Unit 3:

Project Preparation

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PREPARATION OF PROJECT FEASIBILITY STUDY
:
1. Marketing and Technical Analysis

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 Preparation of Project Feasibility Study
Feasibility study involves an examination of the operations,
financial, HR and marketing aspects of a business on ex-ante
(Before the venture comes into existence) basis.
Feasibility is a multivariate concept; that is, a project has to
be viable not only in technical terms but also in economic
and commercial terms too.

•Forms of feasibility studies:-

•Market/Commercial viability
•Technical feasibility
•Economic feasibility
•Financial feasibility
•Other feasibility
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 Cont…
3.1. Market and Demand Analysis (Market feasibility)
• Market and demand analysis aims at determining
the aggregate demand for the product/service and the
market share of the proposed project, with the
practice of forecasting demand for the proposed
project.
•More specifically, it deals with:
I. Objectives of market analysis
ii. The marketing elements
iii. Situational analysis
iv. Collection of information
v. Characterization of the market
vi. Demand forecasting techniques 4
 Cont…
1. Objectives of market analysis
Can be:
To determine the effective demand for the envisaged
(proposed) project
To determine the characteristics of the corresponding
market in terms of unsatisfied demand, competition,
imports, exports etc.

2. the marketing elements

Marketing is characterized by the following elements:
Business philosophy (customer focus)
Marketing research (sources of information)
Marketing instruments (strategies of marketing mix)
Marketing plan and budget 5
 Cont…
3. Situational Analysis
The project analyst should be able to establish the
relationship between the product and its market.
To do so, she/he may informally talk to the following
parties:
Customers- preferences and purchasing power of customers
Competitors- actions, and strategies of competitors
middlemen (wholesalers and retailers)- practices of middlemen.

 The main benefit of such informal contact is to avoid formal study

of the market if adequate and relevant information is obtained
about project demand.

 If enough data was not generated at this stage, formal market and
demand analysis should be carried. 6
 Cont…

4. Collection of information
The following types of information may be collected
through market survey:
 Total demand and rate of growth of demand
 Motives for buying
 Demand in different segments of the market
 Income and price elasticity of demand
 Purchasing plans and intentions
 Satisfaction with existing products
 Unsatisfied needs
 Attitudes towards various products
 Distribution and price practices and preferences
 Socio-economic characteristics of buyers
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 Cont…

5. Characterization of the market

Market characterization involves describing the market
for product/service in terms of the following factors:
Effective demand past and present
Breakdown of demand/segmentation
Price factors and strategy (internal & external )
Methods of distribution
Promotion mix
Consumers
Supply and competition
Government policy
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 3.2. Technical Analysis

The broad purpose of technical analysis is:

(a) to ensure that all the inputs required to set up

the project are available, and

(b) to facilitate the most optimal formulation of the

project in terms of technology, size, location,
and so on.

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 Cont’d
Basic issues relating to technical analysis are :
Manufacturing process/technology
Technical arrangements
Materials and inputs
Product mix
Plant capacity
Location and site
Machineries and equipments
Structures and civil works
Environmental aspects
Project charts and layouts
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 Cont…
1. Manufacturing process/technology
Selecting the technology depends on Choice of
technology and appropriate technology.
The choice of technology is influenced by : Plant
Capacity, Principal Inputs, Investment Outlay and
Production Cost, Uses by Other Units, Product Mix,
Latest Developments and Ease of Absorption.
Appropriate technology refers to those methods
of production, which are suitable to local
economic, social, and cultural conditions.

