BUSINESS ECONOMICS. 16: Project Appraisal and Impact Analysis PAPER NO. 16 : PROJECT APPRAISAL AND IMPACT ANALYSIS MODULE NO. 6 : FEASIBILITY STUDY

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1 Subject Paper No and Title Module No and Title Module Tag 16: Project Appraisal and Impact Analysis 6: Feasibility Study BSE_P16_M6

2 TABLE OF CONTENTS 1. Learning Outcomes 2. Introduction 3. Feasibility Study-Concept 4. Feasibility Study-Features 5. Elements of Good Feasibility Study 5.1 Scope of the Project 5.2 Current Analysis 5.3 Requirements as per the object of the Project 5.4 Recommended Course of Action 5.5 Cost Effectiveness of the Approach 5.6 Concluding Part 6. Major areas of Feasibility Studies 6.1 Technical feasibility Aspects to be covered in Technical feasibility 6.2 Economic feasibility 6.3 Legal feasibility 6.4 Operational feasibility 6.5 Schedule feasibility 6.6 Market and real estate feasibility 6.7 Resource feasibility 6.8 Cultural feasibility 6.9 Financial feasibility 6.10 Market research study 7. Coverage under Pre-Feasibility Study 8. Feasibility Study in SDLC 9. Summary

3 1. Learning Outcomes After studying this module, you shall be able to Know the process of feasibility analysis Identify the phases of feasibility studies Identify the elements of good feasibility studies Learn the major areas of feasibility studies Learn the feasibility studies in SDLC 2. Introduction Feasibility analysis is a process undertaken to determine whether the project idea is worth proceeding with or not. It evaluates the future of the project idea within the limitations imposed by the environment upon it and also the constraints of the implementing body. Generally, the outcome of the study can give a positive result under which the decision to proceed with the project is taken otherwise the project can be abandoned. Sometimes, the data is not sufficient to arrive at any decision and in that case further information is collected till a decision can be reached. The feasibility analysis consists of three stages. These are pre-feasibility study, feasibility study and Project report. This module has been designed to discuss the areas to be covered under feasibility study, features of good study and also the elements of feasibility studies.. 3. Feasibility Study-Concept The future of project idea needs to be evaluated duly considering the constraints and limitations of project implementing body and also the surrounding environment. The projects identified are usually analyzed so as to establish the viability of the project from the point of view of technical, marketing, financial, etc. The feasibility analysis involves detailed analysis and evaluation of the project from all relevant angles. The comprehensive guidelines for project feasibility studies and evaluation are published by several institutions: United Nations/UNIDO, Geneva OECD Development Centre, Paris World Bank Group, Washington, DC Asian Development Bank, Manila BPE, Government of India (Bureau of Public Enterprise) Although the basic concepts, tools and techniques are the same but different guidelines, manuals and authors have called project phases by different names. UNIDO has divided project cycles and phases as follows: 1. PRE-INVESTMENT PHASE: a. Identification of investment opportunities b. Preliminary selection stage c. Project Formulation Stage d. Evaluation and Decision stage

4 2. INVESTMENT PHASE: a. Negotiation and contracting stage b. Project design stage c. Construction stage d. Start-up stage 3. OPERATIONAL PHASE: a. Short-term view b. Long-term view 4. Feasibility Study: Features The following are the important features of a Feasibility study: a) After Pre-Feasibility Study: The feasibility study must be made only after pre-feasibility study, if results are positive and affirmative. b) Related to any Aspect: The feasibility study could be related to any aspects of the project. It means it is not confined to starting a new venture. The feasibility study is that type of study which can be conducted in different situations which are found by the investor. The project includes: Modifications of existing product lines Adding new into existing one. Subsidiary or allied projects can be considered by the manufacturer. So, expert should not ignore the importance of feasibility study. The feasibility study is important both in case of existing company and in case of new venture. c) Detailed, Reliable, Complete, etc.: The feasibility study is likely to be much detailed, sophisticated, complete and covering almost same grounds as in case of pre-feasibility study. The feasibility study will result into certain formats, specifications, reliability, estimation about different data of the project. It is also likely to provide us much reliable information to decide or test viability of the product. d) Clarity of doubts: In feasibility study certain points may be doubtful. But after the feasibility study no doubt remains about the soundness of the project. It is final decision that is why projections developed under feasibility study should not be defective. e) Persons involved: The feasibility study is done by different persons, depending upon the situation. For example it can be by investor himself entrepreneur consultant planner development agencies

