How to Carry Out a Feasibility Study the Right Way

admin

By: Site Engineer, Staff

full bio

Before embarking on any major business project a study should be undertaking to determine the feasibility of such a project and the degree of risk associated with such an investment. The evaluation of a project intended to serve as a basis for deciding whether the project is worthwhile in the light prevailing economic, commercial, technical and socio-cultural circumstances.

The main concerns of the feasibility study are detailed estimates of the cost and the technical commercial management and financial aspects of the project. In essence, the feasibility report is an aid to investment decision-making. Addition, it aids the company in securing the necessary finance and guides it in achieving an efficient implementation of the project plan.

Uses of Feasibility Studies

A feasibility study is carried out for one or more of the following reasons.

  • It helps to ascertain whether or not a project is worth undertaking. For a business project, a feasibility report ascertains the viability, profitability and the technical practicability of the proposed project, thus it is useful when there is a need for business expansion.
  • It is normally required to support an application for financial assistance.
  • It guides the implementation of the project to which it relates.

Preparation of a Feasibility Study

As far as possible business and management consultants or other professionals in relevant fields should be approached for the preparation of a feasibility study. This is especially important, as the final report constitutes vital documents that can influence a decision for the possible funding of a project. It, therefore, needs a professional touch. This is not to say that the potential investor is totally free from the burden of assisting in the preparation of the feasibility study. In fact experience has shown that if the investor is involved, at least, in the collection of data, it will help him to understand more what is in the report and then answer questions arising therefrom, nonetheless, the consultant will be able to put him through even if he did not participate.

How to Conduct a Feasibility Study

There are about four major aspects to feasibility study preparation for small enterprises and they include the followings: Financial, Technical, Social and the Market.

A. Financial Aspect of Feasibility Study

The financial aspect of feasibility study forms the major framework of the feasibility report on which other aspects actually rely upon. It takes into consideration the cost implication of the project. It looks into such items as capital expenditure, working capital requirement, a summary of the project cost, financing plan (either to be wholly financed by the promoters or through long term loan or overdraft). It takes into consideration the interest rate payable, repayment period and moratorium to be observed for such loans.

The financial aspect of the feasibility study must take into consideration the following subjects:

1. Capital Expenditure

These are the items that relate to expenditure on fixed assets of any enterprise to be established. Capital expenditure will include such items as land/building acquisition plant and machinery to be used utility items such as vehicles, generator borehole, etc. The costs of such items have to be determined and their total sum so as to get the promoters prepared for the project.

2. Working Capital Requirements

These include items such as the cost of raw materials required for take-off, salaries and wages for take-off, fueling and lubrication costs, cost of advertisement, public relations and repairs and maintenance expenses. Most of the time preparation for working is usually calculated to meet the period when the project will start to bring income. The working capital requirement is usually calculated for between 3 and 6 months.

3. Summary of Project Costs

This is the summation of capital expenditure and working capital of the project. It now shows us the final figure of what is required to establish any small-scale enterprise. The figure gives the promoters the level of preparation expected of them when they want to set up projects.

4. Financing Plan

On getting the final project cost what comes to mind is how to finance the project, projects are generally financed through equity contribution by owners and term loan and overdraft from banks. The interest elements of any loan to be taken have to be considered in order to determine whether the project can absorb such loans. The repayment period for loans and overdraft has to be stated to determine whether the project will be able to pay back within the stipulated period.

5. Projected Production Costs/Operational Expenses

The list of prospective workers for the enterprise has to be made available. The qualification requirement, experience required of such personnel and remuneration to be given to such workers including welfare package have to be known. Salaries and wages also constitute a part of the annual operating expenses of any enterprise. During the course of conducting a feasibility study, the availability of various manpower required has to be taken into consideration. This borders on the technicality of the project because highly technical projects may require expatriates. Labor availability within the project location is also very crucial. All these have to be taken into consideration to determine the technical feasibility of any project.

6. Schedule of Depreciation

This is used to determine the cost contribution of all fixed assets to the project. The initial cost of acquisition of fixed items and the life span of the project are used in calculating the depreciating value of the items. For example, 10% is usually assumed for one year to make room for holidays and breakdowns.

7. Project Income Statement/Profit Analysis

This is another critical area of feasibility study preparation. It determines whether a project is profitable or not. On getting the revenue accruable, all costs are deducted. Provision is also made for tax which varies from 25% to 45% of the gross profit depending on the tax policy of the government. Projects are further subjected to other profitability tests such as percentage return on investment on equity, on loan and on sales based on profit after tax. Figures arrived at also determine the extent of profitability of the project. The higher the figures, the more viable the project is.

8. Cash Flow Analysis

This usually determines the liquidity or otherwise of the project either on a monthly or yearly basis. Cash Flow Analysis usually helps promoters to know when money will need to be raised from the bank or other sources. There are cash inflow and cash outflow. Cumulative cash flow is obtained by adding the net cash obtained from the previous year to the current year.

