The project feasibility analysis is the process of ascertaining the viability of proposed initiative or service (project) and giving framework & guidance for its development & delivery. Sound decisions are made in this process along with the setting of direction. Project feasibility analysis include the following.
- It is driven by analysis & research
- It generally includes some kind of consultation with stakeholders, users and community etc
- It concentrates on analyzing, clarifying and settling the basic problems and areas of uncertainty or concern
- It mostly includes basic modeling and testing of alternative approaches & concepts
Format of Project Feasibility Analysis
No universal format is available for the project feasibility analysis. Feasibility can be adjusted and shaped to fulfill the specific requirements of any particular situation.
The overview of the primary issues related to a business idea is provided by designing feasibility study. The main purpose is to point out any potential problem that will resist in the business for becoming successful in the marketplace. In other words, project feasibility analysis ascertains whether the business idea is sensible or not.
A lot of the important information for the business plan is provided by a detailed project feasibility analysis. For example, in order to ascertain the feasibility of the project, a good market analysis is essential. The marketing portion of the business plan will base on this information.
The purpose of the feasibility analysis is to point out the roadblocks that will come in the way of development & implementation of the business idea into reality. This will become helpful for the later business plan by saving time, money and energies. A feasibility study considers the following three important areas
- Market issues
- Financial issues
- Technical/organizational issues
It is important to remember that the above mentioned areas are view in the study briefly.
Reasons for Conducting Feasibility Study
It is difficult to develop any new business venture. It is complex and time consuming effort to take a project from the initial idea through operational stage. Mostly ideas are not transformed into business operations. If these business ideas are directly pass to the operational stage, then most of them fail just within initial six months. The economic viability of the project is ascertained by potential investors before making investments in the considered project. Furthermore these potential investors also ascertain that benefits of the projects are more than the risks involved in the project.
Various cooperative business projects are very expensive to execute. The operations of such cooperative project differ from the operations of the individual business members. Mostly risks are involved in the operations of cooperative business which are not clearly understood by the individual members. The potential outcomes of the project are previewed by the group members in order to make the decision to continue the project or not. Although the feasibility study may have high cost but this high will seem to be minimum when it is compared with the cost of the total project. The larger capital investment can be protected by spending smaller expenditure on the feasibility study.
Feasibility study is valid and useful for different types of projects. Projects proposed by the new groups or existing businesses can be evaluated through feasibility study. Feasibility analysis can assist groups to make decision about remodeling or developing facilities, expanding current services, adding new products, altering methods of operation or even merging with another business. Whenever alternative development opportunities are considered by the decision makers, feasibility study helps them in this regard.
Planners are allowed through feasibility analysis to specify their ideas on paper before implementing them. Errors in the designing of project are disclosed by this before their implementation negatively influences the project. The project costs can significantly be reduced by applying the lessons obtained from the feasibility analysis.
The risks and returns associated with the project are presented by the feasibility study for their evaluation by the prospective members. There is no correct rate of return a project requires to get before a group makes decision to go ahead. The suitable risk rate and acceptable level of return will change for single members on the basis of their personal situation.
The risk capital from members and debt capital from banks & other financers are generally required by the proposed project for becoming operational. An objective evaluation of a project before investing is typically required by the lenders. This assessment can be provided by conducting a feasibility study by someone without a vested interest in the outcome of the project.
Following are some of potential benefits and general requirements for conducting feasibility study
- It is difficult to develop any new business venture
- It is complex and time consuming effort to take a project from initiation of ides to operational stage
- Most ideas do not build into business operations whether from investor owned business or cooperative
- Most of the ideas fail within first six months if these were proceed to the operational stage
- Business operations included in the projects differ from individual business
- Risks of unfamiliar are involved in these operations
- Potential project outcomes are previewed with the help of the feasibility study by the groups developing the business idea. Furthermore the decision about the further proceeding in the development of the project is also assisted with the feasibility study
- The costs of conducting study are looked higher but these become little when compared with the entire project costs
- Larger capital investments at later stage are protected from little initial expenditure on a feasibility study by a group
- Feasibility study is an effective tool and is valid for various types of projects
What a Feasibility Analysis is not?
