Chapter 22

PROJECT FEASIBILITY STUDY (PFS)

TRUE OR FALSE 1. A project feasibility is the systematic investigation which ascertains whether a business undertaking is viable and if so, the degree of its profitability. 2. A project study may not have any certain limitations. 3. The team leaders responsibility besides his role as specialist is to plan, organize, and direct supervise all activities of the team until the study is finalized. 4. There are no established norms governing the cost of pre-investment studies. 5. The project should include the projections of the profitability and financing. 6. Costs per man-month should be calculated in each individual case and cover salaries, travel, living allowances, drawings, writing, printing as well as office overheads. 7. Investment cost estimates based on cost parameters should not be adjusted. 8. Technical will involve the study of present and future demand and supply for the product, competition, selling prices and marketing plan for the product. 9. Financing will cover the determination of the financing requirements, financing leverage as well as the possible sources of financing. 10. Taxation will show the relationship between capital to be invested and expected net profit known as the return on investment. 11. Marketing will involve the study of the present and future demand and supply for the product, competition, selling prices and marketing plan for the product. 12. Financing will cover the presentation of the expected profitability, cash needs and cash sources based on the results of the study of the marketing, technical and financing requirements. 13. A feasibility study should arrive at definitive conclusions on all the basic issues of a project after consideration of various alternatives. 14. Social desirability covers the study of the benefits to be obtained from an undertaking in terms of its contribution to the community, to other business firms and to the national economy as a whole.

15. The feasibility study is basically a forecast. MULTIPLE CHOICES: 1. It is a systematic investigation which ascertains whether a business undertaking is viable and if so, the degree of its profitability. a. Project feasibility study b. Business plan c. Case study d. All of the above

2. Through feasibility study they can ascertain viability of new projects. a. Promoters or Proponents of new projects b. Shareholders c. Management of existing enterprises d. Government Agencies

3. Through feasibility study they can evaluate if an investment on a project or existing enterprise should be made or not. a. Promoters or Proponents of new projects b. Shareholders c. Management of existing enterprises d. Government Agencies

4. Through feasibility study they can determine if a project is entitled to government incentives and level of such incentives. a. Promoters or Proponents of new projects b. Shareholders c. Management of existing enterprises d. Government Agencies

5. Through feasibility study they can determine feasibility of expansion programs. a. Promoters or Proponents of new projects b. Shareholders c. Management of existing enterprises d. Government Agencies

6. This will cover the study of the production process, plant capacity, plant location and layout, structural specifications and other operating requirements. a. Organization and Management b. Marketing c. Technical d. Taxation

7. This will involve the study of the present and future demand and supply for the product, competition, selling prices and marketing plan for the product. a. Organization and Management b. Marketing c. Technical d. Taxation

8. This will cover the study of the type or form of business organization, requirements as to control of Filipinos in the stockholdings of a corporate form of organization and organizational structure within the enterprise. a. Organization and Management b. Marketing c. Technical d. Taxation

9. This will involve the study of tax implications of the project, possible tax-saving measures and applicable taxes which should be incorporated in the estimates of profit. a. Organization and Management b. Marketing c. Technical d. Taxation

10. This will cover the presentation of the expected profitability cash needs and cash sources based on the results of the study of marketing, technical and financing requirements. a. Financing b. Financial Projections c. Profitability d. Social Desirability

11. This will cover the determination of the financing requirements, financing leverage as well as the possible sources of financing. a. Financing b. Financial Projections c. Profitability d. Social Desirability

12. This will show the relationship between capital to be invested and expected net profit known as the return on investment. a. Financing b. Financial Projections c. Profitability-

d. Social Desirability

13. This will cover the study of the benefits to be obtained from an undertaking in terms of its contribution to the community, to other business firms and to the national economy as a whole. a. Financing b. Financial Projections c. Profitability d. Social Desirability

14. Name of applicant can be found in what part of the feasibility study? a. Project background and history b. Executive summary c. Economic Aspect d. Technical Aspect

15. Name and address of project promoter can be found in what part of the feasibility study? a. Project background and history b. Executive summary c. Economic Aspect d. Technical Aspect

16. Demand and market can be found in what part of the feasibility study? a. Project background and history b. Executive summary c. Economic Aspect d. Technical Aspect

17. Production program can be found in what part of the feasibility study? a. Project background and history b. Executive summary c. Economic Aspect d. Technical Aspect

18. Which is an example of organization layout? a. Production b. Preliminary test c. Total investment cost d. Estimated manpower requirements

