A feasibility study can be conducted for anything whether it is a program, a solution to a specific problem, new idea, business decision or a project.
Any new project regardless of its scale or nature must yield an added value to a company or environment. So it should have a feasibility study which identifies whether it’s technically feasible, cost effective and profitable.
Every feasibility study introduces the final document or written report which summarizes the results of the analysis, research or evaluation of the idea.
This document has a critical role for the project investors and stakeholders to understand all the tangible and intangible benefits and risks associated with the project and make a strategic decision whether it should be implemented or not.
The feasibility study answers the following questions:
- whether the project is technically possible;
- whether it’s in accordance with established needs;
- whether it’s the most effective solution for those needs;
- whether it will have positive impacts;
- whether it’s socially and environmentally sustainable;
- whether it will yield future profits.
Elements of a feasibility study
Here are the key steps and elements that should be included in the feasibility study, but it is very important to always remember that every project is unique, has its characteristics and special requirements, which must be taken into consideration while analyzing and evaluating the project and preparing a final report for the stakeholders.
- Financial and Economic feasibility
This is the most important part of a study because it overlaps with other areas of feasibility as there are often financial costs related to purchasing new goods and services (hardware, software, consultancy, etc.), training stuff in new procedures and costs associated with the timelines running past deadlines.
The financial feasibility which is the assessment of initial investment calculates financial costs and benefits of the project and demonstrates whether it’s capable to provide value for money. It also include the analysis of the potential financial sources, the way that sources will be used and what kind of return can be expected on the investment.
Financial feasibility should include the following elements:
- Calculation of overall project cost and needed start-up cash;
- Identification and analysis of available budget for project development;
- Financial rates of return (Profit Margin, Return on Assets, Return on Equity, Return on Sales, etc.);
- Predicted growth of sales during the first 5-7 years in a clearly defined niche market;
- Cash flow predictions and liquidity;
- Pro forma financial statements;
- Historical and industry averages, financial performance of similar businesses;
- Assumptions made regarding inflation rate, discount rate, depreciation;
- Annual Debt Service Cover Ratio and Loan Life Cover Ratio.
As was mentioned earlier this is the most important and at the same time the most difficult part of the feasibility study, because forecasting potential revenues is not easy especially where there is little or no historical data available. This study requires an involvement of specialist advisers and experts.
Economic assessment of the project includes:
- Calculation of an economic cost of the project;
- Projected life of the project asset;
- Economic Internal Rate of Return for each component as well as for the project as a whole;
- The Economic Net Present Value for the whole project;
- expected economic benefits, such as increase in land costs, time saving, employment generation and various cost-saving benefits.
- Market research
There must be a level of market interest and demand in the project. Market research shows whether there is a potential market for the product or services. Some experts say that Market Feasibility study is more important than the business plan, because even with the perfect business plan and a fantastic idea, if the project is going to enter unhealthy market that is on a decline then that project are not going to have a success.
Market feasibility includes:
- Description of the industry;
- Current and future market potential (market growth, prospects, potential customers, prediction of sales);
- Technical and resource feasibility
Technical and resource feasibility study shows whether resources (people, land, transportation, etc.), infrastructure, hardware and software within a business can cope with a proposed new system and if not whether it’s feasible to purchase new technology.
- Operational feasibility
Operational feasibility shows whether management supports the project and whether the stakeholders and participants will be able to handle the new system. It also demonstrates whether the project aligns with the strategic objectives and will the new system really benefit the organization.
- Schedule feasibility
Schedule feasibility relates to the amount of time allocated to the development of the new system and determines whether the required time is realistic and can the project have the same value and importance at the end of the initiation phase. Here the time frame would be assessed, as projects that run overtime can have both a financial and organizational impact on a business.
- Legal, social and environmental aspects
The study of social and environmental aspects is necessary to determine environmental and social impacts and consequences that project may have. Moreover every country has specific laws, environmental regulations and determined standards which must be considered prior to initiating any project. One of the requirements is that all projects shouldn’t have adverse impacts to the people and correspond with the culture of the local communities and project beneficiaries. The project must also complement other developments taking place in the area.
- Risk management
One of the fundamental parts of the feasibility study is the construction of the risk matrix. It involves the following stages:
- Identifying project risks;
- Assessing the likelihood and impact of these risks;
- Identifying strategies for mitigating the risk.
Summary and assumptions
All the above elements and results of this studies are assembled into a feasibility study document. It should be made with great accuracy and professionalism. It should include recommendations and limitations for project implementation. The considerations can be given by using traditional business analysis techniques such as SWOT, Porters Five Forces and PEST. To be objective the study should be carried out by the external independent experts and an independent quality review should be clearly stated in the document.