Feasibility studies

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Feasibility Studies By Prof. Mohammed I. Migdad Feb. 2013 1 A course for a master degree of economic development 2 An important work in project evaluation in developing countries 3 Manual for OECD. 1  Manual of industrial project analysis For Little & Mirrlees 1969 & 1974  Project appraisal and planning for developing countries , For Little & Mirrlees 1982 4 Manual for UNIDO. 2  UNIDO guideline for project evaluation in 1972.  Manual for the preparation of the industrial feasibility studies UNIDO 1991. including: Computer model for feasibility analysis and reporting (CMFAR III Expert) in 1995.  Guide to practical project appraisal: social benefit-cost analysis in developing countries 5 World Bank Guidelines. 3  World Bank Guidelines in 1975.  Economic analysis of projects by: Squire, L & Van Der Tak 1984. 6 business success  Establishing a feasibility study of projects is a critical factor in business success.  Many factors can be involved and invariably luck can and probably will play a hand. 7 Key factor  A key factor in any feasibility study must be ensuring that you are dealing with correct facts, correct assumption, and up to date financial data. 8 Countless feasibility studies  Any project which have passed a countless feasibility studies, have been sunk by unexpected events such as flood.  Many projects fail because of incorrect assumptions or because assumptions were based on incorrect facts. 9 Preliminary investigation  When complex problems or opportunities are to be defined, it is generally desirable to conduct a preliminary investigation called a feasibility study.  The primary objectives of the feasibility study is to assess three types of feasibility 10 Types of feasibility Study 1. Technical feasibility can a solution be supported with the existing technology or not? 2. Economic feasibility is the existing technology cost effective? 3. Operational feasibility Will the solution work in the organization if implemented? 11 The Components of a Feasibility Study 1. Description of the Business: The product or services to be offered and how they will be delivered. 2. Market Feasibility: Includes a description of the industry, current market, anticipated future market potential, competition, sales projections, potential buyers, etc. 3. Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.). 12 continue 4. 5. 6. Financial Feasibility: Projects how much start-up capital is needed, sources of capital, returns on investment, etc. Organizational Feasibility: Defines the legal and corporate structure of the business (may also include professional background information about the founders and what skills they can contribute to the business). Conclusions: Discusses how the business can succeed. Be honest in your assessment because investors won’t just look at your conclusions they will also look at the data and will question your conclusions if they are unrealistic. 13 Feasibility Study  A Feasibility Study is the analysis of a problem to determine if it can be solved effectively.  The results determine whether the solution should be implemented.  This activity takes place during the project initiation phase and is made before significant expenses are engaged. 14 Definition of Feasibility Studies  A feasibility study is an evaluation of a proposal designed to determine the difficulty in carrying out a designated task. Generally, a feasibility study precedes technical development and project implementation. 15 Definition of Feasibility Studies  A feasibility study looks at the viability of an idea with an emphasis on identifying potential problems and attempts to answer one main question: Will the idea work and should you proceed with it? 16 Objective  The feasibility study answers the basic questions: is it realistic to address the problem or the opportunity under consideration?  And it produce a final proposal for the management, this final report might includes: 17 Feasibility includes 1. 2. 3. 4. 5. 6. 7. 8. 9. Project name Problem or opportunity definition Project description Expected benefit Consequence of rejection Resource requirements alternatives Other consideration Theorization 18 Five common factors (TELOS) 1. Technology and system feasibility 2. Economic feasibility 3. Legal feasibility 4. Operational feasibility 5. Schedule feasibility 19 1. Technology and system feasibility  The assessment is based on an outline design of system requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures. This can be quantified in terms of volumes of data, trends, frequency of updating, etc. in order to estimate whether the new system will perform adequately or not this means that feasibility is the study of the based in outline. 20 2. Economic feasibility  Economic analysis is the most frequently used method for evaluating the effectiveness of a new system. More commonly known as cost/benefit analysis, the procedure is to determine the benefits and savings that are expected from a candidate system and compare them with costs. If benefits outweigh costs, then the decision is made to design and implement the system. An entrepreneur must accurately weigh the cost versus benefits before taking an action. Time Based: Contrast to the manual system management can generate any report just by single click . 