Feasibility Study

A feasibility study typically is the response to some client-identified problem or

opportunity. It reveals what is required to build a solid business case, allowing
management to make an informed decision about funding or canceling the
project. "To be, or not to be?" is the primary question a feasibility study answers.
This primary question can be decomposed in three supporting questions: What is
this project all about? Should we do this project? How should we go about this
project?

What is this feasibility all about?

One primary reason for project restarts, or outright failure, is the lack of a project
mission, which at this early point means a careful analysis of the problems or
opportunities and their possible impact on the organization. Team members,
customers, and other stakeholders need a good understanding of the project's
fundamental components - goals, objectives, scope, problem statement,
constraints, and vision.

A good test of whether or not a project is understood is to walk around and ask
various participants what they think it's all about. A crisp, business-oriented,
non-technical answer usually means the project's groundwork is well established.
The answer could be what we refer to as a project objective statement: a short,
concise, high-level summary of the project.

Should we do this project?

The second major question answered by a good feasibility study is whether or not
the project should proceed. The very name "feasibility" indicates one possible
outcome is not to proceed. A significant portion of the multi-billion losses on
software projects comes from projects that should never have gotten past the
feasibility stage, but got caught up in corporate egos and politics. Once the
problems and opportunities have been identified, the next task of the feasibility
study is to define the criteria for an acceptable solution. Feasibility (acceptability)
incorporates political, economic, technical, and organizational components. For
example, if the senior vice president of engineering demands that a particular
project to be done, why spend weeks coming up with a detailed cost/benefit
analysis? In this case, the "should" question is fairly easy to answer. It is more
effective to spend the remaining time answering the other feasibility questions.

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 A feasibility study should arrive at definitive conclusions on all the basic
aspects of a project after consideration of various alternatives. These
conclusions and any recommendations made with regard to decisions
or actions required from parties involved in the project would have to
be explained and supported by compelling evidence. For convenience
of presentation, the feasibility study should begin with a brief executie
summary outlining lthe project data (assessed and assumed) and the
conclusions and recommendations, which would then be covered in detail
in the body of the study; and supporting material (statistics, results of market
sureveys, detailed technical descriptions and equipment lists, plant layouts etc.),
however, should be presented in a separate annex to the study. The executive summary
should concentrate on and cover all critical aspects of the study, such as the following :
the degree of reliability of data on the business environments; project input and
output; the margin of error (uncertainty, risk) in forecasts of market, supply and
technological trends; and project design.

The executive summary should have the same structure as the body of the feasibility
study, and cover-but must not be limited to-the following areas :

Summary of the project background and history

 Name and address of project promoter

 Project background
 Project (corporate) objective and outline of the proposed basic.
Project strategy, including geographical area and market share (domestic, export), cost
leadership, differentiation, market niche.

 Project location : orientation towards the market or towards resources (raw

materials).
 Economic and industrial policies supporting the project.

Summary of market analysis and marketing concept

 Summarize results of marketing research : business environment, target market

and market segmentation (consumer and product groups), channels of
distribution, competition, life cycles (sector, product).
 List annual data on demand (quantities, prices) and supplies (past, current and
future demand and supplies).
  Explain and justify the marketing strategies for achieving the project objectives
and outline the marketing concept.
 Indicate projected marketing costs, elements of the projected sales
programmed and revenues (quantities, prices, market share etc.)
 Describe impacts on : raw materials and supplies, location, the environment,
the production programme, plant capacity and technology etc.

