How to conduct a Feasibility

Nusrat Gill – 4th January 2010

 Project ? A proposal for Investment with
the definite aim of producing a flow of output over a
specified period of time.
1- It is a specific activity with a specific starting point and
specific ending point intended to accomplish a
specific object.
2- It is something which is measurable both in its major
costs and returns.
3- It will have some geographic location or at least a
rather clearly understood area of geographic
concentration.
4- It will have a relatively well defined time sequence of
investment and production activities.
5- It will have specific group of activities which we want to
finance.
6- Group of benefits for which we can identify and estimate
values.
7- Partially or wholly independent a administrative structure
and set of accounts.
Project Cycle

Identification

Evaluation

Project Preparati on
Cycle
Implementation

Appraisal

Feasibility Study
Defining Feasibility
A Project Feasibility Study is an exercise that
involves documenting each of the potential solutions
to a particular business problem or opportunity.
Feasibility Studies can be undertaken by any type of
business, project or team and they are a critical part
of the Project Life Cycle.
A feasibility study ascertained 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
Why a Feasibility Study ?
 
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 business-related 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.
Component of a Feasibility
1. Description of a Business
2. Market Feasibility
3. Technical Feasibility
4. Financial/Economic Feasibility
5. Environmental Feasibility
6. Social Feasibility
7. Organization Setup
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 business
run efficiently, as well as other information about the business
Description of Business/Project

Opportunity/problem to be addressed

Location / site of business/project

Detail of product/services

Mechanism of delivery/distribution
Market Feasibility
Description of the Industry/sector
Current Market Analysis
Competition
Anticipated Future Market Potential
Potential Buyers and Sources of Revenues
Sales Projections
Technical Feasibility
Materials (capital and raw material)
 Parts needed to produce a product,
 Supplies (utilities – electricity, water, raw material etc) and
 Other materials that are involved in producing or manufacturing
your product.
Labor (skilled, semiskilled)
Transportation or Shipping
Physical Location (industrial estate, tax exemption
area, environmental sensitive area etc.)
Technology (local or international)
Financial/Economic Feasibility
Start-Up Capital Funding Sources (investor, loan from
bank, self finance etc.)
Identify investment costs ( material, labour, operational cost)
Identify expected revenue/benefits

Methods for Financial / Economic Analysis

What is Cost Benefit Analysis ?
•CBA as an ex-ante technique of project
appraisal. Little & Mirlees 1974, ODA 1988.
•Common sense procedure of weighing-up the
‘pros and cons’ but with quantitative
evaluation of costs and benefits in monetary
terms.
•Procedure:-
•Identify costs and benefits
•Value costs and benefits
•Discount costs and benefits
•Compute net value
Types of C.B.A.
Financial Appraisal
cost-benefit analysis of income and expenditure using
market prices and considering time preference of
money.
Economic Appraisal
CBA for wider costs and benefits on society (social CBA,
environmental economics).

Richard Bond, (Hon.) Research Fellow, IDPM

 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 = Future value of investment
P = Principal
R = Rate of interest (as decimal)
n = Number of years investment is made.
Discounting 2
Discounting is the reverse of
compounding, i.e. calculating the
present value of a future amount.
Re-arrange the equation to find P:-
P = S
This is more useful when examining
future costs and benefits as they (1 + R)n
can be adjusted to present values
for comparison.
The ‘principal’ (present amount) can
be changed into a ‘factor’ by
making future value (S) into 1 1
Hence the discount factor =
(1 + R)n
Exercise;
Calculate the discount 1
factor using a discount (1 + R)n
rate of 5%, for a value 2
years hence.

1
 Answer = 0.907
(1 + 0.05)2
Discounting 3
e.g. 5 years discount factors @ 5% and 20% (note what happens)

N R Discount Factor R Discount Factor

0 0.05 1.000 0.20 1.000
1 0.05 0.952 0.20 0.833
2 0.05 0.907 0.20 0.694
3 0.05 0.864 0.20 0.579
4 0.05 0.823 0.20 0.482
5 0.05 0.784 0.20 0.402
• Discount factor decreases with longer periods of time,
i.e. greater reduction in future value.
• Rate of decrease is greater at higher discount factors.
NB @ 20% future values are halved in just over 3 years.
 A Hypothetical Project Cash Flow

Year Investment Recurrent Sales Net Discount Discounted

& Salvage Costs Cash Flow Factor Cash Flow
(@10%)
1 -Rs 42,000 -Rs42,000 0.909 -Rs38,181.82
2 -Rs 1,000 Rs 10,000
Rs 9,000 0.826 Rs 7,438.02
3 -Rs 1,000 Rs 10,000 Rs 9,000 0.751 Rs 6,761.83
4 -Rs 1,000 Rs 10,000 Rs 9,000 0.683 Rs 6,147.12
5 -Rs 1,000 Rs 10,000 Rs 9,000 0.621 Rs 5,588.29
6 -Rs 1,000 Rs 10,000 Rs 9,000 0.564 Rs 5,080.27
7 -Rs 1,000 Rs 10,000 Rs 9,000 0.513 Rs 4,618.42
8 Rs 5,000 -Rs 1,000 Rs 10,000 Rs 14,000 0.467 Rs 6,531.10
Total Rs 26,000 NPV Rs 3,983.24
Net Present Value

Net Present Value (NPV)

Total of discounted cash flows during project life
 The net value (at today’s values) of doing the project

 Intuitive, tangible; but not scale neutral.

