demand for the product segmented in different
sizes?
 What price will the customers be willing to pay for the
improved product?
 How can potential customers be convinced about the
superiority of the new product?
 What price and warranty will ensure its acceptance?
 What channels of distribution are most suited for the product?
 What trade margins will induce distributors to carry it?

The market/demand analysis processes are:
Situationalanalysis
Collection of secondary information
Conduct market survey
Characterization of the market
Demand forecasting
Market planning

i. Situation analysis
In order to get an understanding of the relationship
between the product and its market, the project analyst
may informally talk to
 customers,
 competitors,
 middlemen,
 and others in the industry.
Wherever possible, s/he may look at the experience of the
company to learn about
 the preferences and purchasing power of customers,
 actions and strategies of competitors, and
 practices of the middlemen.

ii. Collection of secondary information
 Gathering information help to better understand the market

situation.
 information may be obtained from secondary and/ or primary
sources.
 Secondary information is information that has been gathered in
some other context and is already available.
 Primary information, on the other hand, represents information
that is collected for the first time to meet the specific purpose
on hand.
 Secondary information provides the base and the starting point
for market and demand analysis.
 It indicates what is known and often provides leads and cues for
gathering primary information required for further analysis.

Evaluation of Secondary Information
While secondary information is available economically and readily provided, the
market analyst is able to locate
its reliability,
accuracy, and
relevance for the purpose under consideration.
The market analyst should seek to know:

Who gathered the information and for what objective?
When was the information gathered? When was it published?
How representative was the period for which the information was gathered?
What was the target population?
How was the sample chosen?
How representative was the sample?
How satisfactory was the process of information gathering?
How accurately was the information edited, tabulated, and analyzed?
Was statistical analysis properly applied?

iii. Conduct Market Survey
Secondary information, though useful,
often does not provide a comprehensive
basis for market and demand analysis.
It needs to be supplemented with primary
information gathered through a market
survey, specific to the project being
appraised.
The market survey may be a census
survey or a sample survey.
Cont’d....
The information sought in a market survey may relate to one
or more of the following:
 Total demand and rate of growth of demand
 Demand in different segments of the market
 Income and price elasticity of demand
 Motives for buying
 Purchasing plans and intentions
 Satisfaction with existing products
 Unsatisfied needs
 Attitudes toward various products
 Distributive trade practices and preferences
 Socio-economic characteristics of buyers

........Steps in market survey
1. Define the Target Population
2.Select the Sampling frame and Sample Size
3.Develop the Questionnaire
4.Recruit and Train the Field Investigators
5.Obtain Information as per the Questionnaire
from the Sample of Respondents
6.Scrutinize the Information Gathered
7.Analyze and Interpret the Information

2. Technical Analysis
Analysis of technical and engineering aspects is done continually when a
project is being examined and formulated. The technical analysis is
made to identify and evaluate:
The availability of technology
The availability of technical experts
The appropriateness of technology
The affordability of technology
Technical analysis is concerned primarily with:
Material inputs and utilities
Manufacturing process/ technology
Product mix
Plant capacity
Location and site
Machineries and equipments
Structures and civil works
Work schedule

3. Financial Analysis
Financial analysis involves evaluating the
viability or the capability of the project to
raise the appropriate funds needed to
implement the proposed project.

Content of Financial Analysis
Financial analysis consists determination of the ff:
Cost of project
Means of financing
Estimates of sales and production
Cost of production
Working capital requirement and its financing
Breakeven point
Projected cash flow statements
Projected balance sheet.

