MODULE 1

CONCEPTS AND PRINCIPLES

IN FEASIBILITY STUDY
LEARNING OUTCOMES:
● Learn the definition of feasibility study
● Understand the nature of feasibility study
● Identify the purposes of preparing a feasibility study.
● Describe the qualities of a good feasibility study
● Explain the usefulness of a feasibility study
● Enumerate the limitations of a feasibility study
● Identify the factors affecting the preparation of a
feasibility study
● Discuss the classification of feasibility studies; and
● Identify the groups or sectors that require a feasibility
study
Definition
- A systematic inquiry on a proposed business
activity that is used to determine its viability
in all areas directed towards the
measurement of a profitability level.
- It is a special type of research inquiry

It is a special type of research inquiry. It relies heavily on a documentation procedure. It

involves the analysis and evaluation of the trends in historical data when making a
necessary forecast.
 Nature of a Feasibility Study
• Systematic inquiry
First, it implies that there is a procedure or a step-by-step process
involved in the conduct of a feasibility study
Second, systematic means that the whole study is composed of
different phases or aspect
• Proposed business activity
• Viability in all areas
• Measurement of profitability level
Proposed Business Activity
A project feasibility study only applies to a
business endeavor.

A business is an organization engaged in

lawful commercial activities such as
providing products or services for monetary
consideration with the intention of realizing
profit.
To simplify, an activity should have the following
characteristics to qualify as a business activity
1. It should be intended for profit.
Profit must be realized through a business activity that involves the
exchange of values.
2. It should be regularly undertaken.
The element of regularity indicates that there is a continuing and
progressing economic act, not a mere single disconnected act. It implies that
the act is evenly conducted throughout the year.
3. It should be financial in character
A business activity involves an exchange of monetary values with
another part. Except for the socio-economic phase, all aspects of a feasibility
study have a common denominator expressed in Philippine peso.
Why is Feasibility
study important?

A Project Feasibility is
important because it tests the
viability of a business
endeavor not only one but all
aspects.
Measurement of Profitability Level
A feasibility study is directed
towards the determination of
a project’s viability.

VIABILITY can be expressed

in different terms
- Profitability (not only
within a short time but also
during the entire life of the
business.
A proposed business endeavor may appear to be
profitable, but if its profitability level is below that of
other projects with similar capital base, manpower
requirements, or management capability, such
profitability does not carry any weight in the evaluation
and implementation processes. Investors may not
commit funds to such project as it involves opportunity
cost.
 Opportunity Cost
-it refers to the cost or benefits foregone when
one alternative is chosen in favor of another.

For example, when an investor opts to invest in Project A instead of

Project B, the investor foregoes the opportunities or benefits that he/she
may realize from Project B. To illustrate: Angel decides to pursue a
college education instead of working as a saleslady after graduation from
secondary education. The salary that Angel would have received if she
worked as a saleslady will be foregone. This foregone benefit is called
opportunity cost.
PURPOSES OF A FEASIBILITY STUDY
General purpose: to test the viability of a
business project in all areas.

A feasibility study is conducted to achieve the following:

1. Enhance the sustainability of a particular business undertaking.
2. Easily facilitate the evaluation of a project’s success in all areas covered by the study
3. Seek the infusion of additional fresh working capital from financial institution.
4. Determine the recovery period of capital investment or the expected return on investment
5. Serve as a measuring instrument in evaluating actual project results.
6. Mitigate, if not totally avoid, the expected business difficulty that may be experienced during
the actual implementation of the project.
7. Meet and satisfy the requirements set by the investors of a proposed business project.
QUALITIES OF A GOOD FEASIBILITY
STUDY
1. Comprehensive- covers all areas that need to be
scrutinized.
2. Objective- based on fair evaluation and critical analysis of
data from various sources. Data should not be manipulated.
3. Simple- the language should be expressed at the level of the
reader’s understanding
4. Reliable- there is a high degree of truthfulness in the
available date, the analysis and evaluation, and the conclusion
of the study. It is considered reliable when it fully satisfies the
requirements of objectivity, free from errors, and is neutral.
 USEFULNESS OF A FEASIBILITY STUDY
A proposed project can benefit from the result of a feasibility study in various
ways such as:

1. For the benefit of the project proponents, it is still the most scientific
instrument with different interdependent aspects, that can be used in project
design or redesign.
2. It can minimize, if not totally eradicate, the business difficulty that may be
experienced in the actual implementation of the project. This would greatly
benefit the prospective investors.
3. It is considered the most reliable instrument in making a decision of whether
to implement or discard a project, which would also directly benefit the
investors.
 USEFULNESS OF A FEASIBILITY STUDY
A proposed project can benefit from the result of a feasibility study in various
ways such as:

4. It is the most comprehensive medium that can be used to evaluate a project

in terms of infusing additional fresh capital or granting tax exemption
incentives. Financial institutions and government agencies could make use of
the results in these areas of the feasibility study.