19. Which is an example of financial aspect? a. Production

b. Preliminary test c. Total investment cost d. Estimated manpower requirements

20. Which is an example of social desirability aspect? a. Production b. Preliminary test c. Total investment cost d. Estimated manpower requirements

ANSWERS:
TRUE OR FALSE 1. T 2. F 3. T 4. T 5. T 6. T 7. F 8. F 9. T 10. F 11. T 12. F 13. T 14. T 15. T MULTIPLE CHOICES 1. A 2. A 3. B 4. D 5. C 6. C 7. B 8. A 9. D 10. B 11. A 12. C 13. D 14. B 15. A 16. C 17. D 18. A 19. C 20. B

RESEARCHES:

Project Feasibility study (PFS)

Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats as presented by the environment, the resources required to carry through, and ultimately the prospects for success.[1][2] In its simplest terms, the two criteria to judge feasibility are cost required and value to be attained.[3] As such, a well-designed feasibility study should provide a historical background of the business or project, description of the product or service, accounting statements, details of the operations and management, marketing research and policies, financial data, legal requirements and tax obligations.[1] Generally, feasibility studies precede technical development and project implementation. Five common factors The acronym TELOS refers to the five areas of feasibility - Technical, Economic, Legal, Operational, and Scheduling. 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. Technological feasibility is carried out to determine whether the company has the capability, in terms of software, hardware, personnel and expertise, to handle the completion of the project. When writing a feasibility report the following should be taken to consideration:

A brief description of the business to assess more possible factor/s which could affect the study The part of the business being examined The human and economic factor The possible solutions to the problems

At this level, the concern is whether the proposal is both technically and legally feasible (assuming moderate cost). 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. Cost-based study: It is important to identify cost and benefit factors, which can be categorized as follows: 1. Development costs; and 2. Operating costs. This is an analysis of the costs to be incurred in the system and the benefits derivable out of the system. Time-based study: This is an analysis of the time required to achieve a return on investments. The future value of a project is also a factor. Legal feasibility Determines whether the proposed system conflicts with legal requirements, e.g. a data processing system must comply with the local Data Protection Acts. Operational feasibility Operational feasibility is a measure of how well a proposed system solves the problems, and takes advantage of the opportunities identified during scope definition and how it satisfies the requirements identified in the requirements analysis phase of system development.[4] 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. Market and real estate feasibility Market feasibility studies typically involve testing geographic locations for a real estate development project, and usually involve 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 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. 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, 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. Financial feasibility In case of a new project,financial viability can be judged on the following parameters:

Total estimated cost of the project Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost Existing investment by the promoter in any other business Projected cash flow and profitability

Output The feasibility study outputs the feasibility study report, a report detailing the evaluation criteria, the study findings, and the recommendations.[5] MARKET ANALYSIS A market, whether a place or not, is the arena for interaction among buyers and sellers. From sellers point of view, market analysis is primarily concerned with the aggregate demand of the proposed product/service in future and the market share expected to be captured. Success of the proposed project clearly hinges on the continuing support of the customers. However, it is very difficult to identify the market for ones product/service. After all, the whole universe cannot be your market. You have to carefully segment the market according to some criteria such as geographic scope, demographic and psychological profile of the potential customers etc. It is a study of knowing who all comprise your customers, for this you require information on: - Consumption trends. - Past and present supply position - Production possibilities and constraints - Imports and Exports Competition - Cost structure - Elasticity of demand - Consumer behaviour, intentions, motivations, attitudes, preferences and requirements - Distribution channels and marketing policies in use

- Administrative, technical and legal constraints impinging on the marketing of the product

FINANCIAL ANALYSIS The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. While conducting a financial appraisal certain aspects has to be looked into like: - Investment outlay and cost of project - Means of financing - Projected profitability - Break- even point - Cash flows of the project - Investment worthiness judged in terms of various criteria of merit - Projected financial position TECHNICAL ANALYSIS The issues involved in the assessment of technical analysis of the proposed project may be classified into those pertaining to inputs, throughputs and outputs. Input Analysis: Input analysis is mainly concerned with the identification, quantification and evaluation of project inputs, that is, machinery and materials. You have to ensure that the right kind and quality of inputs would be available at the right time and cost throughout the life of the project. You have to enter into long-term contracts with the potential suppliers; in many cases you have to cultivate your supply sources. When Macdonald entered India, they developed sustainable sources of supply of potatoes, lettuce and other ingredients for their burgers. The activities involved in developing and retaining supply sources are referred to as supply chain management. Throughput Analysis: It refers to the production/operations that you would perform on the inputs to add value. Usually, the inputs received would undergo a process of transformation in several stages of manufacture. Where to locate the facility, what would be the sequence, what would be the layout, what would be the quality control measures, etc. are the issues that you would learn in greater details in subsequent lessons. Output Analysis: this involves product specification in terms of physical features- colour, weight, length, breadth, height; functional features; chemical material properties; as well as standards to be complied with such as BIS, ISI, and ISO etc. ECONOMIC ANALYSIS Economics is the study of costs- and- benefits. In regard to the feasibility of the study the entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable vis--vis the price at

