Feasibility study assignment

Definition
A feasibility study is an analysis of the viability of an idea.
The feasibility study focuses on helping answer the essential question of “should
we proceed with the proposed project idea?” All activities of the study are
directed toward helping answer this question.

Lahle Wolfe in Comprehensive Feasibility Study Supports Business & Marketing

Plans(About.com Guide)also alludes to the fact that A feasibility study looks at
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?

Feasibility studies address things like where and how the business will operate.
They provide in-depth details about the business to determine if and how it can
succeed, and serve as a valuable tool for developing a winning business plan.

Feasibility studies can be used in many ways but primarily focus on proposed
business ventures. Determining early that a business idea will not work saves
time, money and heartache later.

EU in their project cycle management guideline views a feasible project as the

project well designed and is likely to deliver tangible and sustainable benefits to
target groups.

Important point to note

If you are considering conducting a feasibility analysis to investigate the viability
of a potential business venture, answering the following six questions will help
guide you through the process. By using these as a guide, it will help you move
through the process efficiently while helping you get the most out of the analysis.
The decision to conduct a feasibility study should not be taken lightly. It is an
expensive and time consuming process. However, not doing a feasibility analysis
can be even more expensive in terms of the poor decisions you may make from
not conducting the proper analysis.

WHEN TO DO A FEASIBILITY STUDY

A project needs to be far enough along in the deliberation process of your
business idea to make the best use of a feasibility study. So you need to have a
clearly defined outline of one or more alternative business models or scenarios
that you want to explore. And you want to have conducted sufficient initial
investigation of these alternatives to determine if they have the potential of being
viable. You don’t want to spend your feasibility money investigating ideas that
you can determine are not feasible by just making a few phone calls.
This means that you will need to have already done much of the early
investigation and exploration of your business idea before you schedule a full
blown study. This early investigation or pre-feasibility analysis can be done
by members of your committee or with the help of a consultant. You may start by
doing a marketing study to determine if the business idea has market viability. If it
does not, you have saved time and money by not commissioning a
comprehensive feasibility study. If the idea has market viability, you can move
forward with the feasibility analysis and use the market analysis in the feasibility
study.

Who does the feasibility study?

 choose the proper consultant to fit your needs
 Time and money spent in choosing and using a good consultant is an
important investment that will pay dividends later.

How to select a consultant for feasibility study

When selecting a consultant for a feasibility study, it is often recommended that

you send a request for Proposals (RFP) to prospective consultants, outlining
what you want done.

A consultant can respond to the RFP by describing how the study will be
conducted, what questions will be answered by the study, a time-line for
completing the analysis and how much it will cost.

When selecting a consultant from among those responding to the RFP, first
identify which ones provide the type and quality of answers needed to adequately
assess your business idea. Then select the consultant who can provide the
required analysis for the least cost.

Remember to communicate to the consultant that you want an accurate

assessment of the feasibility of the venture.

How will you monitor the progress of the study?

Hiring a consultant does not negate your responsibility for insuring that the
feasibility study is conducted properly. You need to be engaged in the project
and the evaluation process, understand the issues involved, question the basic
assumptions used in the study, and challenge the conclusions of the study.

A member of the project committee or a small group of members can to be

selected to work with the consultant. They function as the liaison between the
consultant and the rest of the committee members to insure that the study
progresses according to the wishes of the project committee. To adequately
perform these duties they must have a thorough understanding of the project.
They must also understand the purpose of the study and be knowledgeable of
the provisions of the consulting contract. They will:

 Represent the project committee’s needs and interests to the consultant

 Review and clarify what is needed from the consultant
 Monitor the work of the consultant
 Provide periodic reports to the project committee

How to accept or reject the study?

At the end of the study, the consultant will provide the committee with a draft of a
final report. Before you start discussing the conclusions of the study and what
impact they have on the viability of your project, you must first review the study to
determine if it is accurate, relevant and complete. It is not uncommon for the
project committee to reject the draft of the report and ask for further clarification
and analysis.