Raw Materials and supplies

 Describe General Availability of
Raw Materials
Processed Industrial Materials and Components
Factory Supplies
Spare Parts

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Supplies for social and external needs
 List annual supply requirements of mateiral inputs
 Summarize availability of critical inputs and possible strategies
(supply marketing)
Location, site and environment
 Identify and describe location and plant site selected,
including :
Ecological and enviromental impact
Socio economic policies, incentives and constraints
Infrastructural conditions and environment
 Summarize critical aspects and justify choice of location and site
 Outline significant costs relating to location and site
Engineering and technology
 Outline of production programmed and plant capacity.
 Describe and justify the technology selected, reviewing its availability and
possible significant advantages or disadvantages, as well as the life cycle,
transfer (absorption) of technology, training, risk control, costs, legal aspects
etc.
 Describe the layout and scope of the project.
 Summarize main plant items (equipment etc.) their availability and costs.
   Describe required major civil engineering works

Organization and overhead costs

 Describe basic organization design and management and measures
required.
Human resources
 Describe the socio-economic and cultural environment as related to
significant project requirements, as well as human resources availability,
recruitment and training needs, and the reasons for the employment of
foreign experts, to the extent required for the project.
  Indicate key persons (skills required) and total employment (numbers and
costs)
Project implementation schedule
 Indicate duration of plant erection and installation.
 Indicate duration of production start-up and running-in period
  Identify actions critical for timely implementation.
Financial analysis and investment appraisal

 Summary of criteria governing investment appraisal

 Total investment costs.
Major investment data, showing local and foreign components
Land and site preparation
Structures and civil engineering works
Plant machinery and equipment
Auxiliary and service plant equipment
Incorporated fixed assets
Pre-production expenditures and capital costs
Net working capital requirements

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  Total costs of products sold
Operating costs
Depreciation charges
Marketing costs
Finance costs

 Project financing
Source of finance
Impact of cost of financing and dept service on project proposal
Public policy on financing

Investment appraisal : Key data

Dscounted cash flow (internal rate of return, net present value)

Pay-off period
Yield generated on total capital invested and on equity capital
Yield for parties involved, as in joint venture projects
Significant financial and economic impact on the national
economy and environmental implications

 Aspects of uncertainty, including critical variables, risks and possible strategies

and means of risk management, probable future scenarios and possible impact
on the financial feasibility of the investment project.
 National economic evaluation.
 Conclusions
Major advantages of the project
Major drawbacks of the projects
Chances of implementing the project

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CERTIFICATE MATERIAL :

MANUAL FOR THE

PREPARATION OF
INDUSTRIAL
FEASIBILITY STUDIES
Published by:

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Newly revised and expanded W. Behrens P. M. Hawranek

Contents of the Feasibility Study Course cover the

following :

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 PART ONE :
PRE-INVESTMENT STUDIES AND THE INVESTMENT PROJECT
CYCLE
A. Investment project cycle and types of pre-investment studies.
B. Basic aspects of pre-investment studies.
C. Rehabilitation and expansion projects.
D. Role of institutions, consultancy services and information
systems.

PART TWO :
THE FEASIBILITY STUDY :

I. Executive summary
II. Project background and basic idea
III. Market analysis and marketing concept

A. Marketing
B. Marketing research
C. Outline of the project strategy
D. Outline of the marketing concept
E. Marketing costs and revenues

IV. Raw materials and supplies

A. Classification of raw materials and supplies
B. Specification of requirements
C. Availability and supply
D. Supply marketing and supply program
E. Costs of raw materials and supplies

V. Location, site and environment

A. Location analysis
B. The natural environment
C. Environmental impact assessment
D. Socio-economic policies
E. Infrastructural conditions
F. Final choice of location
G. Site selection
H. Cost estimates

VI. Engineering and technology

A. Production programme and plant capacity
B. Technology choice
C. Technology acquisition and transfer
D. Detailed plant layout and basic engineering
E. Selection of machinery and equipment
F. Civil engineering works
G. Maintenance and replacement requirements
H. Estimates of overall investment costs

VII. Organization and overhead costs

A. Plant organization and management
B. Organizational design
C. Overhead costs
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VIII. Human resources
A. Categories and functions
B. Socio-economic and cultural environment
C. Project-related requirements
D. Availability and recruitment
E. Training plan
F. Cost estimates

IX. Implementation planning and budgeting

A. Objectives of implementation planning
B. Stages of project implementation
C. Implementation scheduling
D. Projecting the implementation budget