On real world projects, feasibility studies are performed. These are not research papers or academic in nature. The feasibility study is not replaced by the simulation or projection models which perhaps may be useful on some projects. The feasibility study must not be a “cookie cutter” concept to a project. The study must not be considered as general source of information. When feasibility study is completed, it must allow a group to make effective decisions for the strategic problems of their particular project.
Feasibility study do not resemble business plan. A business plan is detailed one as compared to the feasibility study and it comes in the later stage of the project development process. The business plan serves as purpose of operating as a blueprint for the business operations of the group. The intended responses of the group to the serious problems mentioned in the feasibility study are presented by the business plan. The business plan is developed on the basis of the results of feasibility study.
The aim of feasibility study is to point out new concepts or ideas for a project. Before the initiation of the study, these ideas must be clearly specified. Before institution of the feasibility study, a number of steps should be achieved by the group. The value of the feasibility study for the group increases with more realistic assumptions underlying.
The feasibility study must not be performed as a forum simply to assist the desire for the success of the project. The chance of the project for the success should be evaluated objectively in the study. Negative results should also be equally beneficial for the decision makers as the positive outcomes.
Before provision of loans by the financers, a feasibility study may be required. But aspect must not be the merely aim of the feasibility study. The ability of the banker to evaluate the project should be increased by the feasibility study; but the main purpose of the feasibility study must be to assist the decision making of the group instead of for obtaining financing.
The basic assumptions of the project idea are presented by the analytical tool of the feasibility analysis. This study reflects changing results with the changing assumptions. Guidance is also provided for the important elements of the project.
Scope of Feasibility Analysis
Following items should be covered generally by the elements of the feasibility analysis for project.
- Need Analysis
- Process Work
- Engineering & Design
- Cost Estimate
- Financial Analysis
- Project Impacts
- Conclusions & Recommendations
- Need Analysis
The realization of the need of the project is indicated in this head. This identified need may influence the company itself, another company, the government or public. The need is confirmed and evaluated by conducting preliminary study. A proposal is then developed that specify that how the need may be satisfied.
- Process Work
The preliminary analysis performed to ascertain what will be needed to fulfill the need is included in the process work. The consultant who is an expert in the project area may perform the work. System models or prototypes are mostly involved in the preliminary study. The general characteristics of the process can be illustrated by using artist’s conception and scaled down models for technology oriented projects. The forecasting of the result before the starting of the actual project can be carried out by the simulation of the proposed system.
- Engineering and Design
A thorough technical study of the proposed project is involved in this. Written quotations are got from subcontractors and suppliers as required. The capabilities of the technology are evaluated as required. If required, the product design must be performed at this time.
- Cost Estimate
The estimation of project cost to an acceptable level of accuracy is included in this category. At this level of a project plan, levels of around -5% to +15% are common. Cost estimation includes both the initial & operating costs. Cost estimate document should also contain estimates of capital investment and of recurring and non-recurring costs. The sensitivity of the project plan to the estimated cost values is also viewed by conducting sensitivity analysis on the estimated cost values.
- Financial Analysis
The analysis of the cash flow profile of the project is included in financial analysis. This analysis should contain sources of capital, rates of return, payback periods, inflation, breakeven points, sensitivity and residual values. It is important analysis in which it is ascertained that either the funds are available or not and also when the funds will be provided to the project. The economic and financial feasibility of the project is supported with the help of the project cash flow profile.
- Project Impacts
The assessment of the impact of the proposed project is provided by this portion of feasibility study. Social, environmental, cultural, economic and political impacts may be some of the factors that how public views the project. The value added capacity of the project must also be evaluated. On the basis of the cost of the raw material used in manufacturing product and the price of the product, a value added tax can be evaluated. The tax so gathered can be considered as a contribution to government pockets.
- Conclusions and Recommendations
The entire outcome of the project feasibility analysis should be covered in the ending portion of the project feasibility analysis. This may reflect the rejection or endorsement of the project. This portion of feasibility report must contain the recommendations on what should be done.