5 5. The Elements of a Good Feasibility Study The fundamental activities involved in preparation of feasibility study are equally applicable to any type of project since these activities are very generic in nature. The project may be for acquisition, development of software, for systems or for any other project. In fact feasibility study includes a) Defining the problem under consideration b) Analyzing the current mode of operation c) Defining the requirements d) Evaluating the various alternatives and e) An agreed upon and approved course of action. Feasibility study determines the worthiness of the project and also evaluates the future of the project. This feasibility study should include the scope of the opportunity, the strength and weaknesses of the project, the requirements as per the object of the Project, etc. The feasibility study should also include the course of action, its review etc. The following are the main components of an effective feasibility study: a) Scope of the Project b) Current Analysis c) Requirements as per the object of the Project d) Recommended course of action e) The cost effectiveness of the approach f) Concluding part 5.1 Scope of the Project It is used to formulate a business problem. The scope should be very well defined and specific. It is also important to define different parts of the business that are directly or indirectly affected by the project. A very many projects which start with great promises but without well-defined scope wither with time and do not reach their objectives. 5.2 Current Analysis The existing method of implementation is required to be defined and understood under current analysis. It may be in relation with system, product or any other parameter. After conducting the current analysis it may be inferred that there is no need to completely modify the system and just some mere modifications are required. There is a need to identify the strengths and weaknesses of the existing system. It is always possible that certain elements under the current system and product may still be useful equally in the new system also. It means that no new fresh efforts are required on these elements. There may be few modifications and adaptations only. It will certainly save precious time and money. The feasibility study may be completed well in time. Had this analysis not been undertaken, these useful elements would have remained undiscovered.

6 5.3 Requirements as per the object of the Project The requirements of the project are to be identified and documented as per the basic object of the project. These requirements may be in relation to infrastructure, technology, information system, software, special operating system, utilities, heavy equipment, etc. This element of feasibility study is as important as it is the nature and type of project on which the requirements are based. For example a manufacturing project may require substantial land resources but software solution project requires relatively lesser space but expert IT professionals. 5.4 Recommended Course of Action It is quite obvious that out of various alternatives available, one or more are preferred and selected. There is a need to explain the logic behind selection of a particular course of action. At this point, the use of existing structures and commercial alternatives are considered. 5.5 Cost Effectiveness of the Approach The approach selected should also be tested with respect to cost effectiveness. In this segment not only the estimated total cost of the recommended project is considered but also the cost of other alternatives in order to facilitate comparison. The approach to development projects is different in the sense that a project schedule is prepared showing the entire project path i.e. from the very beginning and up to the end showing clearly the sequence of all the activities. Thereafter a summary is prepared which elucidates the cost benefit analysis as well the final return on investments. 5.6 Concluding Part This is the assembly portion of the feasibility study wherein all the preceding elements are considered with a formal review. There are two fundamental purposes of the review. The very first being a thorough checks so as to substantiate its accuracy and the ultimate purpose is to take final call on the acceptability of the project. It is important to note that it is not necessary to take an affirmative decision always. It may be rejection of the project or may be required to be revised before finalization of any decision. In the case of approval of the project, the documentation should be completed in all respects including the signatures of all the concerned parties indicating the final acceptance. If the project is rejected then it is always desirable to explain the valid and persuasive reasons of rejection. This should form part of entire documentation.

7 6. Major Areas of Feasibility Study The major areas of feasibility study are the following: 1. Technical Feasibility 2. Economic Feasibility 3. Legal Feasibility 4. Operational Feasibility 5. Scheduling Feasibility 6. Market and real estate feasibility 7. Resource feasibility 8. Cultural feasibility 9. Financial feasibility 10. Market research study 6.1 Technical feasibility The technical Feasibility Study aims to determine whether or not the product is technically feasible. This study determines how the technical requirements of the project can be fulfilled, which location would be the most appropriate and what should be the size of the plant? This study and demand and market feasibility study are the important pre-requisites for evaluating project prospects for commercial profitability and national economic profitability upon which the final decision should depend. The technical study also provides the basis for cost estimating Aspects to be covered in Technical feasibility A suitable technical feasibility should cover the following steps: 1. Materials and Inputs 2. Production Technology 3. Product Mix 4. Location and Site 5. Plant Capacity 6. Structures and Civil works 7. Machinery and Equipment 8. Project Chart and Layouts 9. Work Schedule