The study is only as strong as its weakest part. It takes a mistake in only one part
of the study to sink the business venture. So, before you accept the study you
should determine that it:

 Is understandable and easy to read

 Addresses all of the relevant issues and questions
 Lists and discusses all of the underlying assumptions of the project
analysis
 Meets the expectations of the project committee/team
 Is logically consistent within sections and among sections
 Is thoroughly researched using good research techniques
 Contains all of the relevant information
 Meets the conditions of the consulting contract

It is important that you meet this “due diligence” requirement because investors
and others may question your procedures and decisions during this period if the
business venture eventually fails. You may want to discuss this with your
attorney to make sure the proper safeguards are in place.

How to use the study results

The purpose of the feasibility study is to provide you with the information needed
to determine if the proposed business venture is viable. However, it will probably
not provide you with a magic answer. So you will need to carefully assess the
conclusions of the study and decide if the proposed business venture has
sufficient merit to move forward.
If ever there is a time for unemotional, rational and logical thinking, it is now.
Mistakes at this time may be with you for a long time. Common mistakes made
by groups at this stage are:

1. The committee members have already made up their minds and rationalize the
study results to fit their decision.

2. Because project committee members tend to be action oriented rather than

deliberators, they become restless to move forward with the project and gloss
over important aspects of the study.

3. Because of the importance of the decision and the lack of clear direction from
the feasibility analysis, committee members find they cannot bring themselves to
make a decision. Rather, they continually seek more information.

4. The committee members become confused by the array of information

presented to them and pressure their consultants and others to give definitive
answers of whether to move forward with the project. When committee members
respond to questions pertaining to why they moved forward with a project by
replying, “our consultants said it would work,” are abdicating their decision
making responsibility.

AN OUTLINE OUT THE FEASIBILITY STUDY

Description of the Project

Identification and exploration of business scenarios.

 Identify alternative scenarios or business models of what the project will

entail, how it will be organized, and how it will generate profits. These may
come from the idea assessment or market assessment that you may have
already completed.
 Eliminate scenarios that don’t make sense.
 Flesh-out the scenario(s) that appear to have potential for further
exploration.

Define the project and alternative scenarios

 Describe the type and quality of product(s) or service(s) to be marketed.

 Outline the general business model (i.e. how the business will make
money).
 Include the technical processes including size, location, kind of inputs, etc.
 Specify the time horizon from the time the project is initiated until it is up
and running at capacity.

Relationship to the surrounding geographical area.

 Outline the economic and social impact on local communities.
 Describe the environmental impact on the surrounding area.

Market Feasibility

This can be based on a market assessment that you may have already
completed.

Industry description

 Describe the size and scope of the industry, market and/or market
segment(s).
 Estimate the future direction of the industry, market and/or market
segment(s).
 Describe the nature of the industry, market and/or market segment(s). Is it
stable or going through rapid change and restructuring?
 Identify the life-cycle of the industry, market and/or market segment(s). Is
it emerging, growing, mature, declining?

Industry competitiveness

 Describe the industry concentration. Are there just a few large producers
or many small producers?
 Describe the major competitors? Will you compete directly against them?
 Analyze the barriers to entry of new competitors into the market or
industry. Can new competitive enter easily?
 Analyze the concentration and competitiveness of input suppliers and
product/service buyers.
 Describe the price competitiveness of your product/service.

Market potential

 Identify whether the product be sold into a commodity market or a

differentiated product/service market.
 Identify the demand and usage trends of the market or market segment in
which the product or service will participate.
 Examine the potential for emerging, niche or segmented market
opportunities.
 Explore the opportunity and potential for a branded product.
 Assess market usage and your potential share of the market or market
segment.

Access to market outlets

 Identify the potential buyers of the product/service and the associated
marketing costs.
 Investigate the product/service distribution system and the costs involved.

Sales projection

 Estimate sales or usage.

 Carefully identify and assess the accuracy of the underlying assumptions
in the sales projection.
 Project sales under various assumptions (i.e. selling prices, services
provided, etc.).

Technical Feasibility

Facility needs.

 Estimate the size and type of production facilities.

 Investigate the need for related buildings, equipment, rolling-stock, etc.

Suitability of production technology

 Investigate and compare technology providers.

