Project feasibility study

This activity provides an opportunity to learn more about advanced project management by
developing a project feasibility study. You are expected to formulate a project feasibility report
based on a project idea that you think is worthwhile in terms of:

 Market and demand study

 Technical analysis
 Sources of project financing
 Financial analysis
 Risk analysis .
The proposal you develop should contain a business idea that can be implemented in Ethiopia,
and aspects of the project you study should be based on a real data obtained from both primary
and secondary sources.

Project feasibility study guide

1
Introduction
A project is an undertaking in which resources are committed with the expectation of
future benefits. Projects are designed with a defined schedule, resources and quality
specification. This provides a basis for evaluating project activities and helps in taking
corrective actions in the future. In contrast, projects with vaguely defined resources,
quality specification and time-frame will prove difficult to implement.

A feasibility study is therefore needed to provide a basis for evaluating project

implementation and also to show viability of a project idea from commercial, economic,
and social viewpoints. The depth of feasibility study differs based on the amount of
resources the project demands, type of project idea selected, the specific industry to
which it applies, and the originality of project idea. While projects in technology-
intensive industries may require study of the dynamic technological environment and its
repercussion on the project, those less prone to technological changes may not demand
the same degree of rigor. Similarly, while projects with a large investment outlay may
entail detailed analysis of investment options and a careful projections of benefits and
costs, those that require a relatively smaller investment may be undertaken with a
relatively shallow feasibility study.

Some elements of a project feasibility study are so essential in evaluating its financial,
economic, and social viability that they are included in most project studies irrespective
of their size and complexity. This includes, inter alia, market and demand study, technical
analysis, environmental impact analysis, financial analysis, and risk analysis. Although the
content and coverage of each of the above components of feasibility study vary from
one project to the other, the most critical information should by no means be
overlooked.

This guide to project feasibility study is prepared to help students understand the kind of
information they need to gather and analyze as they try to justify commercial, economic
and social viability of a project. It is also hoped that the guide will assist students in

2
designing a project in a more professional way and in preparing the feasibility report that
will prove appealing to potential promoters. Moreover, such a common guide will allow
uniformity of project feasibility reports irrespective its size and the type of product or
service intended to be delivered, enabling students to learn from one another by
evaluating feasibility reports of their peers.

The guide is structured in the following fashion. Section 1 contains description of

executive summary. Section 2 outlines the elements of market and demand analysis.
Section 3 describes contents of technical analysis. Section 4 presents elements of financial
analysis of a project. Section 5 describes how risk of a project is analyzed. Section
6prescribes how information about sources of project funding be presented. Section 7
describes project implementation plan.

1. Contents of feasibility report

Contents of project feasibility report may vary, but every report should include at least
the following elements:
 Executive summary
 Market and demand study
 Technical analysis
 Sources of project financing
 Financial analysis
 Risk analysis
 Implementation plan

3
2. Executive summary

The purpose of executive summary is to provide a very brief overview of the most
essential and decision-relevant information concerning the project. It contains description
of the project, its objectives, strategies, and the target market segment along with
justification for choosing such a segment.

Moreover, the executive summary presents summary of each section emphasizing on

issues that may need to be brought to the attention of potential promoters.

3. Market and demand analysis

This section reports information sufficient to address the two critical questions of
adequacy of demand for the product and the share of market that can be controlled.
More specifically, it should include information about the total demand, the present level
of supply by existing firms, and the demand gap. The total demand may be the same as
the total gap where a product is new to the market due to no current supply. The
amount of demand gap indicates the likely share of market that can be controlled by a
project. The demand gap may sometimes exceed the capacity of a single project, in
which case one needs to consider portion of the gap to be satisfied by a project. The
present level of demand, amount of supply by existing firms (these are the would-be
competitors), and demand gap have to be presented in a tabular form using a template
such as the following:

Year Total demand Total supply Demand Gap

4
Once the above table that indicates amount of demand gap is prepared, it is essential
that the amount of demand for the project is forecasted considering the specific market
segment intended to be served. It should be noted that capacity of a project may be
sufficient to absorb only portion of a demand gap due to targeting a particular market
segment. In such cases, it would be appropriate to establish estimates of possible level of
the demand gap that can be satisfied by a given project over its life.

Market planning

Market planning is an essential element of market and demand study, and it addresses as
to how various operational activities are handled in marketing a product. A feasibility
report should therefore clearly state the market strategy to be pursued (it includes target
segment, product positioning, product line, price, distribution, sales force, advertising ,
and promotion) and the action program. Action program specifies plans intended to be
achieved over a certain time period.

The total sales revenue to be generated from a product is determined by combining

quantity of demand identified and price established through market planning. A schedule
of sales can be formulated that shows the amount of sales revenue over life of the
project. In fact, this figure can be adjusted for level of capacity utilization determined
under technical analysis.

Market planning can also help in identifying costs associated with distribution, training
sales force, advertising, and promotion. These costs are projected over life of a project
and are considered part of a project cash outflow.

4. Technical analysis

To be included in this section are all technical requirements of a project along with their
related costs. The section should address the following important technical matters:

5
 i) The manufacturing technology selected should be described along with adequate
justification as to why it is selected.
ii) Inputs and utilities should be identified, defined, and source specified.
iii) Adequate description of the principal product and associated by-products must be
provided. In case of product differentiation, each product must be described
and the market intended to be served should be indicated.
iv) Rate of capacity utilization over the life of the project should be indicated along
with the factors that affect capacity utilization.
v) Location and site of a project must be specified with adequate justification as to
why a particular location/site is chosen. Costs of site development, if any, need
to be sufficiently estimated as they will be used as an input to the financial
analysis.
vi) Machineries and equipments should be specified and their source of supply (local
or foreign) needs to be indicated along with the associated cost.
vii) Structures and civil works must be specified, and associated cost should be
identified.
viii) Environmental aspects should be addressed well. The possible environmental
concerns should be identified and the measures to be taken should be
adequately described, and the cost of such measures should be identified.

5. Source of finance

This section describes the sources of finance for the project (equity capital or debt
capital). It should also indicate the cost associated with using a particular combination of
equity capital and debt capital. Ownership form of the project must be described (it has
to be specified as to whether it would be organized as a share company, Partnership, or
sole-proprietorship).

6
6. Financial Analysis

Information gathered in all the previous sections is used as an input to the financial
analysis. This section should therefore present project revenues and costs using different
schedules. The following schedules need to be prepared:

i) Schedule of annual revenue of the project

ii) Schedule of cost of raw materials and utilities
iii) Loan repayment schedule for the project
iv) Schedule of total production costs
v) Schedule of total general and administrative expenses
vi) Projected income statement of the project
vii) Projected cash flows statement

This section should also contain analysis of financial viability based on the following
criteria:

(1) Pay back period

(2) Net Present value(NPV)
(3) Internal rate of return (IRR)

7. Risk analysis

This section should present analysis of risk of a project from different dimensions. The
most important risk measures to be used here are:
 Sensitivity analysis ( you can use a percentage change in project cash flow
components of your choice and show how NPV reacts)
 Accounting and Financial breakeven analysis.

7
8. Implementation plan

This section describes the plan as to how the project is to be implemented. It indicates a
detailed plan of action mapping the activities to be undertaken in converting the paper
work into action. The plan should show the timeframe for leasing land, acquisition of
technical know-how, purchase of machineries and equipments, training workers,
contracting with raw material and utilities suppliers, land development, and the like in a
manner useful in the implementation phase of the project.

Summary

This last section presents summary of major contents of each section, allowing project
reviewers to quickly understand principal features of the project including its financial
feasibility.