PROJECT FEASIBILITY (CONTD.)
What is a Feasibility Study?
Why is a Feasibility Study done?
What a Feasibility Study is not?
Scope of a Feasibility Study
Elements of a Feasibility Study
9.1 What is a Feasibility Study?
A feasibility study is essentially a process for determining the
viability of a proposed initiative
or service and providing a framework and direction for its
development and delivery. It is a
process for making sound decisions and setting direction. It is
also a process which:
• Is driven by
research and analysis
involves some form of consultation with stakeholders, community, users, etc.
• Focuses on
analyzing, clarifying and resolving key issues and areas of concern or
• Very often
involves basic modeling and testing of alternative concepts and approaches
There is no universal format for a feasibility study.
Feasibility studies can be adapted and
shaped to meet the specific needs of any given situation.
A feasibility study is designed to provide an overview of the
primary issues related to a business
idea. The purpose is to identify any “make or break” issues that
would prevent your business
from being successful in the marketplace. In other words, a
feasibility study determines whether
the business idea makes sense.
A thorough feasibility analysis provides a lot of information
necessary for the business plan.
For example, a good market analysis is necessary in order to
determine the project’s feasibility.
This information provides the basis for the market section of
the business plan.
Because putting together a business plan is a significant
investment of time and money, you
want to make sure that there are no major roadblocks facing your
business idea before you make
Identifying such roadblocks is the purpose of a feasibility study.
A feasibility study looks at three major areas:
a) Market issues
b) Organizational/technical issues
c) Financial issues
Again, this is meant to be a “first cut” look at these issues.
For example, a feasibility study
should not do in-depth long-term financial projections, but it
should do a basic break-even
analysis to see how much revenue would be necessary to meet your
9.2 Why Do Feasibility Studies?
Developing any new business venture is difficult. Taking a
project from the initial idea through
the operational stage is a complex and time-consuming effort.
Most ideas, whether from a
cooperative or an investor owned business, do not develop into
business operations. If these
ideas make it to the operational stage, most fail within the
first 6 months. Before the potential
members invest in a proposed business project, they must
determine if it can be economically
viable and then decide if investment advantages outweigh the
Many cooperative business projects are quite expensive to
conduct. The projects involve
operations that differ from those of the members’ individual
business. Often, cooperative
businesses’ operations involve risks with which the members are
unfamiliar. The study allows
groups to preview potential project outcomes and to decide if
they should continue. Although
the costs of conducting a study may seem high, they are
relatively minor when compared with
the total project cost. The small initial expenditure on a
feasibility study can help to protect
larger capital investments later.
Feasibility studies are useful and valid for many kinds of
projects. Evaluation of a new business
ventures, both from new groups and established businesses, is
the most common, but not the
only usage. Studies can help groups decide to expand existing
services, build or remodel
facilities, change methods of operation, add new products, or
even merge with another business.
A feasibility study assists decision makers whenever they need
to consider alternative
Feasibility studies permit planners to outline their ideas on
paper before implementing them.
This can reveal errors in project design before their
implementation negatively affects the
project. Applying the lessons gained from a feasibility study
can significantly lower the project
The study presents the risks and returns associated with the
project so the prospective members
can evaluate them. There is no "magic number" or correct rate of
return a project needs to
obtain before a group decides to proceed. The acceptable level
of return and appropriate risk
rate will vary for individual members depending on their
The proposed project usually requires both risk capital from
members and debt capital from
banks and other financers to become operational. Lenders
typically require an objective
evaluation of a project prior to investing. A feasibility study
conducted by someone without a
vested interest in the project outcome can provide this
General requirements and potential benefits of conducting
feasibility study include:
• Developing any
new business venture is difficult.
• Taking a
project from initiation of idea to operational stage is a complex and time
• Most ideas,
whether from cooperative or investor-owned businesses, do not develop into
• If these ideas
make it to the operational stage, majority of them fail within first six months.
involve business operations that differ from Individual business.
operations involve risks of unfamiliar.
study allows groups developing a business idea to preview potential project
outcomes and decide if they want to continue developing the
• Though the cost
of conducting a study can seem high, almost always, these costs are
relatively minor when compared to the total project cost.
• Small initial
expenditure on a feasibility study by a group can help to protect larger capital
study is a useful tool and is valid for many kinds of projects.