Internal Rate of Return (IRR)

That discount rate which would give a NPV of zero, i.e.
break-even.
 Expressed as % and scale neutral.
 If capital can be borrowed at a lower rate, then OK

 Complex, iterative calculation but spreadsheet function

Benefit-Cost Ratio
A quick and simple comparison of
benefits over costs i.e. divide total
B
value of benefits by total value of
costs.
C
B-C ratio should be >1 to be viable,
If discounted values are used, it requires separate
discounting of costs (capital and recurrent
together) and benefits.
For simplicity it is often done without discounting
so be careful of interpretation.
 Present worth of benefits
Benefit-cost ratio = Present worth of costs

 In case the benefit-cost ratio of a project is greater than

unity, it is a viable project.

 If benefit-cost ratio is less than one, a project is not a

sound proposition.

 In case, the benefit-cost ratio equal unity the investor is

just indifferent to the acceptance or rejection of the
project.
Strengths and Weaknesses of Cost- Benefit Method
Strengths
1. Can be used to judge
absolute worth of a
Project.
2. Can compare CB results
across a wide variety of
Projects in different sectors.
3. Aids in measuring
distributional effects of
alternative Programmes.
Weaknesses
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 great
with many of the Programmes that quantification is almost
impossible, particularly with public goods.
3. Overemphasizing those benefits and costs that can be quantifies
compared to those that cannot be.
4. Choice of Discount Rate influences the results. Low Discount rate
favours those projects that yield higher
and distant benefits and vice- versa.
5. Many of the Programmes have redistributive effects, benefiting
some persons at the expenses of others. CB Analysis does not
contribute towards the establishment of the social welfare function
that provides society’s answer about the relative desirability of
various pattern of income distribution.
6. Adds up a host of items, some of them ‘direct cost’ which will
actually be paid out (e.g. construction costs) and some of them will
never be paid ( e.g. noise costs)
Environmental Feasibility
The need for environmental Assessment
Avoid doing more damage than good
Improve design of interventions
Legal reasons
Loan conditions
Standard best-practice for projects
Environmental
Sensitive & Critical
Areas
National Parks
Wildlife Sanctuaries
Game Reserves
Wetland & Ramsar Sites
Forest Reserves
Rangeland Reserves
Archaeological & Cultural Sites
Habitats of rare & threatened
spp
Project Area
Environmental Assessment -
Definitions
Definition of Environment –
Environment – Biophysical, Social, Cultural &
Economic aspects of the site
Environmental values – site Uses, Function &
Attributes

Broad Objective – to define impact of Project on the

environment or upon ‘environmental values’
Environmental Assessment - Steps

Environmental Scoping – to identify

potentially significant impacts

Environmental Screening – to sort projects

according to level of environmental
assessment needed (none, IEE or EIA)

IES – Initial Environmental Scoping &

Screening combined
Environmental
Scoping

Definition of
Site
Environmental
Screening
System
 IES SUMMARY CHECKLISoT
•ONE FORMAT …All
Project Types / All Sites –
 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 sites
 Economy, livelihood, health &
culture
 Construction impacts
Social Feasibility
Social Impact Assessment: Definition
Social Impact Assessment is analyzing, monitoring
and managing the social consequences of
development

The objective of SIA is to ensure that development

maximizes its benefits and minimizes its costs,
especially those costs borne by the people.
Social Impact Assessment: Definition
(continued)
SIA is a tool to asses the potential impacts of
projects on a society or community prior to their
implementation
It provides a systematic appraisal in advance of the
impacts on the quality of life of people and
communities whose environment is affected by a
proposed project, plan or policy
Organizational Feasibility
Purpose of an Organizational Feasibility Study: To
define the legal and corporate structure of the business.
An Organizational Feasibility Study may also include
professional background information about the founders
and principals of the business and what skills they can
contribute to the business.
Organizational feasibility study should include:
Description of Business Structure
Description of Organizational Structure
Internal and External Principles and Practices of the
Business
Professional Skills and Resumes
Organizational Chart
Some points for strong
Conclusion/Summary
 Discuss how the business can succeed.

 Summarize the most important points you need to make. Do not attempt
to describe minor or unimportant details.
 A good summary or conclusion should be concise, no longer than one
to two pages and written in plain terms.
 Do not attempt to persuade the reader with jargon or an advertising
pitch; feasibility study findings should be objective and based on
research and information in the study.
 Avoid using phrases like “I believe,” or “in my opinion,” “I hope, “I
anticipate.” Do use strong, impersonal phrases like “research supports
that this industry will continue to grow.”
 A summarized conclusion helps to develop an overall impression, but
should not replace the supporting documents. Be sure to submit the
summary as part of the feasibility study, not as a substitute.
******************
Case Study
Government of Pakistan is interested to develop livestock
sector as it has great potential both in dairy and
meat/chicken production. Loans on easy terms and
technical support is provided by the government.
Malik Anwar has hired a consultant to prepare a
feasibility report for establishing a 50 cattle dairy farm
to be operative for ten years. The land to be used for
dairy farm is situated near village Charah on the bank
of Sawan River. The cost of one cattle is Rs.100,00/-, the
funds required for building of cattle with other facilities
are Rs. 2,000,000/-. The running expenditures are
Rs.50,000/- per month for feed and utilities. Each cattle
is expected to yield 20 liter milk per day, which is to be
marketed @ Rs. 50 per liter.
Thank you