1

UNIT THREE

PROJECT FEASIBILITY STUDY

A feasibility study is part of the process of project identification, preparation and selection.

This process involves the appraising of projects or groups of projects and choosing to
implement some of them.

Feasibility literally means whether some idea will work or not.

It knows beforehand whether there exists a sizeable market

for the proposed product/service,

what would be the investment requirements and where to get the funding from,
where from the necessary technical know-how to convert the idea into a tangible product,

In other words, feasibility study involves an examination of the operations, financial, HR and
Marketing aspects of a business on ex ante (before the venture comes into existence) basis.

Feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms
but also in economic and commercial terms too.

These proposals as pointed out above take the following forms of feasibility studies

Forms of project feasibility studies:

1. Market/Commercial viability
2. Economic feasibility
3. Financial feasibility
4. Technical feasibility
5. Social Cost Benefit analysis
6. Other feasibility considerations like legal, administrative, ecological
 2

When projects are evaluated by government or government agencies, economic and social
feasibility is also considered.

Market feasibility is also emphasized, but technical and financial feasibility is less emphasized.

The scope for scrutiny under each of these five heads

The process almost invariably involves making decision relating to

technology, financial viability,

scale, organization and
location, management,
costs and benefits, Availability of inputs, know-
time of completion (gestation how, labor etc.
period), The detailed analysis is set
degree of risk and down in what is called a
uncertainty, feasibility report

Market feasibility (Requirements for market and demand analysis)

Market feasibility

Interaction among buyers and sellers.

From sellers point of view, market analysis is primarily concerned with the aggregate
demand of the proposed product/service in future.
Segment the market as geographic scope, demographic and psychological profile etc.

Knowing who all comprise your customers, require information on

consumption trends, imports and exports,

past and present supply position, competition,
production possibilities and cost structure,
constraints, elasticity of demand,
 3

consumer behavior, distribution channels and

intentions, motivations, marketing policies in use,
attitudes, administrative,
preferences and requirements, technical and legal constraints

The exercise of project appraisal often begins with an estimation of the size of the market.

Before a detailed study of a project is undertaken, it is necessary to know, at least roughly, the
size of the market because the viability of the project depends critically on whether the
anticipated level of sales exceeds a certain volume.

Objectives of market analysis

Market and demand analysis is a key activity for determining the scope of an investment, the
possible production program, the technology required, and the choice of location.

The objectives of demand and marketing analysis are:

I. To determine the effective demand for the envisaged (proposed) project

II. To determine the characteristics of the corresponding market in terms of unsatisfied
demand, competition, imports, exports etc

Marketing elements

Marketing can be characterized by the following four elements:

business philosophy;
marketing research;
marketing instruments; and
Marketing plan and budget.

Requirements for market and demand analysis

A. Information requirement

I. Effective demand: to gauge the effective demand in the past and present, the
starting point
 4

II. Breakdown of demand: to get a deeper insight into the nature of demand, the
aggregate

1. Effective demand: to gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as:

Production + Imports exports changes in stock level

In a competitive market, effective demand and apparent consumption are equal.

2. Breakdown of demand: to get a deeper insight into the nature of demand, the aggregate
(total) market demand may be broken down into demand for different segments of the market.

Market segments may be defined by nature of product, consumer group, and geographical
division.

I. Nature of product: One generic name often subsumes many different products: steel
covers sections, rolled products, and various semi-finished products;
II. Consumer groups: Consumers of a product may be divided into industrial consumers
and domestic consumers. Industrial consumers may be sub-divided industry-wise.
Domestic consumers may be further divided into different income groups.
III. Geographical division: A geographical breakdown of consumers, particularly for
products which have a small value-to-weight relationship and products

Price: Price statistics must be gathered along with statistics pertaining to physical quantities. It
may be helpful to distinguish the following types of prices:

manufacturers price quoted as FOB (free on board) price or CIF (cost, insurance, and
freight) price,
landed price for imported goods,
average wholesale price, and
average retail price.
 5

Methods of distribution and sales promotion

The method of distribution may vary with the nature of product.

Capital goods, industrial raw materials or intermediates, and consumer products tend to have
differing distribution channels.

Methods used for sales promotion (advertising, discounts, gift schemes, etc.) may vary from
product to product.

D. Consumers: two categories of information about the consumers may be required:

Demographic and sociological information-, information on: age, sex, income, avocation,
residence, religion, customs, beliefs, and social background, and Attitudinal information-
information on - preferences, intentions, attitudes, habits, and responses.

E. Governmental policy: the role of government in influencing the demand and market for a
product may be significant.

These are reflected in:

production targets in national plans, industrial licensing,
import and export trade controls, preferential purchases,
import duties, credit controls,
export incentives, Financial regulations and
excise duties, subsidies/penalties of various kinds.
sales tax,

F. Supply and competition: it is necessary to know the existing sources of supply and whether
they are foreign or domestic. For domestic sources of supply information along the following
lines may be gathered:
 6

location,
present production capacity,
planned expansion, c
Capacity utilization level,
bottlenecks in production, and
Cost structure.

Competition from substitutes and near-substitutes should be examined because almost any goods
may be replaced by some other goods as a result of changes in relative

prices, promotional strategies,

quality, consumer taste, and
Availability, other factors.