9.3 What a Feasibility Study is not:
Feasibility studies are conducted on "real-world" projects. They
are not or research
papers. Simulations or projection models, though useful on some
projects, do not replace a
feasibility study. The study should not be a "cookie cutter"
approach to a project. The study
should not merely be a generic source of information. Once
completed, a study should permit a
group to make better decisions for the strategic issues of their
A feasibility study is not a business plan. A business plan is
elaborated later in the project
development process than the feasibility study. The main purpose
of a business plan is to
function as a blueprint for the group’s business operations. The
business plan presents the
group's intended responses to the critical issues raised in the
feasibility study. The feasibility
study results forms the basis for developing a business plan.
The purpose of a feasibility study is not to identify new ideas
or concepts for a project. These
ideas should be clearly identified before a study is initiated.
The group need accomplish a
number of steps, before feasibility study is instituted. The
closer the assumptions lie to the "realworld",
the more value feasibility study will hold for the group.
A feasibility study should not be conducted as a forum merely to
support a desire that the
project will be successful. The study should be an objective
evaluation of the project's chance
for success. Negative results can be just as useful for
decision-makers as positive results.
Financers may require a feasibility study before providing
loans, but this should not be the only
purpose of a study. A feasibility study should enhance a
banker's ability to evaluate a project;
but the primarily goal should be to aid a group's
decision-making, not to secure financing.
A feasibility study will not determine whether or not a project
should be undertaken. The
potential members have to decide if the economic returns justify
the risks involved in their
continuing the project. The results of the feasibility study
assist them in this.
A feasibility study serves as an analytical tool to present the
basic assumptions of a project idea,
shows how results vary when these assumptions change, and
provides guidance as to critical
elements of a project. It provides a group with project specific
information to assist in making
decisions. Groups using feasibility studies should lower the
risks in proceeding with a project.
9.4 Scope of Feasibility Analysis:
In general terms, the elements of a feasibility analysis for a
project should cover the following:
1. Need Analysis:
This indicates recognition of a need for the project. The need
may affect the
organization itself, another organization, the public, or the
government. A preliminary
study is then conducted to confirm and evaluate the need. A
proposal of how the need
may be satisfied is then made. Pertinent questions that should
be asked include:
• Is the need
significant enough to justify the proposed project?
• Will the need
still exist by the time the project is completed?
• What are the
alternate means of satisfying the need?
• What are the
economic, social, environmental, and political impacts of the need?
2. Process Work:
This is the preliminary analysis done to determine what will be
required to satisfy the
need. The work may be performed by a consultant who is an expert
in the project field.
The preliminary study often involves system models or
prototypes. For technology
oriented projects, artist's conception and scaled-down models
may be used for
illustrating the general characteristics of a process. A
simulation of the proposed
system can be carried out to predict the outcome before the
actual project starts.
3. Engineering and Design:
This involves a detailed technical study of the proposed
project. Written quotations are
obtained from suppliers and subcontractors as needed. Technology
evaluated as needed. Product design, if needed, should be done
at this time.
4. Cost Estimate:
This involves estimating project cost to an acceptable level of
accuracy. Levels of
around -5% to +15% are common at this level of a project plan.
Both the initial and
operating costs are included in the cost estimation. Estimates
of capital investment and
of recurring and nonrecurring costs should also be contained in
the cost estimate
document. Sensitivity analysis can be carried out on the
estimated cost values to see
how sensitive the project plan is to the estimated cost values.
5. Financial Analysis:
This involves an analysis of the cash flow profile of the
project. The analysis should
consider rates of return, inflation, sources of capital, payback
periods, breakeven point,
residual values, and sensitivity. This is a critical analysis
since it determines whether or
not and when funds will be available to the project. The project
cash flow profile helps
to support the economic and financial feasibility of the
6. Project Impacts:
This portion of the feasibility study provides an assessment of
the impact of the
proposed project. Environmental, social, cultural, political,
and economic impacts may
be some of the factors that will determine how a project is
perceived by the public. The
value added potential of the project should also be assessed. A
value added tax may be
assessed based on the price of a product and the cost of the raw
material used in making
the product. The tax so collected may be viewed as a
contribution to government
7. Conclusions and Recommendations:
The feasibility study should end with the overall outcome of the
project analysis. This
may indicate an endorsement or disapproval of the project.