...........................Cost of Project
The cost of project represents the total of all items of outlay

associated with a project. It is the sum of the following
outlays:
 Cost of land and site development
 Cost of Building and Civil work
 Cost of Plant and Machinery
 Technical know how Fees (expertise fee)
 Miscellaneous Fixed Assets
 Preliminary expenses
 Preoperative expenses (Costs)
 Provision for Contingencies
 Initial Cash Losses

.....................Means of Financing
In order to finance the project cost, a firm
may use combination of the following
sources;
Share capital (sell of stock)
Term loan and /or bond capital
Deferred credit ( Purchase of goods and
services on credit)
Miscellaneous sources: Eg. unsecured
loan, leasing
.....Estimates of sales and production
 In estimating sales revenue, the following

considerations should be born in mind:
1. It is not advisable to assume a high capacity utilization
level in the first years of operation.
 It is sensible to assume that capacity utilization would
be somewhat low in the first year and rise gradually to
reach the maximum level in the third or fourth year of
operation.
 A reasonable assumption with respect to capacity
utilization is as follows: 40 –50 percent of the installed
capacity in the first year, 50 –80 percent in the second
year, and 80 –90 percent from the third year

Cont’d....
2. For practical purpose, it may be assumed
that production would be equal to sales
( No inventory of Finished goods or
manufactured good will be sold)
3.The selling price considered should be the
price realizable by the company.

.............Cost of Production
Given the estimated production, the cost of
production may be worked out. The major
component of cost of production are:
1. Material cost(raw materials, chemicals,
components, and consumables required for
production).
2. Labor cost(Direct & indirect labor)
3. Utilities Cost (Power, water, and fuel)
4. Factory overhead cost(repairs and maintenance,
rent, taxes, insurance on factory assets, etc)

......................Working Capital Requirements and Its Financing
 Working capital is commonly defined in financial

analysis as net current assets.
 Consisting of inventories, including goods in process;
net receivables; marketable securities; bank balances;
and cash in hand.
 A certain amount of working capital is normally
required to run project facilities created by investment
in fixed assets.
 The principal sources of working capital finance are (i)
working capital advances provided by commercial
banks, (ii) trade credit (iii) accruals provisions; and (iv)
long term sources of financing.
..............Profitability of Projects
Given the estimates of sales revenue and
cost of production, the next step is to
prepare the profitability projections.
The estimates of profitability may be
prepared.

........................Breakeven Points
In addition to determining the level of
profitability, it is helpful to know what the
level of operation should be to avoid losses.
For this purpose, the break –even point,
which refers to the level of operations at
which the project neither makes profit nor
incurs loss is calculated.
BEP= Fixed Costs
S.P per unit-VC per unit

...................Projected Cash Flow Statements
 The cash flow statement shows the movement of

cash into and out of the firm and its net impact on the
cash balance with the firm.
 The cash flow statement is really a cash flow budget.
 The three basic steps in determining whether a
project is worthwhile or not are:
 a. Estimate projected cash flows,
 b. Establish the cost of capital, and
 c. Apply a suitable decision or appraisal criterion
(pay back, NPV, IRR) to decide whether to accept or
reject the project

4.Risk Analysis
Company ‘s success is achieved by pursuing opportunities to gain a competitive
advantage, and projects have typically been setup to take advantage of these
opportunities
to make something new, or
change an existing facility.
Risk has always been an intrinsic part of project management.
Risk management is gaining significance and importance due to:
increasing market competition,
increasing technology and
an increasing rate of change,
Risks are generally deemed acceptable if the possible gains exceed the possible
losses.
A project risk may be defined as any event that prevents or limits the
achievement of project objectives as defined at the outset of the project, and
these objectives may be revised and changed as the project progresses through
the project life-cycle.

5. Economic Analysis and Environmental
Assessment
 Successful economic development depends on the rational use of
natural resources and on reducing as far as possible the adverse
environmental impacts of development projects.
 Environmental assessment (EA) is a primary tool for achieving this
objective, by inserting critical environmental information into the
process of project identification, preparation, and implementation.
 Economic analysis, by comparison, is employed to determine if the
overall economic benefits of a proposed project exceed its costs, and to
help design the project in a way that produces a solid economic rate of
return.
 Adverse environmental impacts are part of the costs of a project, and
positive environmental impacts are part of its benefits.
 Consideration of environmental impacts, therefore, should be
integrated with the other aspects of the project in the economic
analysis to the extent possible.