X. Financial analysis and investment appraisal

A. Scope and objectives of financial analysis
B. Principal aspects of financial analysis and concept of investment appraisal
C. Analysis of cost estimates
D. Basic accounting statements
E. Methods of investment appraisal
F. Project financing
G. Financial and efficiency ratios
H. Financial evaluation under conditions of uncertainty
I. Economic evaluation

Schedules for financial analysis

I. Case-study
II. Outlines of general opportunity studies
III. Outline of pre-feasibility study
IV. Types of decisions to be taken during different pre-investment stages
V. Status of an existing industrial enterprise
VI. Demand forecasting techniques
VII. Sampling principles
V III. Field surveys

Tables
I. Computation of net-present-value ratios
2. Example of cash flow discounting
3. Comparison of project alternatives
4. Example of different rates of return
5. Annual rate of return on equity capital.
6. Net profit of project alternatives
7. Example of investment outlay and structure of finance
8. Calculation of weighted IRR
9. Minimum days of coverage for computation of net working capital
10. Coverage of fixed costs
11. Production costs factors
12. Income and demand projections
13. Forecast of petrol consumption

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 Figures
I. Pre-investment, investment and operating phases of the project cycle
II. Project promotion and capital expenditures
III. The firm and its environment
IV. Coordination and harmonization of the functional strategies
V. Interrelationship between the components of the feasibility study
VI. Information flow chart for the preparation of industrial feasibility studies
VII. Reliability of different types of pre-investment studies
VIII. The phases of rehabilitation projects
IX. Marketing research and preparation of a marketing concept

The marketing mix

Marketing research and the marketing system
Problem classification
Market volume and market share
Assessing the profile of possible reactions of competitors
The life cycle of a sub sector
Intensity of competition
Outline of the project strategy and marketing concept
Types of geographical project strategy
Profitability and market share
Basic strategic options
Product-market relation
Competition and market expansion strategy
Basic elements for the determination of a project strategy
Assessment of product-target-group fields
Development of a marketing concept
Phases of environmental impact assessment
Example of an organization chart for an industrial enterprise
Structure of the balance sheet
Origin of cost items for profitability calculation (return on equity)
NPV method and ranking problem
Determination of the break-even conditions
Check-lists and worksheets
Functional objectives and strategies
III-1. Definition of the market and analysis of the market structure
III-2. Analysis of the marketing system
III-3. Analysis of market characteristics
III-4. Analysis of the competitors
I-5. Analysis of the environment
III-6. Corporate (internal) analysis
V-l. Domains of the natural environment subject to and generating environmental impacts
V-2. Domains of the social environment subject to and generating environmental impacts
V-3. Environmental impacts and factors
V-4 Matrix for the identification of environmental impacts
VI-1. Engineering and technology
VI-2. Subdivision of cost estimates
VII-1. Cost centres
V II-2 Overhead costs
VIII-I. Human resource planning
VIII-2. Computation of surcharges on wages and salaries
IX-I. Sample breakdown of project implementation costs

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VIII. Human resources
A. Categories and functions
B. Socio-economic and cultural environment
C. Project-related requirements
D. Availability and recruitment
E. Training plan
F. Cost estimates

IX. Implementation planning and budgeting

A. Objectives of implementation planning
B. Stages of project implementation
C. Implementation scheduling
D. Projecting the implementation budget

X. Financial analysis and investment appraisal

A. Scope and objectives of financial analysis
B. Principal aspects of financial analysis and concept of investment appraisal
C. Analysis of cost estimates
D. Basic accounting statements
E. Methods of investment appraisal
F. Project financing
G. Financial and efficiency ratios
H. Financial evaluation under conditions of uncertainty
I. Economic evaluation

Schedules for financial analysis

I. Case-study
II. Outlines of general opportunity studies
III. Outline of pre-feasibility study
IV. Types of decisions to be taken during different pre-investment stages
V. Status of an existing industrial enterprise
VI. Demand forecasting techniques
VII. Sampling principles
V III. Field surveys