Positive cash flow indicates the viability of the project while negative cash flow is an indication that the project is likely to run into cash flow problems during the course of its operations. Financing institutions are usually very critical when it comes to cash flow issues. Enterprises with cash flow problems are not likely to attract financial assistance from banks and other financing institutions. Cash inflows usually are money raised from sales, from owners, and from banks while cash outflow constitutes such things as operation expenses capital expenditure working capital loan repayment, tax payment, and overdraft repayment.

9. Projected Balance Sheets

Project balance sheets are usually used to take a kind of snapshots of the project as at a particular period. All the assets and liabilities of projects are usually considered to determine the state of affairs of the project. Land and buildings (less depreciation), plant and machinery (less depreciation), cash at hand/bank and cash receivable (from debtors) are used to determine the total assets of the proposed project on yearly basis. Bank loans (term loan and overdraft), equity contribution, cash payable (to creditors) and other short-term liabilities will form the total viability of the project. The difference between the total assets and total liabilities is what we call to reserve. The reserve could be positive or negative. A project is considered viable if the reserves on yearly basis are positive.

10. Discounted Cash Flow Analysis/Viability Tests

For any enterprise to be considered viable it is further subjected to more rigorous analysis using some other viability indicators.

These indicators are:

  • Net Present Worth: Taking into consideration the time value of money, monies expected from an enterprise in the future is discounted back using some factors which should be higher than the ruling interest rates in the market. If the returns expected from the project are still positive after being discounted then the project is considered viable. If the net present worth is negative after being discounted using a discount factor higher than the prevailing interest rate, the project is considered viable.
  • Benefit/Cash Ratio: When returns expected from a project have been discounted, the sum total of the returns is then divided with the initial cost of the project. If the result of the division is higher than one then the project is considered viable, if it is less than one then the project is considered not viable.
  • Pay Back Period: When returns from the project are discounted back over a period of time the year when the project is expected to pay back the investment fund is the payback period. The payback period varies. It could be acceptable to either the investor or the financing institution depending on their expectation as to when the investment should be fully required. The higher the payback period the less attractive a project is. Projects with small payback period are less attractive to investors.
  • Internal Rate of Return (IRR): This is the rate at which the project is generating back funds invested. The internal rate of return when calculated should always be higher than the interest rates charged on borrowed funds. If IRR is lower than the interest rate charged on borrowed funds, the project is not worth embarking on. If it is higher, then it is considered viable.

11. Sensitivity Analysis

Bearing in mind the changes that take place within the economy projects further evaluated or analyzed taking into consideration the expected changes. For example, one may want to determine the viability of a project supposing there is a certain percentage increase in all costs. One may want to know the viability of the project in case there is an increase in the cost of establishing and operating costs which the revenue expected does not change. It is just a way of knowing how sensitive the project is whenever there is a change within the economy. In this regard, all viability indicators such as net present worth, payback period internal rate of return and benefit/cost ratio are checked. A less sensitive project to bad changes in the economy is considered viable.

B. Technical Aspect of Feasibility Studies

The technical information about a project is usually revealed at this level. The technical aspect of the project will contain such information listed below.

  • Proposed technology
  • Manpower requirement (Quantitative/Qualitative Analysis)
  • Production process
  • Technical appraisal of machines
  • Raw materials to be used
  • Raw materials to be in
  • Quality control
  • Waste management/environmental impact
  • Project location

1. Proposed Technology

The technical feasibility of any enterprise depends largely on the technological process behind the project to be established. There are various types of technologies: Imported (foreign technology), adapted technology or local technology. If the import is to be imported you look at the cost implication of such technology, affordability maintenance of such technology and how the technology can be adapted to the local environment. Locally available technology of any enterprise can be viewed vis-à-vis cost implication, the reliability of such technology and also its maintenance. In a nutshell, any viable enterprise must pass the following tests in terms of technology, reliability, affordability, maintenance, ease of learning and adaptability.

2. Manpower Requirement

A detailed feasibility study must carry out the quantitative and qualitative analyses of manpower requirements for any enterprise. Quantitative analyses must look into the number of personnel required that will effectively manage the enterprise various departments to be created while qualitative analysis will consider those requirements as qualification, experience, relevance to the project, personal ability and other prerequisites needed for the success of the project. Availability of the manpower needed is also very important. The remuneration to be given to each person must also be made available. The viability of any project is also a function of its being able to pay the various costs of personnel involved.

3. Production Process

When detailed feasibility study of any enterprise is being conducted there is a need for the understanding of the process flow from raw materials intake to finished product formation. They win at the end of the day allow a prospective investor to know when the production process is long or short, whether it is going to take minutes, hours, days or weeks before a production batch can be completed. An understanding of production processes contribute to a very great extent the technical feasibility of any enterprise.