Environmental Analysis
ENVIRONMENTAL ANALYSIS (the EA
Process) is a systematic, interdisciplinary
process used to identify the purpose of a
proposed action, develop practical alternatives
to the proposed action, and predict potential
environmental effects of the action.
A few examples of proposed actions are road
construction, tree clearing for disease control,
reforestation, building a hydroelectric dam, or
developing a quarry.

Cont’d....
 An Environmental Analysis (EA)identifies problems,
conflicts, or resource constraints that may affect the
natural environment or the viability of a project.
 It also examines how a proposed action might affect
people, their communities, and their livelihoods.
 The analysis should be conducted by an
Interdisciplinary Team consisting of personnel with a
range of skills and disciplines relevant to the project.
 Team members should include a team leader and may
include
 Engineers, geologists, biologists, archaeologists, and
social workers.
Cont’d....
The EA process and findings are
communicated to the various affected
individuals and groups.
At the same time, the interested public helps
provide input and comment on the proposed
project.
The document produced as a result of the EA
guides the decision maker toward a logical,
rational, informed decision about the
proposed action.
Cont’d....
The EA process and Interdisciplinary Team
studies can reveal sound environmental, social,
or economic reasons for improving a project.
After predicting potential issues, the EA
identifies measures to minimize problems and
outlines ways to improve the project’s feasibility.
Environmental mitigations a designer can use to
avoid potential impacts on wildlife, such as use
of animal underpasses and culvert requirements
for fish passage

Cont’d....
 The EA process can provide many benefits to the road
builder, local agencies, and the communities who will be
affected by road construction and maintenance activities.
 The process and resulting reports are tools that road
managers can use to guide their decisions, produce better
road designs and maintenance plans, identify and avoid
problems, and gain public support for their activities.
 An EA document can be long and complex for major,
potentially high impact projects, or it may only be a few
pages long for a simple road project presents an eight-step
process that is useful for doing Environmental Analysis.

Project Selection....
 The selection of the right project for future investment is a
crucial decision for the long-term survival of the company.
 The selection of the wrong project may well precipitate
project failure leading to company bunckrapcy .
 The execution of a project will tie up company resources,
and as an opportunity cost the selection of one project may
preclude the company from pursuing another project.
 We live in a world of finite resources and therefore cannot
carry out all the projects we may want or need.
 Therefore a process is required to select and rank projects
on the basis of beneficial change to the company.

CRITERIA FOR PROJECT SELECTION
Project selection is the process of
evaluating proposed projects or groups of
projects, and then choosing to implement
some set of them so that the objectives of
the parent organization will be achieved.

Cont’d...
Each project will have different costs,
benefits, and risks. Rarely are these
known with certainty.
In the face of such differences, the

selection of one project out of a set is a
difficult task. Choosing a number of
different projects, a portfolio, is even
more complex.
Cont’d...
Project selection is only one of many
decisions associated with project management.
To deal with all of these problems, we use
models.
We need such models because they abstract
the relevant issues about a problem from the
mass of detail in which the problem is
embedded—reality is far too complex to deal
with in its entirety.

Cont’d...
The model allows us to strip away almost
all the reality from a problem, leaving
only the relevant aspects of the “real”
situation for us to deal with.
This process of carving away the

unwanted reality from the bones of a
problem is called modelling the problem.

Cont’d....
The model represents the problem’s
structure, its form. We will use many
models such as, analogies, diagrams, as
well as flow graph and network models to
help solve scheduling problems, and
symbolic (mathematical) models for a
number of purposes.

Cont’d...
Models may be quite simple to understand, or
they may be extremely complex.
In general, introducing more reality into a model
tends to make the model more difficult to
manipulate.
If the input data for a model are not known
precisely, we often use probabilistic information;
that is, the model is said to be stochastic rather
than deterministic. Again, in general, stochastic
models are more difficult to manipulate.