It is an effective tool for evaluating the profitability level and sustainability of a

proposed project. Prospective investors put much weight on this aspect of a
project using the analytical process.
 LIMITATIONS OF A FEASIBILITY STUDY
Though a feasibility study provides substantial benefits to its users it has some
inherent limitations such as the following:

1 . Valuable information greatly needed in the study may not be readily

available.

2. The cost of gathering the necessary data required in the analysis, formulation
of conclusions, and drafting of recommendations may be very high.

3. Competitors may have available data directly related to their operations but
they may hesitate to share such information because of confidentiality I terms
of effects on taxation, production process, marketing strategies, market share,
and other related a aspects of the business. Business entities usually do not
open themselves to competitors, both existing and prospective.
 LIMITATIONS OF A FEASIBILITY STUDY

Though a feasibility study provides substantial benefits to its users it has some
inherent limitations such as the following:

4. The person undertaking the study may not have acquired the necessary
professional expertise and competency in making the feasibility study. High-
order critical thinking skills are required in preparing a feasibility study, in
addition to the basic requirements of an educational background in the field of
economics, industrial engineering, accounting, financial investment, laws, and
taxation.
 FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY

1. Type of Industry
2. Size of the project
3. Purpose of the Study
4. Party preparing the study
5. Requirements of prospective investors
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY

1.Type of Industry
Industry refers to a group of companies that have
common characteristics and are related in terms of
operational processes, products sold, market,
functions, or services offered.
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY
Classification of Industry

1. Extractive or Primary Industry

–Extract natural resources and sell the products without processing. Included
are mining, logging and farming.
2. Manufacturing
- they process the raw materials from the primary industry and sell the
finished goods to industrial or individual consumers.
3. Service
- composed of companies redering services to the market
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY
2. Size of the Project
The size of a project has a direct relationship to the factors affecting the preparation of
the feasibility study.

Project size is usually expressed in terms of

investment requirements.
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY
Purpose of the Study
It is a common misconception that a feasibility study is
solely intended for new projects, as this is not always the case.
Existing businesses also expect feasibility studies to provide
the following information:

1. Market information on plans to expand

2. Product information on plans to offer a new product to the market.
3. Competition analysis as a result of the entrance of a new competitor
4. Demand studies on plans to launch a new service.
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY
Party Preparing the Study
A feasibility study covers wide and different areas of
specialization. Thus, it cannot be performed by only one
individual. A group conducting a study may include the
following:

1. An economist who will study the trends of the supply and demand of goods,
including prices.
2. An industrial engineer who will study the production processes, waste management,
and efficient use of resources, particularly energy.
3. Competition analysis as a result of the entrance of a new competitor
4. Demand studies on plans to launch a new service.
FACTORS AFFECTING THE PREPARATION
OF A FEASIBILITY STUDY
5. An accountant who will prepare the necessary projected financial statements and
schedules.

6. A lawyer who will prepare the legal documents required by different agencies, banks,
and other monitoring offices.

7. A human resource officer who will provide the necessary inputs on staffing, job
descriptions, and qualification standards of personnel.

The preparation of a feasibility study for a major business project requires more team
members which also translates to longer time and more cash requirements.
CLASSIFICATION OF A FEASIBILITY STUDIES

1. As to the amount of investment

2. As to the status of the project
3. As to the industry classification
4. As to the nature of management
5. As to the liability of investors
 CLASSIFICATION OF A FEASIBILITY STUDIES
As to the amount of investment

A business project can be classified as:

1. Micro – Total investment of Php 3Million and below
2. Small A proposed business project with total assets or resources of
between Php 3 Million to Php 350million, or total financial
3. Medium obligations from financing institution between Php 3 Million to
Php 250 million, is for small-and-medium-sized entities.

4. Large - if the enterprise whose total resources are more

than Php 350 Million is intended for large business
entities
CLASSIFICATION OF A FEASIBILITY STUDIES

As to the Status of the Project.

A feasibility study can either be for a new project or for the
expansion of an existing business enterprise. However, “new” does
not imply that the proposed project is not among those entities the
investors are currently engaged with.