4. Technical Appraisal of Machines

An appraisal of machines involves in the production process is also necessary. Such things to be on the lookout for are the strength of materials used in the construction of machines the quality of materials durability of the machines the production capacity efficiency in terms of raw materials, conversion in terms of energy consumption, efficiency in terms of man-hour usage manpower required to operate such machines. The technical appraisal should be in such a way as to combine all the good attributes expected of a machine so as to get maximum result of such enterprises.

5. Raw Materials

This is one of the most important factors that contribute to the success of any project. Availability of raw materials is the backbone of any project. In this regard when feasibility studies are being carried out enough investigation must be made in terms of raw materials availability. The quantity required, whether it is going to be available locally or not, accessibility of the location of the raw materials, the price of such raw materials whether it is right or otherwise must be exhaustively investigated. Projects tend to be more feasible when raw materials are locally available because of the attendant problems of importation.

6. Utilities

Utilities required for the day-to-day running of the project are the availability of power supply means of transportation and other project supportive items. The investigation must be carried out as to the availability of electricity the regularity of such electricity and the reliability in terms of its being able to power the machines.

There are some production processes that plenty of water. Availability of water for such a project is also very important. More often than not, project sponsors do make arrangement for standby generators and boreholes as a backup to public power and municipal water supply. All these costs must be imputed into the project requirement. For projects to achieve the installed capacity provision must be made for the regular supply of electricity and water for ease of transportation, provision must be made for vehicles (vans, lorries, and trailers). Provision must also be made for project cars for the movement of project operators.

7. Quantity Control

Another technical aspect of the project is quality control. Quality control is important because it determines to a very great extent the acceptability of the finished product in the market. Not only this product certification by regulatory bodies such as the National Agency for Food and Drugs Administration and Control (NAFDAC) is also very important. A prerequisite to good quality control is the establishment of a Quality Control Laboratory and the employment of qualified quality controller to man such a laboratory’ Regular tests of raw materials and finished products must be routinely carried out. A good feasibility study must highlight the requirements needed for products to be certified.

8. Environmental Impact/Waste Management

Before any project can be established the impact such project will have on the environment must be assessed. The impact of such a project in terms of noise, waste effluence and its control is very important. If the noise level of machines will be too high or the waste effluence will be injurious to health it is better than the project is sited in a remote area. The odor of waste effluence is also very important. All these must be mentioned in the feasibility study.

9. Project Location

Where an enterprise is to locate is very important. Factors to be taken into consideration when it comes to location are accessibility, nearness to raw materials and market, suitability in terms of whether to such project. For example, it is not advisable to site a poultry farm where you have a very high temperature or a cattle ranch where there is always high rainfall. People living at the proposed site have to be considered. Is the culture of the area hostile or friendly to strangers?

C. Social Consideration

The social aspect of any enterprise is also very important this is where it has to be proved that it is socially justified to establish such projects. By establishing a project, one may solve an economic problem but ends up creating a social problem. Both economic and social considerations have to be balanced at the end of the day.

The criteria used in justifying a project socially are:

  • Impact on job creation
  • Impact on social vices
  • Political consideration/Government policies
  • Impact on self-reliance
  • Income generation capacity
  • Rural/urban development
  • Sectoral development
  • Infrastructure development
  • Health consideration etc.

D. Market and Marketing

An extensive investigation has to be conducted on the marketability of products emanating from any enterprise. Marketing is very important for the success of any project. An extensive market survey analysis will contain such information as the followings:

  • Product description,
  • Other sources of a similar product in the market,
  • Identification of demand, competitive effect,
  • Assessment of market changes,
  • Estimation of total market and identification of what part of the market to be captured,
  • Forecast of promotional and market penetration strategies,
  • Pricing structure and recommended selling price
  • Attractive packaging and,
  • Cost-effectiveness of such packaging export market if any.

Procedures in Feasibility Studies Preparation

To conduct a comprehensive feasibility study the following procedures are usually adopted: data collection data collation data analysis, observation is drawn from analysis conclusion and recommendation.

1. Data Collection

Relevant data are usually collected from various sources on such information as items needed, the price of such items and sources of such items. Pro-forma invoices are usually collected from manufacturers of inputs. Data collection at times involves going to existing establishments to see how things are done. This will definitely provide useful information on the performance of such establishments the problem they are encountering and the possibility of improvement in order to greatly assist the proposed enterprise.

2. Data Collation

All the information gathered are now collected in a manner that will be useful to the report, information on inputs is separated from the information on products. Data are usually segregated into various heads such as capital expenditure working capital and manpower operating costs revenue and materials etc.

3. Data Analysis

This usually brings in such areas as profitability analysis, cash flow analysis, balance sheets, viability test, and sensitivity analysis. They are usually drawn from the basic information obtained when data have been collated.

4. Observation Drawn From Analysis

The following information is usually deduced from data analysis, percentage return of investment, mean of annual profit after tax, mean of annual turnover, annual net, cash balances, commutative cash flow project net worth, net present value, payback period, benefit/cost ratio, internal rate of return. The implications of the above factors have earlier been spelled out.

 

Don’t forget to share this post!

share:
Whatsapp Share Icon