which it will sell at the market place. For example, technically, silver can be extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but, the cost of extraction is so high that it would not be economically feasible to do so. Likewise, until recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis goes into financial calculations for profitability analysis that we discussed under financial analysis. At this stage it is also useful to distinguish between the economic and commercial feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial feasibility informs whether enough units would sell. Apart from the cost-benefit analysis as above, which we also refer to as private cost-benefit analysis, it is also useful to do what is known as social- cost-benefit- analysis (SCBA). For example, the entrepreneur may be getting subsidized electricity in which case private cost would be less than social cost. Likewise, exporting units earn precious foreign exchange resulting into social benefits being more than private earnings. Many a time, a project that is worthy on SCBA may find greater favour with the support agencies. ECOLOGICAL ANALYSIS In recent years, environmental concerns have assumed a great deal of significance especially for projects, which have significant ecological implications like power plants and irrigation schemes, and for environment polluting industries (like bulk drugs, chemicals and leather processing). The concerns that are usually addressed include the following: - What is the likely damage caused by the project to the environment? - What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable limits? - Check your progress - Match the following - Issues Type of Analysis 1. Availability of know how with the entrepreneur Economic Or to be procured 2. Ability to meet the burden of servicing debt Technical 3. The impact of the project on the level of Ecological social costs-benefits 5. Identification, quantification and evaluation Financial of project inputs 6. Likely damage caused by the project to the Input environment LEGAL AND ADMINISTRATIVE Think of the plight of the entrepreneur who worked on the idea of a laundry to cater to hotels and hospitals, finds it eminently feasible only to learn subsequently that laundry does not figure as an industry within the administrative definition of SSI as applicable on that date. Another entrepreneur in Kalyani (West Bengal) developed an Ayurvedic preparation only to find that the office of DIC did not have an expert to validate the project; the product had to be marketed as a confectionary item! What is implied from these examples is that the entrepreneur has to be sure also of the administrative and legal issues involved in the project. These include, choice of the form of business organisation, registration and clearances and approvals from the diverse authorities.

Forms of Organization Sole Proprietor: At the time of startup the entrepreneur usually has to handle all functional responsibilities of the venture and handles production, marketing, personnel, finance himself. As a result the vast majority of new businesses start as sole proprietors. This form has the added merit of being free from formalities regarding incorporation or maintenance of accounts or auditing etc. Partnership: As the business grows the requirements for funds and management will also increase which might lead him to enter into partnership with one or more persons. It is always preferable to have a written agreement in the form of a partnership deed which clearly indicates the names and addresses of the partners, their ages, contribution to capital, profit sharing ratio etc. This form also makes for pooling of skills and responsibilities and spread of risk. Company: A company can be a private limited company, in which case it can have a minimum of 2 and a maximum of 50 members. It can be a public limited company, which has to have a minimum of 7 members, and there is no maximum limit. This form of organisation provides vast amounts of capital as they, unlike the private limited company, invite the general public to subscribe to its shares and also provide limited liability. The Companies Act of 1956 governs the companies. Co-operative: A co-operative is an enterprise owned and controlled by people working in it. Generally they are formed for some specific purpose like a housing cooperative society. Clearances and Approvals: Setting up of an industrial unit requires the entrepreneur to obtain a number of clearances and approvals regarding land use, pollution control and safety. In this regard, you would be required to interact with the local government authorities such as the municipalities/ village panchayats and state pollution control boards. In case, you wish to avail the incentives accruing to the firms registered under Export Processing Zone/Special Economic Zone (SEZ), Software Technology Park(STP), or 100% Export Oriented Unit you would be required to register as such. Besides, certain products may require specific clearances from the relevant departments/authorities. Box entitled Product-Specific Clearances illustrates a few examples of the necessary clearances and approvals vis--vis specific products.