III.

Project Preparation
(Feasibility Study)
OUTLINE
What is feasibility study?
Why Project Preparation(feasibility study)?
Data Sources for Project Preparation(feasibility Study)
Contents of Feasibility study
Markets and Demand Analysis
Raw Materials and Supplies Study
Location, Site and Environment Impact Assessment
(EIA)
Production Program and Plant Capacity
Engineering and Technology Selection
Organizational and Human Resource
Financial and Economic Analysis
 What is a Feasibility Study?
A feasibility study- is an analysis of the viability
of an idea through a disciplined and documented
process of thinking through the idea from its
logical beginning to its logical end.

A feasibility study- provides an Investigating

function that helps answer “Should we proceed
with the proposed project idea? Is it a viable
project idea?”

A feasibility study - should be conducted to

determine the viability of an idea BEFORE
proceeding with the investment decision.
 Why Project Preparation(Feasibility Study?)
To find out if a proposed project idea can be done:
...is it possible? , ...is it justified?

To provide quality information for decision making- a

“go/no-go” decision
Provide a thorough examination of all issues and assessment
of probability of project success
Identify reasons NOT to proceed
Enhance the probability of success by addressing and
mitigating factors early on that could affect the project
Provide documentation that the proposed project was
thoroughly investigated

Help in securing funding from lending institutions and

other monetary sources
 Data Sources for Project Preparation(a Feasibility
Assessment)
Data required for a feasibility study can
come from primary or secondary sources
Primary data- can include formal
interviews and surveys
• Collection of primary data can be expensive and
time consuming
Secondary data- can include industry and
trade publications, statistics of industry
associations, and government agency
reports
Contents of Feasibility Study
The contents of industrial investment project feasibility study:-
Cover Page
Executive Summary
Table of Content
Project Background &Basic Idea
Markets and Demand Analysis
Raw Materials and Supplies Study
Location, Site and Environment Impact Assessment (EIA)
Production Program and Plant Capacity
Engineering and Technology Selection
Organizational and Human Resource
Financial and Economic Analysis
Conclusion
Annexes
Executive Summary
A feasibility study should begin with a brief executive summary :
• Outlining the project data(both assessed & assumed) and the
conclusions & recommendations
It should concentrate on & cover all critical aspects of the study
In general, it should have the same structure as the body of
feasibility and hence, cover(but not limited to) to the following
areas:
• Summary of project background &history
• Summary of Market and Marketing concept
• Summary of Raw materials& Supplies, Location, Site & Environment,
Engineering& Technology
• Summary of Organization and Human Resources
• Summary of Financial &Economic impact
Key points to remember:-
Write the summary after the content section of feasibility is completed
Although the summary is written last, it is presented first
The summary should no be more than one page long
Project Background & Basic Idea
Clearly state how the project idea fits into the framework of general
economic conditions & industrial development of a nation

The project should be described in detail & sponsors be identified

together with the reasons for their interest in the project including:-
Description of project idea-
• Project Objectives &Project Strategy
• Project Location, product (product mix, plant capacity) &
implementation schedule
• Outline economic, industrial, financial, social and other related policies
that support the project
• Show different geographical levels(International, regional, national…)
• Highlight the economic, sector & sub sectoral coverage of a project
Project Promoters or Initiators-name & address, roles with in a
project, financial possibilities ..
Feasibility Study- author, title, ordering party
Cost of Preparatory Studies & Related Investigations
Market and Demand Analysis
Objective
To estimate the potential size of the market for the product proposed
to manufactured(or services to be offered)
• What is the likely aggregate demand for the product/service?
To estimate the market share to be captured
• What share of the market will the proposed project enjoy?
To develop the marketing concepts of a project
• Determine the marketing strategy and the operative measures
required to implement the strategy
Steps- involved in market and demand analysis-See Fig 3.1-
Conduct Market Research
• Situational Analysis and specification of objectives
• Data Assessment(secondary information & market survey)
• Characterization of the market
• Demand Forecasting
• Conclusion , Opportunities and Risk
Develop Marketing Concepts
....Cont’d
Conduct Market Research
Data Demand
Assessment Forecasting
Collection of Characterization
Situational Secondary Of the market
Analysis & information
Specification
of objectives Conduct
Conclusion,
Market Survey Opportunities,
Risks

Develop Marketing Concept

Fig 3.1 Steps in
Market & Demand
analysis
I- Market Research
Situational Analysis& Specification of objectives
Situational Analysis
• Is conducted to get a clue as to how the product is related with the market.
• “Provide the initial understanding of current status of the key aspects of the market &its
participants- the marketing tools, and who and what determines the characteristics of the
market that the project is supposed to enter - through informal means”- Chandra(2003)