 Determine reliability and competitiveness of technology (proven or
unproven, state-of-the-art, etc.).
 Identify limitations or constraints of the technology.

Availability and suitability of site

Investigate access to:

 raw materials
 transportation
 labor
 production inputs (electricity, natural gas, water, etc.)
 Investigate potential emissions problems.
 Analyze other environmental impacts.
 Identify regulatory requirements.
 Explore economic development incentives.

Raw materials

 Estimate the amount of raw materials needed.

 Investigate the current and future availability and access to raw materials.
 Assess the quality and cost of raw materials.
Other inputs

 Investigate the availability of labor including wage rates, skill level, etc.
 Assess the potential to access and attract qualified management
personnel.

Financial/Economic Feasibility

Estimate the total capital requirements

 Assess the “seed capital” needs of the business project during the
investigation process and start-up, and how these needs will be met.
 Estimate capital requirements for facilities, equipment and inventories.
 Estimate working capital needs.
 Estimate start-up capital needs until revenues are realized at full capacity.
 Estimate contingency capital needs due to construction delays, technology
malfunction, market access delays, etc.
 Estimate other capital needs.

Estimate equity and credit needs

 Estimate equity needs.

 Identify alternative equity sources and capital availability - family,
producers, local investors, angle investors, venture capitalists, etc.
 Estimate credit needs.
 Identify and assess alternative credit sources - banks, government (i.e.
direct loans or loan guarantees), grants and local and state economic
development incentives.

Budget expected costs and returns of various alternatives

 Estimate the expected revenue, costs, profit margin and expected net
profit.
 Estimate the sales or usage needed to break-even.
 Estimate the returns under various production, price and sales levels. This
may involve identifying “best case”, “typical”, and “worst case” scenarios or
more sophisticated analysis like a Monte Carlo simulation.
 Assess the reliability of the underlying assumptions of the analysis (prices,
production, efficiencies, market access, market penetration, etc.)
 Benchmark against industry averages and/or competitors (cost, margin,
profits, ROI, etc.).
 Identify limitations or constraints of the economic analysis.
 Calculate expected cash flows during the start-up period and when the
business reaches capacity.
  Prepare pro forma income statement, balance sheet, and other
statements of when the business is fully operating.

Organizational/Managerial Feasibility

Business structure

 Identify the proposed legal structure of the business.

 Outline the staffing and governance structure of the business along with
lines of authority and decision making structure.
 Identify any potential joint venture partners, alliances or other important
stakeholders.
 Identify the availability of skilled and experienced business managers.
 Identify the availability of consultants and service providers with the skills
needed to realize the project, including legal, accounting, industry experts,
etc.

Business founders

 Character matters - are the people involved of outstanding character?

 Do the founders have the “fire in the belly” required to take the project to
completion?
 Do the founders have the skills and ability to complete the project?
 What key individuals will lead the project?
 Is there a reward system for the founders? Is it based on business
performance?
 Have the founders organized other successful businesses?

Study Conclusions

 Identify and describe alternative business scenarios and models.

 Compare and contrast scenarios based on goals of the producer group.
 Outline criteria for decision making among alternatives.

The Components of a Feasibility Study by A Comprehensive Feasibility Study

Supports Business & Marketing Plans

By Lahle Wolfe, About.com Guide

 Description of the Business: The product or services to be offered and

how they will be delivered.
 Market Feasibility: Includes a description of the industry, current market,
anticipated future market potential, competition, sales projections, potential
buyers, etc.
 Technical Feasibility: Details how you will deliver a product or service
(i.e., materials, labor, transportation, where your business will be located,
technology needed, etc.).
 Financial Feasibility: Projects how much start-up capital is needed,
sources of capital, returns on investment, etc.
 Organizational Feasibility: Defines the legal and corporate structure of
the business (may also include professional background information about the
founders and what skills they can contribute to the business).
 Conclusions: Discusses how the business can succeed. Be honest in
your assessment because investors won’t just look at your conclusions they
will also look at the data and will question your conclusions if they are
unrealistic.

Summary: 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

Why Are Feasibility Studies so Important?

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