Cont’d...
When a firm chooses a project selection
model the following criteria, based on
Souder (1973), are most important:

Realism
 The model should reflect the reality of the firm’s
decision situation, especially the multiple objectives of
both the firm and its managers, bearing in mind that
without a common measurement system, direct
comparison of different projects is impossible.
 Themodel should also take into account the realities of

the firm’s limitations on facilities, capital, personnel,
and so forth, and include factors that reflect project
technical and market risks: performance, cost, time,
customer rejection, and implementation.

Capability
The model should be sophisticated
enough to deal with the relevant factors:
multiple time periods, situations both
internal and external to the project (e.g.,
strikes, interest rate changes), and so on.

Flexibility
The model should give valid results within
the range of conditions that the firm
might experience.
It should be easy to modify in response to
changes in the firm’s environment; for
example, tax law changes, new
technological advancements that alter risk
levels, and, above all, organizational goal
changes.

Ease of use
The model should be reasonably
convenient, not take a long time to
execute, and be easy to use and
understand. It should not require special
interpretation, data that are difficult to
acquire, excessive personnel, or
unavailable equipment.

Cost
Data-gathering and modeling costs
should be low relative to the cost of the
project and less than the potential benefits
of the project. All costs should be
considered, including the costs of data
management and of running the model.

Easy computerization
It should be easy and convenient to
gather and store the information in a
computer database, and to manipulate
data in the model through use of a widely
available, standard computer package.

Project Selection Models..........
A numeric model is usually financially focused and
quantifies the project in terms of either time to repay
the investment (payback) or return on investment.
 While non-numeric models look at a much wider
view of the project considering items from market
share to environmental issues.
 The main purpose of these models is to aid decision-
making leading to project selection.
 When choosing a selection model the points to
consider are; realism, capability, ease of use,
flexibility and low cost.
Cont’d....
 Most importantly the model must evaluate projects by how well
they meet a company's strategic goals and corporate mission. The
following sub-headings indicate the type of questions to ask:
 Will the project maximize profits?
 Will the project maximize the utilization of the workforce?
 Will the project maintain market share, increase market share or
consolidate market position?
 Will the project enable the company to enter new markets?
 Will the project maximize the utilization of plant and equipment?
 Will the project improve the company's image?
 Will the project satisfy the needs of the stakeholders aspirations?
 Is the project's risk and uncertainty acceptable?
 Is the project's scope consistent with company expertise?

Numeric Models
 The numeric selection models presented here may be sub-divided into
financial models and scoring models. The financial models are:
 payback period
 return on investment (ROI)
 net present value (NPV)
 internal rate of return (IRR)
 Companies tend to prefer financial models and often select solely on
profitability. This may not be as drastic as it sounds because
subconsciously the managers will be considering a wider scope of
selection criteria.
 In an investment appraisal only the incremental income and expenses
attributed directly to the project under consideration should be
included. Costs that have already been incurred (sunk costs) should be
ignored as they are irrelevant to decisions effecting future projects.

Scoring Models
 The numeric models discussed so far all have a common limitation;
they only look at the financial element of the project.
 In an attempt to broaden the selection criteria a scoring model called
the factor model which uses multiple criteria to evaluate the project.
 The factor model simply lists a number of desirable factors on a
project selection proforma along with columns for Selected and Not
Selected.
 A weighted column can be added to increase the score of important
factors while reducing the scoring of the less important.
 The weighted column is calculated by first scoring each factor, and
then dividing each factor by the total score.
 The total of the weighted column should always add up to one.
 The factors can be weighted simply 1 to 5 to indicate; 1 "very poor",
2 "poor", 3 "fair", 4 "good" and 5 "very good".

Exercise: Do exercises on the following
Financial Modelling
payback period
return on investment (ROI)
net present value (NPV)
internal rate of return (IRR)

Feasibility Study: Chapter-Three

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Chapter-Three

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This step in project analysis aims to estimate the

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 Gathering information help to better understand the market

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The market analyst should seek to know:

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The cost of project represents the total of all items of outlay

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 In estimating sales revenue, the following

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 Working capital is commonly defined in financial

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 The cash flow statement shows the movement of

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In the face of such differences, the

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This process of carving away the

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 Themodel should also take into account the realities of

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