– Include customers(customer preferences &purchasing power),

competitors(strategies & actions of competitors) and practices of middlemen-
Sales agents &brokers-(if any)
Specification of market research Objectives- to carry out formal study, it is necessary to
spell out its objectives clearly & comprehensively
– “As common approach, it would be organized along the following lines:
– Assessment of the effective demand
– Customer analysis and market segmentation
– Analysis of the channels of distribution
– Analysis of the competition
– Analysis of the governmental policy and socio-economic environment
– Projections of marketing data-Demand forecasting
– Conclusions, Opportunities and risks” –UNIDO(1991)
....Cont’d
Data Assessment
Methods-There are basically two options for obtaining the required data:-

• A. Desk Research-Collection of Secondary Information- Represent

the assessment of information that has already been gathered in
some other context and is already available- Eg. Census report ,
National Economic Survey reports, Annual survey of industries, NBE
bulletins/reports, Ministry of trade/industry reports.

• B. A field survey-Conduct of Market Survey- is the assessment of

primary information directly by questioner, interviews and
observations.

Required Data- may include:

• General economic indicators relating to product demand, such as

population level and growth rate, per capita income and
consumption, GDP per capita and annual growth rate, and income
distribution
....Cont’d
Data Assessment(Cont’d)
• Government policies, practices and legislation, to the extent directly
related to consumption, production, imports and exports of the
products in question, standards, restrictions, duties, taxes, as well as
subsidies or incentives, credit control and foreign exchange regulations

• Present level of domestic production, by volume and value, including

production intended for internal consumption and not placed on the
market

• Present level of imports, by volume and value

• Production targets determined in national economic plans

• Present level of exports, by volume and value

• Behavioral patterns, such as consumer habits and responses, individual

and collective, and trade practices
....Cont’d
Characterization of the Market-
Based on Primary and secondary data gathered, market for the proposed
product is characterized along the following attributes:
1. Effective Demand : Past and Present
• Apparent consumption=Production+ Imports-Exports-Change
in Inventory(stock)
– This figure should be adjusted for consumption of the product
by the producer and effects of abnormal factor
– The consumption series, after such adjustments may be obtained
for several years
• Example:-
– Beg. Inv ----------5,000,000 Ton
– Ending inv.-------2,000,000 Ton
– Production--------6,000,000 Ton
– Import------------1,000,000 Ton
– Export------------3,000,000 Ton
– Apparent Consumption…………………………………..7,000,000
....Cont’d
Characterization of the Market-Cont’d
2. Breakdown of Demand- Divide the aggregate demand
/market into different segments, on the basis of: i) nature of the
product, ii)Consumer groups, and iii)Geographically

3. Customers- the customers and their needs and behavior must

be identified. Customers may be characterized along two
dimensions:

– 1. Socio-demographic criteria for individuals (age, sex,

income, education, profession, social background etc.)

– 2. Attitudinal criteria (preferences, habits, intentions etc.)

4. Price- specify the current prices of the market distinguishing

among manufacturer’s price, Average whole sale price, Average
retail price
...Cont’d
Characterization of the Market-Cont’d
5. Methods of Distribution and Sales Promotion- The methods
of distribution and sales promotion employed currently and their rationale
must be specified
• Methods/Channels of Distribution- are the chain connecting producers
and end users.
– Either separately or in combination, the three main routes to the end-
customer are as follows: through wholesalers to retailers; through retailers
only; directly to consumers.
• Methods of Sales promotion-Methods employed for promotion (advertising,
discounts, gift schemes…) may vary from product to product

6. Supply and Competition-It is necessary to know and describe the

existing source of supply and competitors. In doing so:-
• Describe Competitor's position-Total sales, Sales in most important segments,
Total market share ,Market shares in most important segments
• Give special attention to the f/g questions
– What are the aims of the competitors? How do the competitors behave?
– How do the competitors use their marketing tools? Which target groups (segments)
do they work on and how extensively? In which segments have they special
strengths and where are their weaknesses?
....Cont’d
7. Government Policy
The role of the government in influencing the market and
demand of a product may be significant such that:
Government policies, plans and legislations that would
have a bearing on market demand should be spelt out

8. Wider socio-economic environment

• Describe the social and socio-economic aspects relevant to
the preparation of marketing concept