8 6.2 Economic feasibility The proposed project should provide favourable economic benefits to the entity. The economic feasibility assessment is conducted to analyse this aspect. There is also a need to identify and quantify the economic benefits that is expected to be provided by the project. This feasibility necessarily involves comparative analysis of cost and benefits. 6.3 Legal feasibility Every entity is bound to fulfill the legal requirements. There is a need to study the legal scenario and to see the legal implications of the project. It necessarily involves ethical considerations. So it is also called as Ethical Feasibility. Before the actual execution of the project undertaken, it has to be ensured that it meets all ethical and legal requirements. 6.4 Operational feasibility In the execution of the project, the entity is expected to face some problems and also there may be some opportunities arising in the course of the project. The operational feasibility is a measure of this fact only i.e. the ability to solve problems and taking advantage of opportunities. The assessment under this study emphasizes on the degree to which the proposed project fits in existing scenario and also the objectives with regards to following: 1. Development schedule 2. Delivery date 3. Corporate culture and 4. Existing business processes To ensure success, there are certain parameters to be considered at very early stage of design. These include the following: 1. Reliability 2. Maintainability 3. Supportability 4. Usability 5. Productivity 6. Disposability 7. Sustainability 8. Affordability. In fact this feasibility is a critical aspect of systems engineering and also needs to be an integral part of the early design phases. It is so because a system becomes most effective for the desired purposes when its design includes the technical and operating characteristics.

9 6.5 Schedule feasibility The time element of a project has its own importance. It is so because a project will fail or is unsuccessful if it takes too much time to complete. It means there is a need to estimate the time required to develop the system. The deadline for the project needs to be initiated. It is also necessary to decide the desirability or whether the deadlines are mandatory? It is also ascertained whether the company currently has the required time resources for undertaking the project? The possibility of completion of project in the available time is also checked. 6.6 Market and real estate feasibility The demand and market study is the thorough analysis of the market for the product to be manufactured by the industrial project. It helps us to know the market penetration, capacity to enter into market as compared to total market. It is important that if, after the pre-feasibility study, on the basis of demand and market study it is finding that market is not sufficient then project idea should be abandoned immediately. The information determined under demand and market study includes the following: 1. The size and composition of present demand in the market. 2. Market segments identified. 3. Demand projections of overall market. 4. Market penetration. 5. Broad pricing structure The Real Estate Feasibility answers the questions like: 1. The type and kind of property required 2. The availability of the requirement in the market 3. The related legal aspect 4. The impact of business on the area. 6.7 Resource feasibility The execution of the project requires availability of required resources. It is required to be seen whether we have enough resources or the facilities necessary for the project? This feasibility finds out the type and amount of resources required the dependency on others, the alternatives in hand or the sources in case of emergency, etc. 6.8 Cultural feasibility The impact of the project on both local and general cultures needs to be analyzed in advance. Such types of environmental implications are studied in this feasibility study. The culture of the entity should not be clashed for the success of the project. 6.9 Financial feasibility The financial feasibility tries to make projections about earning prospects of an industrial project. The following four aspects are considered in this study: 1. The total investment cost

10 2. Sales revenue 3. Operating cost 4. Cash Flows 6.10 Market research study The product or services to be sold or rendered should be marketable. This study examines this important aspect. It will assess the potential sales of the product; its absorption and market capture rates of the project. 7. Coverage under Pre-Feasibility Study The following points should be covered by Planners of the concern while making Pre-Feasibility Study. 1. Product Description: The characteristics of the product should be equally described, along with possible substitutes which are available in the market. The subsidiary or allied products should also be identified which can be manufactured along with the main product. 2. Description of the Market: The present and projected potential market and its competitive nature must be specified, with reference to the following aspects: i) The status of present location of manufacturing ii) How many competitors are operating in the market and their corresponding specialization, if any? iii) What are the national production, imports and exports? iv) Are there any Governmental controls or incentives? v) What is the estimated consumption? vi) What is the price structure? vii) What is the estimated product durability for future consumption? 3. Technology: The technology choices for the manufacture of the product should be described briefly. Also, the key plant location factors, listed below, should be identified: i) Labour ii) Proximity or nearness to market and raw material iii) Transportation facilities and cost iv) Water availability 4. Cost Estimates: The estimates should be meet of the necessary investment cost and production cost. 5. Estimated Profit: The information collected should include estimates of profit of business firms manufacturing similar products or an actual estimated profit for the project under study.