Tables
I. Computation of net-present-value ratios
2. Example of cash flow discounting
3. Comparison of project alternatives
4. Example of different rates of return
5. Annual rate of return on equity capital.
6. Net profit of project alternatives
7. Example of investment outlay and structure of finance
8. Calculation of weighted IRR
9. Minimum days of coverage for computation of net working capital
10. Coverage of fixed costs
11. Production costs factors
12. Income and demand projections
13. Forecast of petrol consumption

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 X-91/. Discounted cash flow - total capital invested
X-92/. Discounted return on equity capital invested
X-10. Net income statement from operations
X-1 1. Projected balance sheet

Certificate Program:

COMFAR III
Published by :

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

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 WHAT IS COMFAR III

The United Nations Industrial Development Organization (UNIDO) has been

working with governments, business associations and individual companies to
solve industrial problems – and equip them to help themselves – for more than 30
years. One of the tools developed by UNIDO to serve this purpose is COMFAR, the
COmputer Model for Feasibility Analysis and Reporting.

In 1983, the first version of the software was released. Since then, UNIDO has been
constantly working on development and improvement of this tool. The third
generation, COMFAR III Expert for Windows, was released in 1995. Since then, in
order to meet the technical developments as well as users requests, it has been
upgraded yearly. This software is based on the experience, recommendations,
comments and needs of more than 3,000 users in 140 countries and is
complementing the UNIDO Manual for the Preparation of Industrial Feasibility
Studies (2nd ed., 1991).

COMFAR III Expert is a valuable aid in analysis of investment projects. The main
module of the program accepts financial and economic data, produces financial
and economic statements and graphical displays and calculates measures of
performance. Supplementary modules assist in the analytical process. Costbenefit
and value-added methods of economic analysis developed by UNIDO are
included in the program, with allowance made for the methods used by major
international development institutions.

The program is applicable for the analysis of investment in new projects and
expansion or rehabilitation of existing enterprises as, e.g. in the case of
re-privatization projects. For joint ventures, the financial perspective of each
partner or class of shareholder can be developed. Analysis can be performed
using a variety of assumptions concerning inflation, currency revaluation and
price escalations.

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 THREE PRODUCTS TO SERVE
DIFFERENT NEEDS

COMFAR III Expert : facilitates financial and economic appraisal of

investment projects. It permits the user to simulate the short- and
long-term financial and economic situation of industrial and
nonindustrial investment projects.

COMFAR III Business Planner : enables the user to carry out financial analysis of
investment projects. The economic appraisal module is not included in this
product.

COMFAR III Mini Expert : has been developed for preliminary assessment of
investment opportunities from a purely financial point of view.

Expert Business Planner Mini Expert

Opportunity study level

Financial Appraisal
Feasibility Study Level
Economic Appraisal

GENERAL DESCRIPTION OF
COMFAR III EXPERT SOFTWARE

Easy to access – easy to operate

COMFAR III Expert’s graphical user interface makes it very userfriendly and,
therefore, ideal even for those with no special computer knowledge. At the
moment, it is available for MS Windows 98/ME and MS Windows 2000 / XP /
2003.

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After having specified the project type (industrial, agro-industrial,
infrastructure, tourism or mining) and the level of analysis (opportunity or
feasibility study), the user is guided through data entry, data saving,
calculations, display and printing of result schedules and graphical charts.

User-defined flexibility
COMFAR III Expert allows users greater flexibility in specifying how detailed
an analysis they require. The main features are :

• new or expansion/rehabilitation project option

• Joint-venture project option
• CDM/JI project option (Kyoto protocol)
• variable planning horizon: up to 60 years
• variable time structure: construction and start-up
• up to 20 products can be specified
• data may be entered in up to 20 currencies
• direct costing option
• price escalation/inflation option
• economic analysis option

The standard structure of investment, operating and marketing costs may

be expanded to allow the entry of sub-items. Sources of finance include
equity, long-term loans, short-term finance and definition of conditions of
profit distribution.

