Chapter 3.

1
PROJECT
FEASIBILITY STUDY
A Feasibility study should arrive at definitive
conclusions after consideration of various
alternatives.
 The conclusions and recommendations should be
explained and supported by evidence
 The feasibility covers the following aspects:
• Project background and history
• Market analysis and marketing concept
• Raw materials and supplies
• Location, site and environment
• Engineering and technology
• Organization and overhead costs
• Human resources
• Project implementation schedule
• Financial analysis and investment appraisal
• Conclusions and recommendations
1. MARKET ASSESSMENT
Market analysis is the key activity for
determining
 the scope of an investment,
 the possible production programs,
 the technology required, and
 the choice of a location.
 The demand or market analysis must be carefully
planned in order to obtain the required information
within the time and cost limits, and to determine
the possible marketing and production strategies
required to reach the basic or corporate objectives.
 The first step in the market analysis is the preparation
of a detailed estimate of the actual market volume
 The second step is to project the development of the
future market volume.
 This is the basis for projection of targeted market share of
the enterprise. and
 The targeted market share provides the basis for the
projection of;
 Sales quantities,
 Production program,
 Plant capacity, and
 Derived requirements of inputs.
 Export markets
 The possibility of extending the market to other countries
should be explored, as export sales have to be taken into
consideration in determining plant capacity.
 To test the competitiveness of product;
 First, the price and quality of the product in the international
market should be determined,
 Secondly, the geographical divisions of possible exports should
be defined in the context of a particular product.
Analysis of the channels of distribution
 Distributionchannels are the chain connecting producers
and end-users
 The three main routes to the end-customer are;
 Through wholesalers to retailers,
 Through retailers only, and
 Directly to consumers.
 The choice of distribution channels should be based on the
results of the market research.
 Analysis of the competitors
 Assessing the project situation must also take in to
account the intentions of competitors
 Special attention should be given to the following
questions.
 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 what are
their weaknesses?
 Marketing research
 It mainly deals in the analysis of;
 Demand and competition,
 Consumer behavior and consumer needs,
 Competitiveness of the product and marketing instruments, and
 The impact of social, ecological and economic factors.
 Any errors made in the research phase would result in wrong
marketing concepts, and may place the whole project in
jeopardy.
 Objectives and Scope of research:
 Thereare three principal requirements of demand
and market analysis.
1. Market-project relations should be made transparent
2. Strategic constraints and problems should be identified
3. Strategic options for the project should be outlined.
 Sources of Data for research; There are two options:
1) Desk Research, and
2) Field survey
 Determination of Project strategy as well as
marketing strategy
A project strategy is a set of objectives and principles
defined for a project with a view to determining the
allocation of resources over a period of time.
 In the feasibility study alternative marketing strategies should
be assessed
 Competition strategy: This strategy aims at gaining market
shares from competitors
 Market expansion strategy: This strategy geared to the
creation of new markets or to demand intensification [more
consumption].
DEMAND FORECASTING TECHNIQUES
 The utmost caution should be exercised in the use of demand
forecasting techniques, in order to avoid misleading results.
 Important points:
 Characteristics should be precisely defined.
 A fairly large number of observations should be taken
 Data and coefficients associated with one market cannot be applied
to others.
 Assumptions made in the analysis must be distinctly expressed
without reservation.
 The selection of statistical techniques should be appropriate to the
nature of product, market, and data patterns.
 Reference data should be used with the necessary adjustment.
 Weighted averages should be preferable
 DEMAND FORECASTING TECHNIQUES
1. Trend (extrapolation) method
 The trend method is based on the extrapolation of past data
2. Consumption-level method
 The consumption-level method considers the level of
consumption, using standard and defined coefficients.
3. End-use or consumption coefficient method
 The end-use or consumption coefficient method is particularly
suitable for assessing intermediate products.
4. Regression models
 In the regression technique, forecasts are made on the
basis of relationship estimated between the forecast (or
dependent) variable and the explanatory (or independent)
variables.
5. Leading indicator method
 Leading indicators are variables that react to change
before, and which can be used to predict, other variables.
 Production Program and Plant Capacity
 Production Program
 A production program should indicate the levels of output
to be achieved during specified periods, which should be
related to specific sales forecasts.
 Full production may not be practicable for most projects
during the initial production operations.
