Ch03 Project Feasibility

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PROJECT FEASIBILITY

CHAPTER

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Dr. CH. VENKATAIAH

Associate Professor601-PROJECT MANAGEMENT

The feasibility study involves

Market analysis

Technical analysis

Environmental analysis

Financial analysis

Social cost benefit analysis.

FEASIBILITY STUDY

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Aim: To identify the need or the potentialdemand for the product or service resultingfrom the project.

Objectives for the study are spelt out inquestion form and can be grouped under thefour Ps of marketing.

Let us consider a firm that plans a project toset up a unit to manufacture domestic air-conditioners

Market Analysis

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Product. Who are the buyers of air-conditioners?

What is the current total demand?

How is the demand distributed (geographically as well as seasonally)?

What is the break up of the demand (by sizes and models)?

Price What price is the customer willing to pay?

What will be the cost of production?

Place

What should be the channels of distribution?

What should be the trade margins?

Promotion

How can customers be convinced of the superiority of the air-conditionerover those produced by competitors?

How should the customers be made aware of the attributes of the product?

Objectives of Market Study

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Issues to consider

Purpose

Person

Method

Time

Sample

Secondary Information

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Manufacturing process and technology

Material inputs and utilities

Product mix

Plant capacity, location and layout

Machines and equipments

Civil works and structuresProject charts, layouts and work schedules.

Technical Analysis

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What will the technology do?

What will it not do?

What inputs will it require?

What will it cost?

How certain are the above?

Sources of Technology. Technology maybe developed in-house by the firm or may beacquired from outside the organisation eitherfrom abroad or indigenously.

Selection of Technology

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Long term relationship

Components

Uncertainty

Costs

Sources

Technology Acquisition - Issues

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Identification

Choice of technology is dictated by plant capacity,the principal inputs available, capital outlays,

product mix and the ease of absorptionComponent required

Licensing agreement, an outright purchase oftechnology or a joint venture with the supplier of

technology.

Technology Acquisition Process

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Evaluation Does it use local raw materials which are easily available?

Can it be used by the local inhabitants? Does it conform to theknowledge and skills available locally, or will it require that highly

skilled and trained man power be brought in from elsewhere tooperate the technology?

Will the products and services produced or facilitated by thetechnology meet the basic needs?

Is the technology ecologically friendly and will it maintain

environmental harmony? Is it in harmony with the local social and cultural norms?

Source

Negotiations

Technology Acquisition Process

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Definition

Technology Package

Payment

Duration

Access to improvements

Rights and obligations

Technology Transfer Agreement

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Indemnification

Exclusivity or non-exclusivity

Force Majeure

Arbitration

Governing law

Technology Transfer Agreement

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Financial analysis aims at studying thefinancial viability of a project.

It is concerned with the financial profitability

of the project.

This involves the estimation of the cost of theproject and an estimation of cash flows that

will result after the project is completed.Criteria used net present value, internal rate

of return, return on investment and benefit

cost ratio.

Financial Analysis

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Land and site development

Building and civil works

Plant and Machinery

Miscellaneous fixed assets Pre-operative expenses

Preliminary expenses

Capital Issue expenses

Provision for contingencies

Technical know-how fees

Margin money for working capital

Project Costs

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Equity

Preference Capital

Term loans

Debentures

Deferred credit

Miscellaneous sources

Means of Finance

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A. Revenue from sales and other income.

B. Operating expenses.

C. Gross profit A B.

D. Interest on term loans and short term borrowings

E. Depreciation and amortisation of preliminary expensesF. Profit before tax C D E

G. Tax

H. Profit after tax F G

I. Dividend on preference shares and equity sharesJ. Repayment of loans

K. Retained profit

L. Net cash accrual K + E

Profit Loss Statements

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Stream of cash flows is obtained from theprofit and loss statements. In the final year ofthe life of the project, salvage value of assets,

final settlement of all loans and workingcapital are also taken into account.

Profit Loss Statements

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Managements minimum desired rate of

return is used as a discounting rate

Net Present Value

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0

1

where(1 )

n

tt

t

F

NPV Ik

0 Initial investment (since it is an outflow, it is negative)

Net cash flow for periodRequired rate of return

t

I

F tk


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Discount rate at which NPV is zero.

Internal Rate of Return (IRR)

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0

1

0 where

(1 )

n

t

t

t

FI

k

0 Initial investment (since it is an outflow, it is negative)

Net cash flow for period

Internal rate of return

t

I

F t

k


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Commonly used methods Average income after tax/Initial investment

Average income after tax/Average investment

Average income after tax but before interest/Initialinvestment

Average income after tax but before interest/Averageinvestment

Average income before interest and tax/Initial

investment Average income before interest and tax/Average

investment

Return on Investment

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Benefit cost ratio

Benefit Cost Ratio = Present value ofbenefits/Initial Investment

Pay back period - the time that would elapsebefore the initial investment is fully recovered.

Other Methods

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Environment. The environment of man consistsof everything that is outside him. According toThe Environment (Protection) Act, 1986,

environment includes water, air, land and theinter-relationship that exists between water, air,land and human beings, other living creatures,plants, micro-organisms and property. The

definition includes interaction between the non-life components and their interaction with livingbeings.

Environmental Analysis

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Environmental pollutant. The Act defines anenvironmental pollutant as any solid, liquid or

gaseous substance present in such

concentrations as may be, or tend to beinjurious to environment.

Environmental pollution. It is the presence in

the environment of an environmentalpollutant.

Definitions

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It is a tool used to identify the environmental,social and economic impacts of a projectprior to decision-making.

Aims to predict environmental impacts at an early stage

in project planning and design

find ways and means to reduce adverse impacts

shape projects to suit the local environment

present the predictions and options to decision-makers.

Environmental Impact Assessment

(EIA)

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Scoping Identifies key issues and concernsof interested parties. Helps in site selectionand in identifying possible alternatives

Screening

Identifying and evaluating alternatives

Mitigating measures

EIA Study - Steps

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A description of the project, its purpose, its location, itssize its design and technical details such as materials tobe used and so on.

Description of the significant effects of the project. This

should include the effect of the project on eachcomponent of the environment, describing the natureand severity of the impact. For Government projects, theeffect on plans for land usage and surrounding areas

should also be included. Private projects which wouldaffect land usage in surrounding areas are not permittedto be undertaken.

Environmental Impact Statement (EIS)

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Dr. CH. VENKATAIAHAssociate Professor

601-PROJECT MANAGEMENT

Possible alternatives should be spelt out in the EIS, bothin terms of alternate sites and alternate projects whichdo not cause adverse effects to the same degree asforeseen in the project under review.

The report should list details of the possible remedialand mitigating measures that will be adopted to prevent,avoid and reduce the adverse effects and the extent towhich these effects will be reduced.

The residual adverse effects of the project despite themitigating measures adopted.


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Evaluation of the commercial and socialdesirability of the project vis--vis the adverseimpact on the environment caused by it.

Amount of resources that have to becommitted irretrievably to the project.


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Life cycle Assessment

Environmentally sound technologies

Cleaner production

Eco-design

Supply chain management

Environment Management System

Mitigating Measures

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Documents

Ch03 Project Feasibility