– Such aspects may reflect the society and its culture, social
and economic policies, and related regulations, customs and
habits.
....Cont’d
Demand Forecasting
A)Qualitative Methods-rely essentially on judgments of experts to
translate qualitative information into quantitative estimates
i)Jury of Executive Opinion-involves soliciting the opinions
of managers /experts on expected future demand and
then, combining them into a demand estimate.

ii)Sales Force Composite- Approach in which each

salesperson estimates sales in his or her region

iii)Delphi Method-
• Opinions are sought from a group of experts who don’t
know the identity of each other using mail survey and,
• Any divergent views are then mailed back to experts
for further opinion until the consensus is obtained
....Cont’d
B)Time Series Projection Methods-generate forecasts on the basis of
an analysis of the historical time series.
i)Trend Projection method- Involves a) determining the trend of consumption by
analyzing past consumption data and then, b)projecting future consumption by
extrapolating the trend. This is given by the following expression:

Yt=a + bT where, Y is the demand for year t , T is time variable

Slope=
Y intercept=
ii) Exponential Smoothing method
• Forecasts are modified in light of observed error, as in the following equation
=>

iii) Moving Average Method

• Forecast for next period is equal to the average of sales for several preceding
periods, as in the f/g equation:-
....Cont’d
B)Time Series Projection Method
Moving Average Method(Cont’d)
• This moving average method may be also classified as simple moving average
and weighted moving average method depending the degree emphasis given to
the observation
 Simple Moving average method:-Uses an average of a specified number of the most
recent observations, with each observation receiving the same emphasis (weight)
 The forecast for next period (period t+1) will be equal to the average of a specified
number of the most recent observations, with each observation receiving the same
emphasis (weight).
 Weighted Moving Average method- Uses an average of a specified number of the most
recent observations, with each observation receiving a different emphasis (weight)
 The forecast for next period (period t+1) will be equal to a weighted average of a
specified number of the most recent observations

Other Time series Method

• Simple Mean (Average): Uses an average of all past data as a forecast .
– The forecast for next period (period t+1) will be equal to the average of all past
historical sales
• Naïve : Uses last period’s actual value as a forecast
– The forecast for next period (period t+1) will be equal to this period's actual sales
Example-Time series
1. Given the demand of a certain product during a 12-year as below, find
the least square regression for trend projection
Year Demand(‘000) Year Demand(‘000)
2001 28.0 2007 33.5
2002 29.0 2008 31.8
2003 28.5 2009 31.9
2004 31.0 2010 34.3
2005 34.2 2011 35.2
2006 32.7 2012 36.0
2. For the data given in Qn1, assume the forecast for period 1 was 29.0. If
is equal to 0.2 , derive the forecast for the periods 2 to 12 using the exponential
smoothing method

3. For the data given in Qn1, set n equal to 4 and develop forecasts for the period
5 to 12 using the (Simple) moving averages method. Besides, develop forecast for
the period 4 to 12 using the 3 year weighted moving average method with weight
of 5,3,2 from recent to old)
1. Trend Projection
T Y TY T2
0 28.0 0 0
1 29.0 29 1
2 28.5 57 4
b=2214.8- (12X5.5X32.2)
3 31.0 93 9 506 - (12X5.5X5.5)
4 34.2 136.8 16 b= 89.6 =0.627
143
5 32.7 163.5 25
6 33.5 201 36
7 31.8 222.6 49
8 31.9 255.2 64
9 34.3 308.7 81 a=32.18- (0.627X5.5)
a= 28.73
10 35.2 352 100
11 36.0 396 121
Sum=66 Sum=386.1 Sum=2214.8 Sum=506
Average=5.5 Average=32.18
Trend Projection(Cont’d)
Given the slope(0.627) and y-intercept(28.7), forecast for
the coming five years would be computed as:-

Yr. 12= 28.7+ 0.627 X 12= 36.2

Yr. 13= 28.7+ 0.627 X 13= 36.9
Yr. 14= 28.7+ 0.627 X 14= 37.5
Yr. 15= 28.7+ 0.627 X 15= 38.1
Yr. 16= 28.7+ 0.627 X 16= 38.7
.
.
.
2. Exponential Smoothing
t Data(St) Forecast(Ft) Error(St-Ft)
1 28.0 29.0 -1.0 F2=29.0 + 0.2(-1.0)=28.8
2 29.0 28.8 0.2 F3= 28.8 + 0.2(0.2)=28.8
3 28.5 28.8 -0.3 F4 =28.2 +0.2(-0.3)=28.7
4 31.0 28.7 2.3 F5 =28.7 + 0.2(2.3)=29.2
5 34.2 29.2 5.0 F6=29.2 + 0.2(5.0)=30.2
6 32.7 30.2 2.5 F7=30.2 + 0.2(2.5)=30.7
7 33.5 30.7 2.8 F8= 30.7 + 0.2(2.8)=31.3
8 31.8 31.3 0.5 F9= 31.3 +0.2(0.5)=31.4
9 31.9 31.4 0.5 F10=31.4 +0.2(0.5)=31.5
10 34.3 31.5 2.8 F11=31.5+0.2(2.8)=32.1
11 35.2 32.1 3.1 F12=32.1 +0.2(3.1)=32.7
12 36.0 32.7 3.3 F13= 32.7 +0.2(3.3)=33.4
3. a) Moving Average(Simple)
t Data(St) Forecast(Ft)
1 28.0
2 29.0
3 28.5
4 31.0 F5=(28.0+29.0+28.5+31.0)/4=29.1