 Depending on the nature of the industry and local factor
situations, production and sales target of 40-50 percent of
overall capacity for the first year should be reasonable. It
is only towards the third or fourth year that full
production levels can be achieved
 Input requirements:
 Once a production program defines the levels of output in terms
of end-products, intermediate products, the specific
requirements of material and labor should be quantified in
each stage.
 Technology:
 An important factor in determining the production program and
plant capacity is the technology and know-how to be utilized in
the project.
2. RAW MATERIALS AND SUPPLIES
 Differentmaterials and other inputs required for the
operation of the project should be identified and
checked their availability.
a) Raw Materials Classification
 Agricultural Products
 Livestock and forest products
 Marine products
 Mineral products
 Processed industrial materials and components
 Factory supplies and others
b) Specification of requirements
 All requirements of materials and supplies should be
identified and specified in the study considering all factors
 The quality of various inputs and their quantities are
estimated based on the user demands and market
expectations about the products of the project.
c) Availability and supply
 The availability of materials, their users and prices of should
be analyzed.
 Data regarding locations of supply, whether concentrated or
dispersed, transportability, transport costs and alternate
usage of such materials need to be collected.
d) Supply program
 Making use of the marketing research information, suppliers
to be identified and input quantities should be determined.
 The objectives of supply marketing are:

1. Cost minimization,
2. Reliability of supplies; Quality, quantity and timing wise.
3. To cultivate good business relations with suppliers for
smooth and mutual trusting transactions.
e) Costs of raw materials and supplies
 The costs of materials and other supplies have to be
analyzed in detail to determine project economies.
 Current prices have to be viewed in the context of past
trends and future projections of the elasticity of supply.
3. LOCATION, SITE AND ENVIRONMENTAL
ASSESSMENT
 Location: A feasibility study should determine the
location and site suitable for the project.
 The choice of location should be made form a fairly wide
geographical area, within which several alternative sites can
be considered.
 The traditional approach to industrial location focused on
the proximity of raw materials and markets, mainly with a
view to minimizing transport costs.
 The modern view requires consideration of commercial,
technical and financial factors but also of the social and
environmental impact of a project
 The best choice of location would be one where the costs of
products sold [marketing and production costs] are a
minimum.
 However other environmental [ecological and socio-
economic] factors will also influence the selection of a
feasible location and site.
 Regarding financial feasibility on alternative locations, the
following data and its related risks should be assessed:
• Production costs [including environmental protection costs]
• Marketing costs
• Investment costs [including environmental protection]
• Revenues
• Taxes, subsidies, grants and allowances
• Net cash flows.
 Site selection: The structure of site analysis is basically
the same as for location analysis.
 For sites available, the following conditions are to be
assessed:
• Ecological conditions on site [soil, hazards, climate…]
• Environmental impact [restrictions, standards, guidelines]
• Socio-economic conditions [restrictions, incentives requirements]
• Local infrastructure at site
• Strategic aspects [future corporate strategies on supply and
marketing policies]
• Cost of land
• Site preparation and development, requirements and costs.
 Environmental Impact Assessment
 Environmental impact assessment is designed to develop an
understanding of the environmental consequences of a newly
planned or existing project and of any project-related activities.
 The analysis will cover the impact of the project and its
alternatives [in terms of size, technology etc] on the
surrounding area, and population.
 Environmental effects are measured both qualitatively and
quantitatively.
 In countries, where the law requires it, an extensive
environmental impact assessment must be submitted to the
authorities for examination and clearance.
 When applying for international financing, many of the
international institutions require assessment of the
environmental impact of industrial investment projects
 In principle, environmental impacts should be assessed on
the basis of legal regulations and emission standards and
guidelines established in the country where the project is
located.
 In countries where environmental protection standards are
not yet defined, standards published by UN organizations’,
may be used as reference for environmental impact
assessment.
 Three phases of environmental impact analysis are
distinguished.
1. A preliminary impact analysis using a checklist.
2. Identification and evaluation of environmental impacts
resulting from the project.
3. Preparation of the environmental impact statement and this
statement specifies if any mitigation measures required.
 The primary purpose of the environmental impact
statement is to ensure that the policies, goals and
aspirations of the proponents, the government and the
affected population are incorporated in the decision
process.