how to conduct feasibility

8/6/2019 How to Conduct Feasibility

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How to conduct a Feasibility

Nusrat Gill 4 th January 2010


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Pr oject ? A p r oposal fo r Investment withthe definite aim of p r oducing a flow of output ove r aspecified pe r iod of time.

1- It is a specific activity with a specific starting point andspecific ending point intended to accomplish aspecific object .

2- It is something which is measurable both in its majo r costs and r etu r ns.3- It will have some geographic location o r at least a

r athe r clea r ly unde r stood a r ea of geog r aphicconcent r ation.

4- It will have a r elatively well defined time sequence of investment and p r oduction activities.

5- It will have specific group of activities which we want tofinance.

6- G r oup of benefits fo r which we can identify and estimatevalues.

7- P a r tially o r wholly independent a administ r ative st r uctu r eand set of accounts.


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I i i i

P rojectCycle

Evaluat ion

P reparat i on

Appra i al

I plementat ion

P roject Cycle

Feas ibi lity S tudy


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D efining Feasibilityy A Project Feasibility Study is an exercise that

involves documenting each of the potential solutionsto a particular business problem or opportunity .Feasibility Studies can be undertaken by any type of business, project or team and they are a critical partof the Project Life Cycle.

y A feasibility study ascertained the viability of an idea

with an emphasis on identifying potential problemsand attempts to answer one main question: W ill theidea work and should you proceed with it


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W hy a Feasibility Study ?Th e information you gat h er and present in your feasibility

study will h elp you:y List in detail all the things you need to make the business work;y Identify logistical and other business-related problems and

solutions;y Develop marketing strategies to convince a bank or

investor that your business is worth considering as aninvestment; andy Serve as a solid foundation for developing your business

plan.


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Component of a Feasibility1. D escription of a Business

2 . M arket Feasibility 3 . T echnical Feasibility 4 . Financial/Economic Feasibility 5 . Environmental Feasibility 6 . S ocial Feasibility 7 . O rganization S etup

In short, Feasibility studies contain comprehensive, detailed information about your business structure , your products and services , the market , logistics of how you will actually deliver a product or service, the resources you need to make the businessrun efficiently, as well as other information about the business


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D esc r iption of Business/ Pr ojecty Opportunity/problem to be addressed

y Location / site of business/p r oject

y Detail of product/services

y Mechanism of delivery/distribution


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M a rk et Feasibilityy Description of the Industry/sectory Current M a rk et A nalysisy Competitiony A nticipated Future Market Potentialy Potential Buyers and Sources of Revenuesy Sales Projections


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Technical Feasibilityy Materials ( capital and raw material)

y Parts needed to produce a product,y Supplies (utilities electricity, water, raw material etc) andy Other materials that are involved in producing or manufacturing

your product.y Labor (skilled, semiskilled)y T ransportation or Shippingy Physical Location (industrial estate, tax exemption

area, environmental sensitive area etc.)y Technology (local or international)


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Financial/Economic Feasibilityy Sta r t-Up C apital Funding Sou r ces (investor, loan from

bank, self finance etc.)y Identify investment costs ( material, labour, operational cost)y Identify expected r evenue/benefits

y M ethods fo r Financial / Economic Analysis


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R ichard Bond, (Hon.) R esearch Fellow, IDPM

Types of C.B.A.y F inancial Appraisal

y cost-benefit analysis of income and expenditure using

market prices and considering time preference of money.y Economic Appraisal

y CBA for wider costs and benefits on society (social CBA,

environmental economics).


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Discounting 1

If we put our Rs. 100 in the bank @ 10% interest,it would be worth Rs.110 after one year.i.e. we calculate the compound interest using;

S = P (1+R)n

Where:- S =F

uture value of investmentP = PrincipalR = Rate of interest (as decimal)n = Number of years investment is made.


