The project feasibility analysis is the process of ascertaining the viability of a proposed initiative or service (project) and providing a framework & guidance for its development & delivery. Sound decisions are made in this process along with the setting of direction.
Project Feasibility Analysis Includes:
- 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
No universal format is available for 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 a feasibility study. The main purpose is to point out any potential problem that will resist the business from becoming successful in the marketplace. In other words, project feasibility analysis ascertains whether the business idea is sensible or not.
A lot of 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 be based 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 be helpful for the later business plan by saving time, money, and energy.
Key Areas of Feasibility Study:
A feasibility study considers the following three important areas:
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Market issues
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Financial issues
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Technical/organizational issues
It is important to remember that the above-mentioned areas are viewed briefly in the study.
Reasons for Conducting Feasibility Study
It is difficult to develop any new business venture. It is a complex and time-consuming effort to take a project from the initial idea through the operational stage. Mostly, ideas are not transformed into business operations. If these business ideas are directly passed to the operational stage, then most of them fail within the 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 the benefits of the projects are more than the risks involved.
Various cooperative business projects are very expensive to execute. The operations of such cooperative projects differ from the operations of the individual business members. Mostly, risks are involved in the operations of cooperative businesses 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 a high cost, this cost will seem minimal when compared with the cost of the total project. 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 new groups or existing businesses can be evaluated through a feasibility study. Feasibility analysis can assist groups in making decisions 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 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 design of the project are disclosed by this before they negatively influence the project. The project costs can be significantly reduced by applying the lessons obtained from feasibility analysis.
The risks and returns associated with the project are presented by the feasibility study for evaluation by the prospective members. There is no fixed rate of return a project requires before a group decides to proceed. The suitable risk rate and acceptable level of return will vary for individual members based on their personal situation.
Risk capital from members and debt capital from banks & other financiers are generally required by the proposed project to become operational. An objective evaluation of a project before investing is typically required by lenders. This assessment can be provided by conducting a feasibility study by someone without a vested interest in the outcome of the project.
Benefits and Requirements of Feasibility Study:
Following are some potential benefits and general requirements for conducting a feasibility study:
- It is difficult to develop any new business venture
- It is a complex and time-consuming effort to take a project from the initiation of ideas to the operational stage
- Most ideas do not develop into business operations, whether from investor-owned businesses or cooperatives
- Most ideas fail within the first six months if they proceed directly to the operational stage
- Business operations included in the projects differ from individual businesses
- Risks of unfamiliarity 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 further proceeding in the development of the project is also assisted by the feasibility study
- The cost of conducting the study may seem high, but it becomes minimal when compared with the total project cost
- Larger capital investments at later stages are protected by small initial expenditure on a feasibility study
- Feasibility study is an effective tool and is valid for various types of projects
What a Feasibility Analysis is not
In real-world projects, feasibility studies are performed. These are not research papers or academic in nature. The feasibility study is not replaced by simulation or projection models, which may be useful in some projects. The feasibility study must not be a “cookie-cutter” concept for a project. The study must not be considered as a general source of information. When the feasibility study is completed, it must allow a group to make effective decisions regarding the strategic problems of their particular project.
Feasibility study does not resemble a business plan. A business plan is more detailed compared to a feasibility study and comes at a later stage of the project development process. The business plan serves as a blueprint for business operations. The intended responses of the group to the serious problems mentioned in the feasibility study are presented in the business plan. The business plan is developed based on the results of the feasibility study.
The aim of feasibility study is not to point out new concepts or ideas for a project. Before initiating the study, these ideas must be clearly specified. Before conducting the feasibility study, a number of steps should be completed by the group. The value of the feasibility study increases when more realistic assumptions are used.
The feasibility study must not be performed merely to support the desire for project success. The chances of project success should be evaluated objectively in the study. Negative results should be considered equally useful for decision makers as positive outcomes.
Before providing loans, financiers may require a feasibility study. However, this should not be the only aim of the feasibility study. The ability of bankers to evaluate the project should be enhanced by the feasibility study, but the main purpose remains supporting decision-making rather than obtaining financing.
The basic assumptions of the project idea are presented through the analytical tool of feasibility analysis. This study reflects changing results with changing assumptions and provides guidance for the important elements of the project.
Scope of Feasibility Analysis
Following items should generally be covered in the feasibility analysis of a project:
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Need Analysis
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Process Work
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Engineering & Design
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Cost Estimate
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Financial Analysis
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Project Impacts
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Conclusions & Recommendations
1) Need Analysis
The realization of the need for the project is indicated in this section. This identified need may influence the company itself, another company, the government, or the public. The need is confirmed and evaluated by conducting a preliminary study. A proposal is then developed that specifies how the need may be satisfied.
2) Process Work
The preliminary analysis performed to ascertain what will be needed to fulfill the requirement is included in process work. A consultant who is an expert in the project area may perform this work. System models or prototypes are often included. The general characteristics of the process can be illustrated using conceptual designs and scaled-down models. Simulation may be used to forecast results before actual implementation.
3) Engineering and Design
A thorough technical study of the proposed project is involved in this stage. Written quotations are obtained from subcontractors and suppliers as required. The capabilities of the technology are evaluated, and product design may be performed if needed.
4) Cost Estimate
This includes estimating the project cost with an acceptable level of accuracy. At this stage, accuracy levels of around -5% to +15% are common. Cost estimation includes both initial and operating costs, capital investment, and recurring and non-recurring costs. Sensitivity analysis may also be conducted.
5) Financial Analysis
This involves analyzing the cash flow of the project. It includes sources of capital, rate of return, payback period, inflation, break-even point, sensitivity, and residual values. It determines whether funds are available and when they will be required.
6) Project Impacts
This section assesses the impact of the proposed project. It includes social, environmental, cultural, economic, and political impacts. It also evaluates the value-added contribution of the project.
7) Conclusions and Recommendations
The final section summarizes the entire analysis and provides a clear decision regarding the project. It may include acceptance or rejection along with recommendations on the next steps.