Demand estimation

The first and most difficult step in market feasibility analysis is determining the potential
demand for the product or the service we are intending to produce/render.

There are different methods of estimation.

A. Market survey

The information sought in a market survey may relate to one or more of the following;

Total demand and rate of growth of demand;

Demand in different segments of the market;
Income and price elasticity of demand;
Motives for buying;
Purchasing plans and intentions;
Satisfaction with existing products;
Unsatisfied needs;
Attitudes toward various products
 7

Distributive trade practices and preferences;

Socio-economic characteristics of buyers.

Market survey can be undertaken using the following steps:

1. Definition of the target population

2. Selection of sampling scheme and sample size
3. Preparation of the questionnaire
4. Recruiting and training of field investigators
5. Obtaining information as per the questionnaire from the sample of respondents
6. Editing of information gathered
7. Analysis and interpretation of data

B.Demand forecasting

After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate future demand.

Several methods are available for demand forecasting. The important ones are qualitative and
quantitative methods.

A. Qualitative Methods

Qualitative or judgmental forecasting does not rely on numbers to conclude forecast, but rather
on intangible factors.

This method is especially common when sufficient historical data is not available, i.e., for a new
business or a less-established market environment.

Groups whose judgment is normally surveyed in preparing a qualitative forecast include the
experts in the field, the sales force and the customers.
 8

Combining historical data with the judgment of people or groups presumed to have superior
knowledge of sales

Some of the identified qualitative methods of sales forecasting are

Delphi method and

Jury of Executives Opinion methods.

These methods rely essentially on the judgment of experts to translate qualitative information
into quantitative estimates.

I. Jury of Executives Opinion Method

This method, which is very popular in practice, involves soliciting the opinions of a group of
managers on expected future sales and combining them into a sales estimate.

The advantages of this method are:

(1) It is an expeditious method for developing sales forecast;

(2) It permits a variety of factors like

economic climate,
competitive environment,
consumer preferences,
technological developments, and so on,

(3). it has an immense appeal to managers who tend to prefer their judgment to mechanistic
forecasting procedures.

The disadvantages of this method are:

(1) The biases underlying subjective estimates cannot be unearthed easily;

 9

(2) The reliability of this technique is questionable.

ii. Delphi Method

This method is used for eliciting the opinions of a group of experts with the help of a mail
survey.

The steps involved in this method are:

A group of experts is sent a questionnaire by mail and asked to express their views.
The responses received from the experts are summarized without disclosing the identity
of the experts, and sent back to them along with a questionnaire
The process may be continued for one or more rounds till a reasonable agreement
emerges in the view of the experts.

Delphi method appeals too many organizations for the following reasons:

(1) it is intelligible to users;

(2) it seems to be more accurate and less expensive than the traditional face-to-face group
meetings.

While the Delphi method is appealing, there are certain questions it doesnt answer.

(1) What is the value of the expert opinion?

(2) What is the contribution of additional round and feedback to accuracy?

Quantitative Methods

Simply stated, the word quantitative signifies an estimate of a particular, indefinite or

considerable amount of anything.

Quantitative techniques rely primarily on numbers to conclude forecasts.

 10

These numbers are multiplied, added or correlated and then placed in a formula to predict the
company's sales.

You can start by building up to aggregate totals of market demand, or start with these totals and
work the numbers down into more focused forecasts for individual products.

Quantitative techniques are calculated from important numbers such as a number of sales
volume, gross national product, disposable income, and total number of buyers in the market.

These numbers have been shown to have significant value in forecasting.

Among others some of the quantitative forecasting methods include the time series methods
and Causal methods.

A. Time Series Methods: these methods generate forecasts on the basis of an analysis of the
historical time series.

The important time series projection methods are trend projection methods, exponential
smoothing method and moving average method.

I. Trend Projection Method

When the trend projection method is used, the most commonly employed relationship is the
linear relationship.

Trend projection: it consists of determining the trend of consumption by analyzing past

consumption statistics, and projecting future consumption by extrapolating the trend.

Linear Relationship: Yt = a + bt

Where; Yt = demand for year t,

t = the time variable,

 11

a = intercept of the relationship

b = slope of the relationship

a, b and ajs are constants.

This relationship may be estimated by using one of the following methods

Visual curve fitting method and

Least squares method.

Consumption level method:

Useful for a product which is directly consumed,

this method estimates consumption level on the basis of elasticity coefficients,
the important ones being the income elasticity of demand and the price elasticity
of demand.

Income elasticity of demand t

12
 13

End use method

Suitable for estimating the demand for intermediate products,

The end use method, also referred to as the consumption coefficient method involves the
following steps:

i. Identify the possible uses of the product.

ii. Define the consumption coefficient of the product for various uses.
iii. Project the output levels for the consuming industries.
iv. Derive the demand for the product

D. Leading Indicator Method

Leading indicators are variables which change ahead of other variables, the lagging variables.
 14

Hence, observed changes in leading indicators may be used to predict the changes in lagging
variables. For example, the change in the level of urbanization- a leading indicator may be used
to predict the change in the demand for air conditioners a lagging variable.

Two basic steps are involved in using the leading indicator method:

First, identify the appropriate leading indicator(s).

Second, establish the relationship between the leading indicator(s) and the variable to be
forecast.