An existing business that plans to expand, although already

profitable at its present capacity, still requires a feasibility study.
 CLASSIFICATION OF A FEASIBILITY STUDIES

As to Industry Classification.
A feasibility study may be classified according to the following
industries:

1.Manufacturing 5. Entertainment
2.Real Estate 6. Agriculture
3.Electronics 7. Merchandising
4.Transportation 8.Utilities
The focus of a study may differ slightly from one industry to
another.
 CLASSIFICATION OF A FEASIBILITY STUDIES

As to the Nature of Management.

The proposed business entity may either be administered by newly-hired
managerial personnel or by the existing set of officers. Oftentimes, the nature
of a proposed project is highly influenced by whether or not it will be under a
new nature of a proposed project is highly influenced by whether or not it will
be under a new management. In case the existing management has the
required expertise and the available time to handle the project, there is no
need to hire a new set of managers. However, if the new project is not aligned
with the capabilities of the existing management, there is a need to look for a
new one.
 CLASSIFICATION OF A FEASIBILITY STUDIES

As to the Liability of investors. .

The liability of investors or owns depends entirely on the type of the
proposed business. The business under study can either be
In sole proprietorship and partnership, the liability of the owners
a. SOLE PROPRIETORSHIP to the creditors is not limited to their investments only. In the
event of liquidation and if there are still unsettled obligations, the
b. PARTNERSHIP creditor can run after the personal properties of the owners.
c. CORPORATION – the liability of the owners in a corporation is limited only
to their investments. In case of bankruptcy, creditors cannot run after the
personal properties of the shareholders.
PARTIES REQUIRING A FEASIBILITY STUDIES
Different parties require different feasibility studies depending on the specific
purpose of the party concerned. The different parties that may require a
feasibility study are as follows:

1. Prospective investors
2. Management
3. Proponents
4. Financial institutions
5. Shareholders
6. Government agencies
PARTIES REQUIRING A FEASIBILITY STUDIES

Prospective Investors
They are primarily interested in knowing the viability of a proposed project
taken as a whole. In addition, they are very much interested in conducting a
feasibility study because they want to determine the following:

1. If the profitability of a business can be sustained during its entire life.

2. The amount of funds to be committed
3. The rate of return on invested capital.
PARTIES REQUIRING A FEASIBILITY STUDIES
Management
The management of an existing project would want to conduct a feasibility
study to determine the following:

1. The viability of a proposed expansion, such as the opening of a new

manufacturing plant, a new branch, or a new product line.
2. The appropriate selling price of an existing business which the
organization is planning to dispose of
3. The appropriate price of a particular business which the company plans to
buy.
4. The gap between the expected demand and the estimated supply for a new
product line that the business plans to introduce..
PARTIES REQUIRING A FEASIBILITY STUDIES
Proponents
Promoters of a new project are looking to conduct a feasibility study because
they want to achieve the following:

1. Test the viability of a new project through the application of the

appropriate projection tools.
2. Answer the queries of other interested parties.
3. Identify possible ways to improve project specification, particularly
through a market study.
4. Use the study as an instrument in attracting prospective investors.
PARTIES REQUIRING A FEASIBILITY STUDIES
Financial Institutions
Lending institutions or creditor banks take interest in feasibility studies to
achieve the following:

1. Determine the capacity of proposed projects to settle their financial

obligations before they extend the necessary credit.
2. Define the terms and conditions for extended credit, particularly the
interest rate, repayment period, or collaterals used to secure the amount
borrowed.
PARTIES REQUIRING A FEASIBILITY STUDIES
Shareholders
The shareholders of an existing business are interested in feasibility studies
because they need to accomplish the following:

1. Have a basis in making a decision on the sale of an existing business or

the purchase of a new one.
2. Decide whether or not to commit additional fresh capital on a proposed
new project.
3. Determine the expected return on their investments on a new project.
PARTIES REQUIRING A FEASIBILITY STUDIES
Government Agencies
Government agencies are keen on evaluating feasibility studies in order to
determine the following:

1. Whether the project has complied with the minimum requirements.

2. Whether the project needs to be supported in terms of providing
incentives or grants.
3. Whether the project contributes to the socio-economic program promoted
by the government.
 PROJECT FEASIBILITY FRAMEWORK
Government Agencies
The framework used in the preparation of a project feasibility study is shown
in Figure 1. It presents the following major aspects of a feasibility study
based on the sequential flow of data and information:

1. Market Study
2. Technical study
3. Management study
4. Financial study
5. Socio-economic study
PROJECT FEASIBILITY FRAMEWORK