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 With these facilities, COMFAR III Expert can be applied to all
kinds of investment projects, small- and medium-scale
business investments and analysis of large-scale projects or
complex production units, e.g. chemical plants.

COMFAR III Expert – Cash Flow Model

The COMFAR system distinguishes cash flows in domestic and
foreign currencies while allowing for changes in exchange rates. A
number of standard functions are available to compute net working
capital, debt service, annual depreciation of fixed assets and corporate tax.
From a variety of financial and efficiency ratios, the user may select those
needed for project appraisal. Direct costing, allocation of indirect costs to profit
centres and analysis in constant or current prices are also available. An auxiliary
module supports project developers seeking to develop CDM or JI projects in
those sectors, where projects aiming at ruducing GHG emissions can take place.

Financial analysis (enterprise level)

For financial analysis, COMFAR III Expert produces, the following result
schedules: Summary sheet, Investment costs, Production costs, Production and
sales program, Sources of finance and debt service, Business results (financial
cash flow, discounted cash flow, income statement, balance sheet (with ratios),
data on direct costing and product profitability), Financial and efficiency ratios
and Break-even conditions. User-defined sub-items may be displayed and
printed within the standard schedules.

Economic analysis (macro level)

The economic analysis option allows the user to introduce shadow prices (to
express project inputs and outputs in terms of economic prices) and to
compute economic rates of return, value added, foreign exchange and
employment effects. All results might be calculated including or excluding
external economic effects.

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The economic analysis module of COMFAR III Expert supports
methodologies described in the Guide to Practical Project Appraisal
(UNIDO,1986), in (“Little, I.M.D. and Mirlees, J.A.”), Project Appraisal and
Planning for Developing Countries (OECD, 1982) and in (“Squire, L., and van
der Tak”, H.G.), Economic Analysis of Projects (World Bank, 1984).
Value-added methodology follows that of the Manual for Evaluation of
Industrial Projects (UNIDO, 1984) but is modified to include decomposition
of intermediate inputs suggested in the Manual of Economic Evaluation of
Projects by (M. Chervel and Michel le Gall) (Paris, 1989).
Graphic presentation of results
COMFAR III Expert gives the user the ability to generate graphic
presentations of ratios as well as structures of cash flows, costs and
revenues.

Sensitivity analysis
With the help of sensitivity analysis, it is possible to show how net cash
returns or the profitability of an investment alter with different values
assigned to the variables needed for the calculation (sales prices, unit costs,
sales volumes, etc.). COMFAR III Expert facilitates assessment of alternative

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 project scenarios and determination of critical variables. A
variety of graphic charts is available to analyse the structures of
project inputs and outputs, e.g. the structure of annual
production and sales programme, or variable and operational
margins and break-even sales volumes. Furthermore, COMFAR III
Expert offers Incremental Analysis in order to facilitate the
calculation of the impact of project expansions or rehabilitations..

Non-industrial investment projects

For appraisal of investment projects in other sectors of the economy, such as
agro-industrial development, mining, infrastructure and tourism projects,
COMFAR III Expert offers corresponding data input formats and output tables.

COMFAR III Expert allows the user to create his own project type based on the
above mentioned standard types.

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 MULTILINGUAL SOFTWARE

The financial analyst might choose to work in his/her language

but might need to present the results, print-outs, charts of the
analysis in a different language, which is often the case in
international negotiations. Time and money has to be spent in
translations. UNIDO has solved this problem by offering COMFAR III
software in different languages and providing full compatibility among
the programs in the different languages.
All COMFAR III programs are delivered in the language selected by the
user. It is possibile to acquire and install, at any time, one or more
additional language sets. This will permit the analyst to operate COMFAR III
in one language (e.g. English) and print all tables and charts in a different
language (e.g. French).
COMFAR III is currently available in the following languages:
• Chinese, Croatian, Czech, English, Farsi, French, German, Indonesian,
Italian, Japanese, Korean, Polish, Portuguese, Russian, Serbian, Slovak
and Spanish.

Other language versions will follow depending on demand.

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