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 Con…
2. Technical arrangement 
Satisfactory arrangements must be made to obtain the
technical know-how needed for the proposed
manufacturing process.
3. Material inputs and utilities
 

•An important aspect : defining the materials and utilities

required, specifying their properties in some detail, and
setting up their supply programmes.
•Material inputs and utilities may be classified into four
broad categories: (i) raw materials, (ii) processed industrial
materials and components, (iii) auxiliary/supplementary
materials and factory supplies, and (iv) Utilities.
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 4. Product mix  
Con…

 The choice of product mix is guided by market

requirements.
 In the production of most of the items, variations
in size and quality are aimed at satisfying a broad
range of customers.
 While planning the production facilities of the firm,
some flexibility with respect to the product mix
must be sought.
 Such flexibility enables the firm to alter its product
mix in response to changing market conditions and
enhances the power of the firm to survive and
grow under different situations.
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 Cont..
5. Plant Capacity (Production Capacity)
•Refers to the volume or number of units that can be
manufactured during a given period.
•Plant capacity may be defined in two ways:

The feasible Normal capacity(FNC) refers to the capacity attainable

under normal working conditions.

The nominal Maximum capacity (NMC)is the capacity, which is

technically attainable, (installed capacity guaranteed by the
supplier).

Several factors have a bearing on the capacity decision. These are: Technological
requirement, Input constraints, Investment cost , Market conditions, Resources
of the firm, Governmental policy.
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 Cont…
6. Location and site selection
•Location refers to a fairly broad area like a city, an industrial zone,
or a coastal area; site refers to a specific piece of land where the
project would be set up.
•The choice of location is influenced: proximity to raw materials and
markets, availability of infrastructure, labor situation,
governmental polices, and other factors.
•Thus, Two or three alternative sites must be considered and
evaluated with respect to cost of land and cost of site preparation
and development.
7. Machineries and Equipments  
The requirement of machineries and equipment is dependent
on production technology and plant capacity.
It is also influenced by the type of project.

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 8. Structure and civil work Cont…
Structure and civil works may be divided into three
categories:
(i) Site preparation and development,
(clearing , relocating and connecting utilities
etc…)
(ii) Buildings and structures,
(factory, auxiliary, staff welfare, adminstrative,
residential ..etc)
(iii) Outdoor works. (supply & distribution utilities,
waste mag’t, lightning, land scaping, etc..)
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 Cont…
9. Environmental Aspect
The key issues that need to be considered in
this respect are:
What are the types of effluents/ liquid
waste and emissions generated?
What needs to be done for proper disposal
of effluents/waste and treatment of
emissions?
Will the project be able to secure all
environmental clearances and comply with all
statutory/legal requirements? 17
 Cont..

10. Project chart and layout

These define the scope of the project and provide
the basis for detailed project engineering and
estimation of the investment and production costs.

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 Demand Forecasting

Qualitative methods include:

Jury of executive opinion method(Panel of
discussion)
Delphi method (expertise opinion-using repeated
questionnaire)
Quantitative methods include:
Trend projection method
Exponential smoothing method
 consumption level methods
 end use method
Moving average method 19
 …
Cont

i. Trend projection method (regression analysis)

– also called least square method
 
It involves interrelated steps: These are:

i. Obtain demand data for some past periods, (the trend

of consumption)
ii. Establish liner relationship using the ff formula:
Yt = a + bT
Where
Yt = Demand for year t a= Intercept of the relationship
b = Slope of the relationship T= Time variable
The values of a and b can be determined using the
following formula: 20
 Cont…

n  TY   T  Y
b
n  T   T 
2 2

a
 Y  b T
n
Consult your statistics materials for further
understanding of regression analysis
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 Cont…
To illustrate demand forecasting using simple regression
analysis, consider the following data concerning demand
for product x during the last eight years.
Year Actual demand (DD)
1 200
2 250
3 175
4 186
5 225
assuming that the base line is the first five years:
Forecast the demand for period 7, 8, 9?
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 Cont…
Using the above data, the computations of a and
b are as follows:
Year (T) Actual DD (Y) TY T2
1 200 200 1
2 250 500 4
3 175 525 9
4 186 744 16
5 225 1125 25
 = 15  = 1036  = 3094  = 55
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 Cont…
Yt = 211.40 – 7/5 T
Y(7)= 211.40 – 7/5(7)
Y(7)= 201.6

Y(8)= 211.40 – 7/5(8)

Y(8)= 200.2

Y(9)= 211.4 – 7/5(9)

Y(9)= 198.8
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Thank you!!!

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