The Islamic University of GazaFaculty of CommerceDepartment of Economics

Feasibility Studies and Projects’ Evaluation

Prepared byMohammed Othman

2014 / 2015

Chapter 1:

Introduction to Feasibility Studies

What is a feasibility Study ?

An analysis and evaluation of a proposed project to determine if it (1) is technically feasible, (2) is feasible within the estimated cost, and (3) will be profitable.

What is a Feasibility Study

Is this a good business idea?

Helps answer the question of whether to go forward with the business idea.

What is a Feasibility Study

A feasibility study is valuable for:

Starting a new business

Expansion of an existing business

Purchasing an existing business

A feasible business will:

Generate cash flow and profits,

Withstand risks,

Remain viable in the long-term

Meet the goals of the founders

Reasons to Do a feasibility Study

Gives focus to the project.Narrows the business alternatives.Identifies new opportunities.Provides valuable information for “go/no go” decision.Increases probability of business success by identifying

weaknesses early.Helps receive funding from lenders, grant providers,

etc.

Feasibility Study Phases

Phase 1: A brainstorming for selecting the projectPhase 2: Pre-feasibility StudyPhase 3: Detailed feasibility StudyPhase 4: Implementation phasePhase 5: Follow up and Evaluation phase

The detailed Feasibility Study includes

Study 1: Marketing feasibility StudyStudy 2: Technical feasibility studyStudy 3: Legal and environmental studyStudy 4: Financing feasibility studyStudy 5: Financial and economical feasibility studyStudy 6: National Feasibility study

Major Questions before Preparing Feasibility Study

When to do a Study?

Who will do the Analysis?

How will Monitor the Study Progress?

How to Accept or Reject the Study?

How to Use the Results?

The feasibility study process involves making rational decisions about a number of enduring characteristics of a project, which may include:

Establishing project scope - stating exactly what the project is.

Vision/mission statement

Situation analysis, history and background of the product/service, industry and the organization

The aims, goals and objectives of pursuing the opportunity

Market opportunities

Current market segments

Projected growth in each market segment

Customer profile and demographics

Performance objectives expected

Estimation of customers and potential revenues

Critical success factors

Determination of competitive advantage

Barriers to entry, education, distribution channels, costs

The time frames

The initial costs involved

Performance objectives expected

Financing and projected cash flows - where will the money come from?

Break even analysis

The pay back period

Return on investment

A report of costs & benefits

Development of an action plan for the project to proceed

A summary of findings

Are you thinking about starting a business ?

How long have you been dreaming about starting your own business?

What steps have you taken toward making your dream come true?

Do you have family support to start your own business?

Are you thinking about starting a business ?

How much money do you need to make?

What kind of experience do you have in this industry?

Will this business help you realize your personal life goals?

How to Write the Aims and Objectives of your Feasibility Study

You should commence your Feasibility Study by writing the aims and objectives you envisage for your study.

Establish the scope of the Feasibility Study - state exactly what the project is and what it is intended to achieve.

Some aims and objectives for a Feasibility Study could be:

The aims and objectives of this Feasibility Study are to investigate the feasibility of importing / selling / manufacturing a new type of flowers for sale to the Palestinian market, as well as investigation of the costs involved and the potential profits and return on investment.

The Pre-feasibility study : A detailed review of available alternatives must take place at the stage of the pre-feasibility study

The detailed feasibility study should provide all data necessary for an investment decision with more details than the pre-feasibility study.

The feasibility study should include deep analysis for the following parts

1) Executive summary about the project and project background2) Business environment analysis & Entry Timing 3) Market analysis and marketing concept4) Material inputs 5) Location, site and environment 6) Engineering, 7) Technology and equipment 8) Human resources9) Implementation planning and budgeting10) Financial analysis and investment appraisal11) National Feasibility Study 12) Legal study13) Conclusion and recommendation

The Outlines of a detailed feasibility studyThe structure of a detailed-feasibility study should include the following

components:1) Executive summary about the project and project background

Project historyCost of studies and investigations already performedProject sponsors Definition of the basic idea of the project, objectives and strategy

2) Business environment analysis & Entry Timing:SWOT analysis.Best entry timing of the project

The Outlines of a detailed feasibility study3) Market analysis and marketing study:

Demand and market, includes the following: A. Structure and characteristics of the marketB. The estimated existing size and capacities of the industry (specifying

market leaders), C. The estimated future growth (specifying major programs of

development), D. Major problemsE. Analysis of CompetitorsF. Demand forecasting

The Outlines of a detailed feasibility studyG. General quality of goodsH. Past imports and their future trends, I. PricesJ. Role of the industry in the national economy and national policies,K. Priorities and targets related to the industryL. Approximate present size of demand, M. The past growth of demand, N. Major determinants and indicators

The Outlines of a detailed feasibility study

Marketing concept, sales forecast and marketing budget includes the following:

A. Description of the marketing segments, B. Selected targets and strategiesC. Anticipated competition for the project from existing and potential local and

foreign producers and suppliesD. Localization of markets and product target groupE. Sales programF. Estimated annual sales revenues from productsG. Estimated annual costs of sales promotion and marketing

The Outlines of a detailed feasibility study Production program required, includes the following:

A. Products, B. Wastes (estimated annual cost of waste disposal)C. Capacity utilization & Capacity utilization rate

4) Material inputs (approximate input requirements, their present and potential supply positions, and a rough estimate of annual costs of local and foreign material inputs):

Raw material Processed industrial materials Factory supplies

The Outlines of a detailed feasibility study

5) Location, site and environment, includes the followingPre-selection, including, if appropriate, an estimate of the cost of landPreliminary environmental impact assessment

6) Project engineering:Determination of factory capacityQuantitative relationship between sales, factory capacity and material

inputsMaps and layouts

The Outlines of a detailed feasibility study Civil engineering works, includes the following: A. Rough layout of civil engineering works, B. Arrangement of buildings, C. Short description of construction materials to be used,D. Site preparation and developmentE. Buildings and special civil worksF. Outdoor works

Rough estimate of investment cost of civil engineering works (local and foreign), classified as above.

The Outlines of a detailed feasibility study7) Technology and equipment, includes the following: A. Technologies and processes that can be adopted, B. Technology description and forecastC. Environmental impacts of technologiesD. Rough estimate of costs of local and foreign technologyE. Rough layout of proposed equipment (major components):

E.1. Production equipmentE.2. Service equipmentE.3. Spare parts, wear and tear parts, tools

Rough estimate of investment cost of equipment classified as above.

The Outlines of a detailed feasibility study

8) Human resources: Estimated human resource requirements Estimated annual human resource costs

9) Implementation scheduling: Proposed approximate implementation time schedule Estimated implementation costs

10)Financial analysis and investment: Total investment costs

Rough estimate of working capital requirementsEstimated fixed assets

The Outlines of a detailed feasibility study Project financing Proposed capital structure and proposed financing (local and foreign) Cost of finance Production cost (materials, personnel and overhead costs, fixed and variable costs) Financial evaluation based on the above-mentioned estimated values :

• Payback period• Simple rate of return• Break-even point• Internal rate of return• Sensitivity analysis

The Outlines of a detailed feasibility study

11) National Feasibility Study National economic evaluation (economic cost-benefit

analysis), includes the following:• Foreign exchange effects• Value-added generated• Absolute efficiency• Employment effects

The Outlines of a detailed feasibility study12) Legal Study, includes (Registrations , Contracts,

Agreements, …etc)

13) Conclusions and Recommendations