11 6. Other Factors: In certain cases, the following aspects may be the most important in the judgment of suitability of the project, especially in case of new project: i) Local attitude towards industry ii) Education, recreational and civic background iii) Availability of the local sites The pre-feasibility study can be considered a combination of different steps which permit determination of the fact whether or not a complete and detailed feasibility study should be undertaken. The pre-feasibility is an essential and not a wasteful exercise. It should be noted that since the pre-feasibility study is a screening device, it can be discontinued at any point, where information gathered indicates the rejection of project idea. 8. Feasibility Study in SDLC The project analysis and its impact may be studied in relation to all types of projects, whether these are related with manufacturing, marketing or even in case of development of information system for the organization. This necessarily involves some special considerations like input devices, transaction processing, communication channels, data base management, etc. rather than raw material, labour, machinery, etc. which are considered in a pure manufacturing project. These types of projects are under different legal umbrella including Information Technology Act, Cyber laws, etc. This portion of module discusses the overall related aspects and issues. The system development projects basically involve SDLC. The System Development Life Cycle (SDLC) includes set of activities which are conducted by system analysts, designers and users to develop and implement the required information system. The SDLC can also be viewed as systematic process oriented system development framework. There are mainly seven activities which together form the SDLC. These are:

12 The testing of feasibility is performed after the identification of options. These options are tested for the following: 1. Technical Feasibility 2. Economic Feasibility 3. Operational Feasibility 4. Behavioral Feasibility 5. Resource Feasibility 6. Legal Feasibility 7. Schedule Feasibility Technical Feasibility This feasibility is related to analysis of ability and capability of different types of hardware and software for viable options. In this, analyst also evaluates whether the proposed system is feasible with existing or expected computer hardware and software technologies. The analysts analyze various issues like: Is existing technology more viable or new technology will be better for option under consideration? Can the technology under consideration handle the required volume of data efficiently? Will this system under consideration expandable as per the future requirements? Will there be sufficient efficiency, accuracy and reliability in operation when the considered technology used Some of the key technology consideration in above analysis is: Consideration Alternatives 1. Types of input devices for data entry Key Boards, Scanner, Touch Screen 2. Output Medium Display Device, Printer, etc. 3. Types of Transaction Processing Batch or Direct 4. Communication Channels for Data Telephone Line, Cable, etc. Communication 5. Types of Database Management File System or DBMS 6. Type of Central Processor Micro, Mini or Mainframe A technically feasible system may not be economically viable or the staff may not be technically competent to operate the system. Economic Feasibility This feasibility considers all incremental costs and benefits if the system option is implemented. It has many intangible benefits therefore it is difficult to compute. The cost of hardware, software and investigations are considered whereas benefits will include reduced costs and other benefits.

13 Operational Feasibility This feasibility is related with the operational parameters, in terms of use of computer facilities by users i.e. employees, customers and suppliers, etc. It involves following analysis: Is there sufficient support from the users and management for the system to be developed? Are the users involved in the planning and development of the project? If yes, then there will be less resistance and more adaptability for better technology. Are the current business methods are acceptable to users? Will there be loss of control, slower processing in some areas if the system implemented etc.

14 Behavioral Feasibility In this feasibility, the issues related to the system environment, primarily; collection of inputs is analysed whether the required inputs will be available on time for processing, mainly when inputs are to be provided by external entities (supplier, banks, etc.) Resource Feasibility Although the issues addressed in this feasibility are covered, to some extent, in the operational and technical feasibilities. In this feasibility, primarily the issues related to availability of human resources are determined; mainly when system is to be maintained in non-metro locations. Legal Feasibility This is mainly performed to determine whether there will be any conflict between new proposed system and organization legal obligations. Schedule Feasibility This feasibility is related with the time estimates that an option under analysis will take. Management may take decision on this basis whether proposed time is acceptable for system development or not. 9. Summary Feasibility analysis is a process undertaken to determine whether the project idea is worth proceeding with or not. The feasibility analysis involves detailed analysis and evaluation of the project from all relevant angles. UNIDO has divided project cycles and phases as Pre-investment phase, Investment phase and Operational Phase. The feasibility study must be made only after pre-feasibility study, if results are positive and affirmative The fundamental activities involved in preparation of feasibility study are equally applicable to any type of project since these activities are very generic in nature. The major areas of feasibility study are Technical, Economic, Legal, Operational, Scheduling, Market and real estate feasibility, Resource feasibility, Cultural feasibility, Financial feasibility and Market research study.