Recommendations on what
should be done should be included in this section of the
9.5 Elements of a Feasibility Assessment:
As a first step, a feasibility assessment should define the
business idea, be it a new project,
product or service. The project or business idea feasibility can
then be determined. The
feasibility needs to account for the current circumstances of
the proponent. For example, for a
business intender it should take into account personal
readiness, skills, resources, knowledge
and goals. For established businesses, linkages to existing
lines of business, customers,
suppliers, employees and other stakeholders need to be accounted
A feasibility report should have the following structure:
1. Executive Summary:
It provides a quick overview of the main points of the
assessment, helping to form a
picture of the proposal along with the recommendations. It
should be concise and
include the major findings covered in the main body of the
2. Need Analysis:
Need Analysis information provide a context to the business
proposition. It analyzes the
justification of the idea, with a study of possible
alternatives. It links the business idea
to the current circumstances and helps to inform evaluation of
the business idea.
Description of the technical aspects of the business idea,
including any changes needed
to be made to existing processes or the need to add items to
existing range of products
4. Advantages and Disadvantages:
Advantages and disadvantages of the business idea compared to
alternatives, such as
competing products; or for a new concept, its relevance to
current practices, and to
unmet or potential demand.
5. Market for the Product Offerings:
State the number of customers, expected frequency and size of
average purchase, and
any reduction in costs across the business arising from the new
product or service. Any
assumptions about customer purchase behavior should be
identified so that they can be
evaluated in terms of likelihood of being achieved or exceeded.
For changes in business
operations, the payoff may come from competitive advantages such
as increased market
share, cost savings or higher prices. Research should focus on:
You need to be clear about the type of customer you will target,
and why they will
respond to your offering.
Identify your target market segments or groups: What knowledge
do you have of
your market segments or groups? How many are there? What will
they buy? How
often will they buy? What will be their average purchase?
Create a list showing the products/services you will be offering
to each segment;
how much customers will pay for each product or service.
List your competitors and note their perceived strengths and
weaknesses. You need
to understand why they are competition to your proposed
Ask the question: How can you attract customers from them (i.e.
competitors)? Price should not be the only answer; whole of life
features, distribution and promotion strategies, and after sales
options may all be
part of the purchase decision.
Obtain a map and define on it your market boundaries, your
location, access routes,
your competitors, your suppliers, and demographic information on
such as population and distribution.
Costing for the implementation of the business idea is done.
Assess how long it will
take you or your staff to produce or obtain the proposed
products or services and to
deliver them to your customers and work out the cost of that
time. Determine how
much it will cost to buy, assemble or produce them. This
approach should account
for all costs over and above the existing activity. For existing
section should clearly specify if marginal or average costs have
been used to
determine costing. Assumptions should be stated, for example,
material prices, availability of supplies, staff skills, plant
and equipment etc. Costs
of alternative production/implementation strategies should also
be considered in the
Identify preferred and alternative suppliers; collect their
catalogues and price lists.
Identify your site, is it rented, owned or at home? Do you need
more room than
existing business? Why locate there? What are the advantages and
Resources such as assets and equipment that will be required,
cost of acquiring
them, alternative methods of acquisition etc. are assessed. For
purchase versus hire purchase or other forms of leasing.
What staff will you need? What skills will they need? What will
you need to pay
6. Financial analysis:
Work out the profits from a given level of operations, the
capital required and how the
capital will be found to commence operating.
7. Risk analysis of the Preferred Solution:
Risk analysis may take the form of basic break-even analysis,
i.e. the level of business
operation that will ensure that the business does not incur a
loss. Sophisticated analysis
may consider various business scenarios based on the assumptions
made in costing and
8. Comparative Analysis:
Comparative analysis of alternatives should reflect the
objectives of the project. For
example, decision making may be based on maximizing profit or
minimizing of loss for
various business scenarios. Some alternatives may be riskier,
which will be reflected in
higher financial payoffs under certain scenarios and potential
losses under other
scenarios; while some may be less risky with low financial
profits or losses under a
wide variety of circumstances. The choice between a “high payoff
but high risk of
failure” option instead of a “low payoff with associated low
risk” option is one that you
can then make in the context of your objectives, your market and
Recommendations of the preferred alternative with an associated
plan of action; or a
decision not to proceed, should be covered in this section.
Possible plans of action will
be – going back to the drawing board, developing more promising
research to minimize possibility of failure or moving forward to