21 Legal feasibility. 3  Determines whether the proposed system conflicts with legal requirements, e.g. a data processing system must comply with the local Data Protection Acts. 22 4. Operational feasibility  Is a measure of how well a proposed system solves the problems, and takes advantages of the opportunities identified during scope definition and how it satisfies the requirements identified in the requirements analysis phase of system development. [1] 23 5.schedule feasibility  A project will fail if it takes too long to be completed before it is useful. Typically this means estimating how long the system will take to develop, and if it can be completed in a given time period using some methods like payback period. Schedule feasibility is a measure of how reasonable the project timetable is. Given our technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines. You need to determine whether the deadlines are mandatory or desirable. 24 Other feasibility factors  Market and real estate feasibility  Resource feasibility  Cultural feasibility 25 Market and real estate feasibility  Market Feasibility Study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for a given parcels. Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility takes into account the importance of the business in the selected area. 26 Resource feasibility  This involves questions such as how much time is available to build the new system, when it can be built, whether it interferes with normal business operations, type and amount of resources required, dependencies, etc. Contingency and mitigation plans should also be stated here. 27 Cultural feasibility  In this stage, the project's alternatives are evaluated for their impact on the local and general culture. For example, environmental factors need to be considered and these factors are to be well known. Further an enterprise's own culture can clash with the results of the project. 28 Description of the Project 29 Identification and exploration of business scenarios  .Identify alternative scenarios or business models of what the project will entail, how it will be organized, and how it will generate profits. These may come from the idea assessment or market assessment that you may have already completed.  Eliminate scenarios that don’t make sense.  Flesh-out the scenario(s) that appear to have potential for further exploration. 30 Define the project and alternative scenarios  Describe the type and quality of product(s) or service(s) to be marketed.  Outline the general business model (i.e. how the business will make money).  Include the technical processes including size, location, kind of inputs, etc.  Specify the time horizon from the time the project is initiated until it is up and running at capacity. 31 Relationship to the surrounding .geographical area  Outline the economic and social impact on local communities.  Describe the environmental impact on the surrounding area 32 Market Feasibility  This can be based on a market assessment that you may have already completed. 33 Industry description  Describe the size and scope of the industry, market and/or market segment (s).  Estimate the future direction of the industry, market and/or market segment (s).  Describe the nature of the industry, market and/or market segment (s). Is it stable or going through rapid change and restructuring?  Identify the life-cycle of the industry, market and/or market segment (s). Is it emerging, growing, mature, declining? 34 Industry competitiveness  Describe the industry concentration. Are there just a     few large producers or many small producers? Describe the major competitors? Will you compete directly against them? Analyze the barriers to entry of new competitors into the market or industry. Can new competitive enter easily? Analyze the concentration and competitiveness of input suppliers and product/service buyers. Describe the price competitiveness of your product/service. 35 Market potential  Identify whether the product be sold into a     commodity market or a differentiated product/service market. Identify the demand and usage trends of the market or market segment in which the product or service will participate. Examine the potential for emerging, niche or segmented market opportunities. Explore the opportunity and potential for a branded product. Assess market usage and your potential share of the market or market segment. 36 Access to market outlets  Identify the potential buyers of the product/service and the associated marketing costs.  Investigate the product/service distribution system and the costs involved. 37 Sales projection  Estimate sales or usage.  Carefully identify and assess the accuracy of the underlying assumptions in the sales projection.  Project sales under various assumptions (i.e. selling prices, services provided, etc.). 38 Technical Feasibility  Facility needs.  Estimate the size and type of production facilities.  Investigate the need for related buildings, equipment, rolling-stock, etc. 39 Suitability of production technology  Investigate and compare technology providers.  Determine reliability and competitiveness of technology (proven or unproven, state-of-the-art, etc.).  Identify limitations or constraints of the technology. 