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Discounting 2D iscounting is the reverse of

compounding, i.e. calculating thepresent value of a future amount.R e-arrange the equation to find P:-

T his is more useful when examiningfuture costs and benefits as theycan be adjusted to present valuesfor comparison.

T he principal (present amount) can

be changed into a factor bymaking future value (S) into 1

Hence the discount facto r =(1 + R )n

1

(1 + R )n

S=P


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Exercise;

y Calculate the discountfactor using a discount

rate of 5%, for a value 2 years hence.

y Answer = 0.907

1

(1 + R )n

1

(1 + 0.05) 2


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D iscounting 3N R iscount Factor R iscount Factor

0 0.05 1.000 0.20 1.000

1 0.05 0.952 0.20 0.8332 0.05 0.907 0.20 0.6943 0.05 0.864 0.20 0.5794 0.05 0.823 0.20 0.4825 0.05 0.784 0.20 0.402

e .g . 5 years discount factors @ 5% and 20% (note what happens)

Discount factor decreases with longer periods of time,i.e . greater reduction in future value .

R ate of decrease is greater at higher discount factors . NB @ 20% future values are halved in just over 3 years .


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A Hypothetical Project Cash Flow

R s 3,983 .24NPV Rs 26,000 T otal

R s 6,531.100.467R s 14,000R s 10,000-R s 1,000R s 5,0008

R s 4,618.420.513R s 9,000R s 10,000-R s 1,0007

Rs 5,080.270.564

Rs 9,000

R s 10,000-R s 1,0006

R s 5,588.290.621R s 9,000R s 10,000-R s 1,0005

R s 6,147.120.683R s 9,000R s 10,000-R s 1,0004

R s 6,761.830.751R s 9,000R s 10,000-R s 1,0003

R s 7,438.020.826R s 9,000R s 10,000-R s 1,0002

-R s38,181.820.909-R s42,000-R s 42,0001

D iscountedC ash Flow

D iscountFacto r

(@10%)

NetC ash Flow

SalesRecu rr entC osts

Investment& Salvage

Yea r


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Benefit-Cost Ratioy A quick and simple comparison of benefits over costs i.e. divide total value of benefits by total value of costs.

y B-C ratio should be >1 to be viable,y If discounted values are used, it requires separate

discounting of costs (capital and recurrenttogether) and benefits.

y F or simplicity it is often done without discounting

so be careful of interpretation.

BBCC


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Benefit-cost ratio =Present worth of benefits

Present worth of costs

In case the benefit-cost ratio of a project is greater thanunity, it is a viable project.

If benefit-cost ratio is less than one, a project is not asound proposition.

In case, the benefit-cost ratio equal unity the investor is just indifferent to the acceptance or rejection of theproject.


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St r engths W ea knesses1. Can be used to judge absolute

worth of aProject.

2. Can compare CB results acrossa wide variety of Projects indifferent sectors.

3. Aids in measuringdistributional effects of

alternative Programmes.

1. Does not assist in the establishment of priorities for various goals(national defense versus education).

2. Problems of measurement of benefits and uncertainties are so greatwith many of the Programmes that quantification is almostimpossible, particularly with public goods.

3. Overemphasizing those benefits and costs that can be quantifiescompared to those that cannot be.

4. Choice of Discount Rate influences the results. Low Discount ratefavours those projects that yield higherand distant benefits and vice- versa.

5. Many of the Programmes have redistributive effects, benefitingsome persons at the expenses of others. CB Analysis does not contribute

towards the establishment of the social welfare function that providessocietyd s answer about the relative desirability of various pattern ofincome distribution.