5 34.2 29.1 F6=(29.0+28.5+31.0+34.2)/4=30.7

6 32.7 30.7 F7=(28.5+31.0+34.2+32.7)/4=31.6

7 33.5 31.6 F8=(31.0+34.2+32.7+33.5)/4=32.9

8 31.8 32.9 F9=(34.2+32.7+33.5+31.8)/4=33.1

9 31.9 33.1 F10=(32.7+33.5+31.8 +31.9)/4=32.5

10 34.3 32.5 F11=(33.5+31.8 +31.9+34.3)/4=32.9

11 35.2 32.9 F12=(31.8 +31.9+34.3+35.2)/4=33.3

12 36.0 33.3 F13=(31.9+34.3+35.2+36.0)/4=34.4

3. b)Moving Average(Weighted)
t Data(St) Forecast(Ft)
1 28.0
2 29.0
3 28.5 F4=(0.2*28.0)+(0.3*29.0)+(0.5*28.5)=28.6

4 31.0 28.6 F5=(0.2*29.0)+(0.3*28.5)+(0.5*31.0)=29.9

5 34.2 29.9 F6=(0.2*28.5)+(0.3*31.0)+(0.5*34.2)=32.1

6 32.7 32.1 F7=(0.2*31.0)+(0.3*34.2)+(0.5*32.7)=32.8

7 33.5 32.8 F8=(0.2*34.2)+(0.3*32.7)+(0.5*33.5)=33.4

8 31.8 33.4 F9=(0.2*32.7)+(0.3*33.5)+(0.5*31.8)=32.5

9 31.9 32.5 F10=(0.2*33.5)+(0.3*31.8)+(0.5*31.9)=32.2

10 34.3 32.2 F11=(0.2*31.8)+(0.3*31.9)+(0.5*34.3)=33.1

11 35.2 33.1 F12=(0.2*31.9)+(0.3*34.3)+(0.5*35.2)=34.3

12 36.0 34.3 F12=(0.2*34.3)+(0.3*35.2)+(0.5*36.0)=35.4

....Cont’d
C)Casual Methods- Seek to develop forecasts on the basis of cause &effect
relationship specified in an explicit quantitative manner.
Include:-
i) Consumption Level method
• For products that are directly consumed, the consumption level is estimated on the basis
of elasticity coefficients – income elasticity and price elasticity of demand.

• Income Elasticity-The extent to which demand changes in response to variations in

income is measured by the income elasticity of demand. The following formula gives the
income elasticity coefficient :-

Ey= Q1-Qo X I1+Io

I1-Io Q1 +Q o
Where, Ey: Income Elasticity coefficient; Q 0(I0):Qty demanded (income level)in base
year; Q1(I1):Qty demanded(income level) in subsequent year

Example: The following information is available on the quantity demanded and income
level: Q1=50, Q2=55,I0=1,000 and I1=1,020. What is income elasticity?

Ey= Q1-Qo X I1+Io = (55-50) X (1000 +1020) =4.81

I1-Io Q1 +Q o (1020-1000) (55+50)

.
....Cont’d
 Price Elasticity-The price elasticity of demand, that is, the ratio of
relative variations in the volume of demand to the relative variation in
price, may be expressed as a coefficient:

= Q1-Qo X P1+Po
P1-Po Q1 +Qo

Where , Ep is the price elasticity coefficient, Q1 is the new demand,

Qo is the existing demand at the present price Po and Pi is the new
price.