40 Availability and suitability of site 1. 2. 3. 4. 5. 6. 7. 8. 9. Investigate access to: raw materials transportation labor production inputs (electricity, natural gas, water, etc.) Investigate potential emissions problems. Analyze other environmental impacts. Identify regulatory requirements. Explore economic development incentives. 41 Raw materials  Estimate the amount of raw materials needed.  Investigate the current and future availability and access to raw materials.  Assess the quality and cost of raw materials. 42 Other inputs  Investigate the availability of labor including wage rates, skill level, etc.  Assess the potential to access and attract qualified management personnel. 43 Financial/Economic Feasibility 44 Estimate the total capital requirements 1. 2. 3. 4. 5. 6. Assess the “seed capital” needs of the business project during the investigation process and startup, and how these needs will be met. Estimate capital requirements for facilities, equipment and inventories. Estimate working capital needs. Estimate start-up capital needs until revenues are realized at full capacity. Estimate contingency capital needs due to construction delays, technology malfunction, market access delays, etc. Estimate other capital needs. 45 Estimate equity and credit needs  Estimate equity needs.  Identify alternative equity sources and capital availability - family, producers, local investors, angle investors, venture capitalists, etc.  Estimate credit needs.  Identify and assess alternative credit sources - banks, government (i.e. direct loans or loan guarantees), grants and local and state economic development incentives. 46 Budget expected costs and returns of various alternatives  Estimate the expected revenue, costs, profit margin and expected net profit.  Estimate the sales or usage needed to break-even.  Estimate the returns under various production, price and sales levels. This may involve identifying “best case”, “typical”, and “worst case” scenarios or more sophisticated analysis like a Monte Carlo simulation. 47 continue  Assess the reliability of the underlying assumptions     of the analysis (prices, production, efficiencies, market access, market penetration, etc.) Benchmark against industry averages and/or competitors (cost, margin, profits, ROI, etc.). Identify limitations or constraints of the economic analysis. Calculate expected cash flows during the start-up period and when the business reaches capacity. Prepare pro forma income statement, balance sheet, and other statements of when the business is fully operating. 48 Organizational/Managerial Feasibility 49 Business structure  Identify the proposed legal structure of the business.  Outline the staffing and governance structure of the business along with lines of authority and decision making structure.  Identify any potential joint venture partners, alliances or other important stakeholders.  Identify the availability of skilled and experienced business managers.  Identify the availability of consultants and service providers with the skills needed to realize the project, including legal, accounting, industry experts, etc. 50 Business founders  Character matters - are the people involved      of outstanding character? Do the founders have the “fire in the belly” required to take the project to completion? Do the founders have the skills and ability to complete the project? What key individuals will lead the project? Is there a reward system for the founders? Is it based on business performance? Have the founders organized other successful businesses? 51 Study Conclusions  Identify and describe alternative business scenarios and models.  Compare and contrast scenarios based on goals of the producer group.  Outline criteria for decision making among alternatives. 52 Why Are Feasibility Studies ?so Important 1. 2. 3. 4. 5. The information you gather and present in your feasibility study will help you: List in detail all the things you need to make the business work; Identify logistical and other businessrelated problems and solutions; Develop marketing strategies to convince a bank or investor that your business is worth considering as an investment; and Serve as a solid foundation for developing your business plan. 53 continue  Even if you have a great business idea you still have to find a cost-effective way to market and sell your products and services. This is especially important for store-front retail businesses where location could make or break your business.  For example, most commercial space leases place restrictions on businesses that can have a dramatic impact on income. A lease may limit business hours/days, parking spaces, restrict the product or service you can offer, and in some cases, even limit the number of customers a business can receive each day. 54 Feasibility studies V business plans  A feasibility study is designed to discover if a business is "feasible" or not. It will answer questions such as "will your idea work?" [new window] It is an essential first step before spending money and time on more detailed plans. The information gathered is not wasted as it can be incorporated into the Business Plan.  On the other hand a Business Plan is a more detailed and in depth document that incorporates the information gained from a feasibility study plus specific timelines, detailed budgets with forecasts and a detailed financial strategy. 