Feasibility study is the assessment, analysis and evaluation of a planned project to determine if it is technically feasible within the estimated cost and will be financially profitable. In this post we will discuss everything under the sun related to the feasibility study.
Feasibility study is an objective and rational analysis of the strengths and weaknesses of a project. A robust feasibility study covers five areas of feasibility - Technical, Economic, Legal, Operational, and Scheduling.
You should note the words 'objective' and 'rational' in the definition. Feasibility study evaluates the potential success of any project; hence, objectivity is an important factor in the credibility of the study. It must be conducted with an objective and unbiased approach to provide information upon which decisions can be made.
Any feasibility study starts with the project idea. The project can be greenfield or anything. It can be any type of project - real estate or paint manufacturing plant.
Once the idea is conceptualized, the next step should be formation of a feasibility team. Team members should be from various departments depending on the type of the project. However, members from technical, finance, legal, operational, and planning are desired.
Qualified team member need to cost the project (estimate project cost). Project costing at the concept stage can be difficult and a rational approach should be taken.
Every business (or project) sells something a product or a service. A proper market research should be conducted to find out the market demand for the said product/service, and also the price point at which we can sell it.
Market research is a specialized job and should be done by a qualified and experienced team member.
Operational team member should be involved at all stages starting from the concept. If you don't understand the operation of a project, you probably cannot do a reliable feasibility study.
Legal team must be involved from the day one to guide if the conceptualized project (product/service) is legal in your country / location.
Once all the data are collected, the finance team should start working on the feasibility analysis. This involves projecting the profit and loss statement, forecasting capital expenditure, designing an optimal capital structure and finally doing a discounted cash flow analysis.
Team member from operations must be involved in projecting the profit and loss statement. Without their inputs it will not be realistic.
Capital expenditure forecasting can be done based on the previous similar projects.
Based on the discussion with banks and financial institutions, an optimal capital structure can be designed. An optimal capital structure is the mix of debt and equity that maximizes the return on capital for the company.
You should have a look at this post on project IRR and equity IRR to know more about the impact of capital structure on project return.
Discounted cash flow (DCF) analysis is a method of valuing a project using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values. At the end of analysis we can calculate internal rate of return (IRR, net present value (NPV), and other financial indicators.
The outcome of the feasibility analysis is the key performance indicators of the project like IRR and NPV. The key financial metrics for feasibility study are listed below:
- Internal Rate of Return
- Net Present Value
- Return on Investment
- Payback Period
- Benefit-Cost Ratio
Note that the economic merit of a project cannot be decided on a single parameter.
You may like to refer Key Financial Metrics for Project Feasibility Study for more details on this.
Feasibility study report is a more formal document for senior management, investors and lending institutions.
Many of us know how to do a feasibility study but often get confused when it comes to writing a feasibility study report. A feasibility study report should consist of the followings:
- Background or Introduction of the Project
- Overview of the Project
- Economic Overview of the Area
- Site and Location Analysis
- Market Assessment
- Financial Analysis
- Appendices (Maps, market research data etc.)
You should refer to Feasibility Study Report Template to know more about this. You can also download FREE feasibility study report template.
Sample Feasibility Study Reports
Still looking for more guidance on writing feasibility study report? Sample feasibility study report is one of the most requested items on our site. Readers often ask for a pdf/doc version of sample feasibility study report.
You should refer to the Sample Feasibility Study Reports to access about 60 actual feasibility study reports from around the world for various asset classes.
Things to Remember
The purpose of the feasibility study is to determine whether the project is technically / financially feasible to move forward with. There are some small points you must consider while conducting a feasibility study:
- Limited market research is a dangerous thing
- Making too many assumptions ahead of time is even more dangerous
- Bigger is not always better
- Operating expenses are difficult to forecast
- Liquidly can disappear more quickly than you can imagine
- Construction delay is the norm
- Cost overrun should not surprise you
- Define KPIs and be clear how you will be tracking financial health of the project
- Always consider margin of safety
You may like to refer to the 10 Things to Remember While Doing Feasibility Study for more details.
Common Mistakes to Avoid
We are not robots, and humans make mistakes. We should always follow the best practices of doing feasibility study and should avoid common mistakes at all costs, which are listed below:
- Not optimizing the product mix
- Not conducting basic market research
- Mixing assumptions and calculations
- Ignoring market absorption rate
- Not including financing cash flow
- Focusing too much on calculating WACC
- No including sensitivity analysis
- Using complex formulas
- Not focusing on the things you can control
You must refer to the 10 Mistakes to Avoid when Doing Feasibility Study to know more about these mistakes in detail.
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