Example: If 500,000 and 400,000 refrigerators sell at $500 and $700

respectively, the price elasticity of demand is:

– Ep= Q1-Qo X P1+Po

P1-Po Q1 +Qo

– Ep= 100,000 X 1,200 = -0.67

-200 900,000
Example- Consumption Level
Suppose the present per capita demand(base year) for paper is 2kg and the
present per capita income(base year) is $90. The income elasticity of demand
is 2. The future demand of for paper in future years could be estimated by
applying the income elasticity coefficient as in table below

Year Per Increas Increase Per capita Populati Aggre.Deman

capita e in per Per capita Demand on d
Incom capita Demand (Kg) (in For paper
e income (%) = Millions) =(Projected
($) (relativ (Increase Present per per capita X
e to in per capita(1+ increase Projected
base capita per capita income X population)
year) income IE)
XIE)

2000(bas 90.0 2.00 540 1,080

e year)
2001 91.8 2 4 2.08 557 1,158
2002 94.5 5 10 2.20 585 1,280
2003 99.0 10 20 2.40 601 1,442
....Cont’d
ii) End Use Method-Consumption Coefficient Method
• Suitable for estimating demand for intermediate products that
are consumed for various end uses

• Involves the following steps:-

– 1st. Identify all possible uses of a product

– 2nd.Define the consumption coefficient of a product for
various uses
– 3rd. Project the output levels for the consuming industries
– 4th .Compute the aggregate demand for a product
– By multiplying the consumption coefficient of the
various uses with their respective projected outputs
and then summing up the projected demands for
various uses
.
Example-End Use Method
Assume petrol is used by four different types of vehicles, the annual petrol
consumption coefficient for these vehicles and the projected (forecast) # of vehicles
for the year 2012, the forecast of petrol consumption using end use method would
be as shown in Table below:

Vehicles Annual petrol Forecast # of Forecast of petrol

consumption vehicle in year consumption
per vehicle 2012 (million liters)
(thousand liters) (thousand cars)
Private Cars 3.2 150 480
Taxi 8.6 60 546
Commercial Vehicle 11.2 110 1232
Motor Cycle, Bajaj 0.12 410 49
Other Uses(10% 0.32 … 48
of private cars)
Total 730 2355
....Cont’d
iii)Regression/አማካይ ተዛምዶ/ Method
• Forecasts are made on the basis of a relationship estimated between the
forecast (or dependent) variable and the explanatory (or independent)
variables.
• Different combinations of independent variables can be tested with data, until
an accurate forecasting equation is derived.
– Unfortunately, projection of the independent variables is difficult.

iv)Leading Indicator Method

• To use these indicators for forecasting purposes, at first the appropriate leading
indicators would have to be identified, and then the relationship between them
and the variable being forecast is determined.

– Leading indicators are variables that react to change before, and which can
be used to predict, other variables.

• This method obviates the need for projecting an explanatory variable, but it is
not always possible to determine the leading indicator, and the lead time may
not be stable.
– The relationship itself may also change with time. The method is used to
only a limited extent.
....Cont’d
Uncertainties in Demand Forecasting
Demand forecasts are subject to errors and uncertainties which
basically emanate from the following three:-

 A. Data about past and present market:

 it is spring board for projection. But can be affected due to few
observation, influence of abnormal factors(war, natural calamity).

 B. Methods of forecasting
 due to inabilities to handle unquantifiable factors, unrealistic
assumptions, Excessive data requirement.

 C. Environmental changes : Environment in which business function is

characterized by uncertainty including Technology change, change in
govt. policy etc
....Cont’d
Conclusions , Opportunities and Risks
At this stage, after having summarized all results obtained so far by the
marketing research:

The market opportunities that can make the project feasible, as well
as the market risks endangering it, can be summed up.

These potential opportunities and risks provide the bases for

The development of the marketing concept, which comprises :-
• the specific marketing strategies (focus on target market and customer
needs), and, measures and means (coordinated marketing) required to
achieve the project objectives in a chosen market - as shown in next
section
II-Develop Marketing Concept
Includes the following two dimensions :
A. Strategic Dimension
• 1st ) Determine Product-target group- Identification of target groups and of the
products likely to win their favor;

• 2nd ) Determine Marketing Objectives -Comprise sales objectives as well as the

desired position in the product and target-group fields.

• 3rd) Determine Marketing Strategies-

– For Saturated Market-Determine Competition Strategy-Aggressive price
strategy , Imitation strategy ,Profile strategy or
– For Growing Market- Determine Market expansion Strategy: Demand
expansion ,Demand intensification
B. Operative Dimension
• 4th) Determine the marketing mix-Product, price, promotion and distribution-the
components of the marketing mix-must be seen as interdependent marketing
tools, which are to be combined in an optimal way so as to achieve the marketing
objectives

• 5th )Determine measures and Tools-concerned with the preparation of a schedule

or plan of action and the projection of the marketing budget.