55 Feasibility before business plan  Before you begin writing your business plan you need to identify how, where, and to whom you intend to sell a service or product. You also need to assess your competition and figure out how much money you need to start your business and keep it running until it is established. 56 Feasibility is a tool for a business plan  Feasibility studies address things like where and how the business will operate. They provide in-depth details about the business to determine if and how it can succeed, and serve as a valuable tool for developing a winning business plan. 57 ...Before you get started  Are you suited to working in a small business environment? Answer this checklist [new window 69 kb] or take the business readiness quiz [new window] to get an idea if this is what you really want and whether you have the personality, skills and temperament to succeed. 58 The feasibility study framework  The document should include sections on:  Personal details  The Business Idea  Critical factors  Market analysis  Resource requirements  Financial viability  Capital requirements 59 Use this template to:  Perform a preliminary study to determine a project's viability.  Analyze an existing system to see if it is worth upgrading.  Determine if there is sufficient time to build the new system, when it can be built, whether it interferes with operations, type and amount of resources required, dependencies, etc.  Establish the cost-effectiveness of the proposed system.  Determine if the system conflicts with legal requirements. 60 [...]... mandatory or desirable 24 Other feasibility factors  Market and real estate feasibility  Resource feasibility  Cultural feasibility 25 Market and real estate feasibility  Market Feasibility Study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land Developers often conduct market studies to determine the best location... might includes: 17 Feasibility includes 1 2 3 4 5 6 7 8 9 Project name Problem or opportunity definition Project description Expected benefit Consequence of rejection Resource requirements alternatives Other consideration Theorization 18 Five common factors (TELOS) 1 Technology and system feasibility 2 Economic feasibility 3 Legal feasibility 4 Operational feasibility 5 Schedule feasibility 19 1 Technology... out a designated task Generally, a feasibility study precedes technical development and project implementation 15 Definition of Feasibility Studies  A feasibility study looks at the viability of an idea with an emphasis on identifying potential problems and attempts to answer one main question: Will the idea work and should you proceed with it? 16 Objective  The feasibility study answers the basic...Types of feasibility Study 1 Technical feasibility can a solution be supported with the existing technology or not? 2 Economic feasibility is the existing technology cost effective? 3 Operational feasibility Will the solution work in the organization if implemented? 11 The Components of a Feasibility Study 1 Description of the Business: The product... conclusions if they are unrealistic 13 Feasibility Study  A Feasibility Study is the analysis of a problem to determine if it can be solved effectively  The results determine whether the solution should be implemented  This activity takes place during the project initiation phase and is made before significant expenses are engaged 14 Definition of Feasibility Studies  A feasibility study is an evaluation... uses for a given parcels Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project Market Feasibility takes into account the importance of the business in the selected area 26 Resource feasibility  This involves questions such as how much time is available... delivered 2 Market Feasibility: Includes a description of the industry, current market, anticipated future market potential, competition, sales projections, potential buyers, etc 3 Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.) 12 continue 4 5 6 Financial Feasibility: Projects... system feasibility  The assessment is based on an outline design of system requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures This can be quantified in terms of volumes of data, trends, frequency of updating, etc in order to estimate whether the new system will perform adequately or not this means that feasibility is the study of the based in outline 20 2 Economic feasibility. .. Time Based: Contrast to the manual system management can generate any report just by single click 21 Legal feasibility 3  Determines whether the proposed system conflicts with legal requirements, e.g a data processing system must comply with the local Data Protection Acts 22 4 Operational feasibility  Is a measure of how well a proposed system solves the problems, and takes advantages of the opportunities... the requirements analysis phase of system development [1] 23 5.schedule feasibility  A project will fail if it takes too long to be completed before it is useful Typically this means estimating how long the system will take to develop, and if it can be completed in a given time period using some methods like payback period Schedule feasibility is a measure of how reasonable the project timetable is Given