6. Adds up a host of items, some of them c direct costd which willactually be paid out (e.g. construction costs) and some of them willnever be paid ( e.g. noise costs)

St r engths and W ea knesses of C ost- Benefit M ethod


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Environmental Feasibility

T he need fo r envi r onmental Assessmenty Avoid doing more damage than goody Improve design of interventionsy Legal reasonsy Loan conditionsy

Standard best-practice for projects


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Project Area

Environmental

Sensitive & Critical Areas

y National Parksy Wildlife Sanctuariesy Game Reservesy Wetland & Ramsar Sitesy F orest Reservesy Rangeland Reservesy Archaeological & Cultural Sitesy Habitats of rare & threatened

spp


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y D efinition of Envi r onment y Environment Biophysical, Social, Cultural &

Economic aspects of the sitey Environmental values site Uses, Function &

A ttributes

y Br oad Objective to define impact of Project on theenvironment or upon environmental values

Envi r onmental Assessment -

D efinitions


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y Environmental Scoping to identifypotentially significant impacts

y Environmental Screening to sort projectsaccording to level of environmental assessmentneeded (none, IEE or EIA)

y I ES Initial Environmental Scoping & Screening combined

Envi r onmental Assessment - Steps


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D efinition of Site

EnvironmentalScoping


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EnvironmentalScreeningSystem


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ON E FOR M AT A ll

ProjectT

ypes / A

ll Sites

IES SU MM ARY C HECKL ISo T

Ecological / Biophysical parameters (Hydrology, soil Conservation etc.,)Landscape attributes &

special sites (wetlands, forests, rangelands etc.,)Landscape functions(catchment functions, flood control etc.,)

Landscape & resource use

Socio-cultural special sitesEconomy, livelihood, health &culture

Construction impacts


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Social Impact Assessment: D efinition

y Social Impact A ssessment is analyzing, monitoringand managing the social consequences of development

y T he objective of SI A is to ensure that development

maximizes its benefits and minimizes its costs,especially those costs borne by the people.

Social Feasibility


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Social Impact Assessment: Definition(continued)

y SI A is a tool to asses the potential impacts of projects on a society or community prior to their

implementationy It provides a systematic appraisal in advance of the

impacts on the quality of life of people andcommunities whose environment is affected by aproposed project, plan or policy


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Organizational Feasibilityy Purpose of an Organizational Feasibility Study: To

define the legal and corporate structure of the business. AnOrganizational F easibility Study may also include

professional background information about the foundersand principals of the business and what skills they cancontribute to the business.

y Organizational feasibility study should include:y Description of Business Structurey

Description of Organizational Structurey Internal and External Principles and Practices of theBusiness

y Professional Skills and Resumes


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Org anizational Cha r tChief executive

DG Marketing& Processes

Director Administration

DirectorMarketing

DG Technical

DirectorOperations


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Some points fo r st r ongC

onclusion/Summa r yy Discuss how the business can succeed.y Summarize the most important points you need to make. Do not

attempt to describe minor or unimportant details.y

A good summary or conclusion should be concise, no longer thanone to two pages and written in plain terms.y Do not attempt to persuade the reader with jargon or an advertising

pitch; feasibility study findings should be objective and based onresearch and information in the study.

y Avoid using phrases like I believe, or in my opinion, I hope, Ianticipate. Do use strong, impersonal phrases like researchsupports that this industry will continue to grow.

y A summarized conclusion helps to develop an overall impression, butshould not replace the supporting documents. Be sure to submit thesummary as part of the feasibility study, not as a substitute.

******************


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Case StudyGovernment of Pakistan is interested to develop livestock

sector as it has great potential both in dairy andmeat/chicken production. Loans on easy terms andtechnical support is provided by the government.

Malik Anwar has hired a consultant to prepare a

feasibility report for establishing a 50 cattle dairy farmto be operative for ten years. The land to be used fordairy farm is situated near village Charah on the bankof Sawan River. The cost of one cattle is Rs.100,00/-, the

funds required for building of cattle with other facilitiesare Rs. 2,000,000/-. The running expenditures areRs.50,000/- per month for feed and utilities. Each cattleis expected to yield 20 liter milk per day, which is to bemarketed @ Rs. 50 per liter.


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how to conduct feasibility

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