A feasibility study is an important tool for decision-making in project management. Accurate and adequate information about the project like technology, location, production capacity, demand, and impact on existing operations, cost and benefits to the company, time span for execution, resources needed should be included in the report. Alternatives if any should also be suggested.
Feasibility Study in Project Management can be defined as: “A tool for transforming the initial project- A tool for transforming the initial project-idea into a idea into a specific hypothesis of intervention, through the identification, the specification and the comparison of two or more alternatives directed to achieve the defined objectives, by producing a set of information helping the Project manager to take the final decision”
Market research or demand analysis, technical viability studies, financial or commercial feasibility studies are other wise known as functional or support studies to aid the decision-making. A preliminary feasibility study and the detailed project report later prepared would aid the management to appraise the project in different aspects. Project is appraised generally in the following areas. If one can remember the acronym METRE, then he can remember the various aspects of project appraisal easily. METRE stands for
- M – Management
- E – Economic viability (this includes market, commercial and financial aspects)
- T – Technical feasibility
- R – Risk and returns
- E – Environment
1. Management Appraisal
A project may be acceptable in terms of the market potential, technical feasibility, financial viability and returns. The risks associated with the project may be acceptable. But if the project does not suit the philosophy of the management, or align with the business goal of the firm a company may not pursue such a project.
The Management appraisal is of two kinds. The first one is the appraisal with regard to the current management, its goals, strategic perspective and synergies of the new project. The second is the project’s management set up, organizational structure organizational climate, expected management — labor relations etc. A strategic perspective would mean what the company wants to achieve, when it wants to achieve it and how much it is willing to expend in resources to achieve it. In short, the Synergy, time and cost (STC) would primarily determine whether the project would get a go ahead.
2. Technical Appraisal
Technical appraisal is mainly undertaken to ensure that the project is technically viable no possible gaps or gray areas in technology, know-how, equipment, input supply, organization of production facilities etc. exists. Technical appraisal is key to assess the financial viability of the project. The computation of projects’ ability to earn satisfactory return on investment made and ability to service equity and debt depend on the project technical viability. Technical appraisal is basically concerned with aspects like technology, design, layout of the plant, infrastructure facilities envisaged for the project and the possible problems in various areas related to these technical aspects, which can be broadly grouped under the conception, construction and continuation phases.
3. Market Appraisal
A “technically feasible” project to be “financially viable” should realize the projected unit sales and earn sales revenue, ensure smooth cash flow, funds flow and the resultant surplus generation. Therefore, Market Appraisal of the project becomes important. Market appraisal mainly focuses upon the estimates of aggregate demand for the product/service and market share offered by the proposed project. Therefore, the appraisal should be really critical and realistic and should not project only the optimistic scenario. It is therefore important to appraise and analyze incisively, intelligently and meaningfully various factors affecting the market size, the market share and in the ultimate analysis, the sales volume and the sales revenue generation. The analyst must be clear in his approach to distinguish between the Sales Concept and Marketing concept. He should be aware that under the sales concept, the industrial concern earned profits by increasing the sales volume. Under the marketing concept, an essential ingredient is customer oriented and profit is the result of customer satisfaction. In essence “Selling tries to get the customer to want what you have. Marketing, on the other hand, tries to have what the customer will want — where, when, in what form and at what price”(Levitt).
While assessing the market, it must be remembered that goods/services are being created not because they will be useful, but because somebody needs and wants them. Therefore major attention to even minor details must be given. The design of the product, packaging, channel of distribution, sales network, price, sales force training and management, promotional efforts and advertising, the product in planning and market audit of the competitive environment all become important and hence should be analysed.
No market analysis can be made in the ultimate analysis with out a Demand Forecast for the product/market. Demand analysis, is a technique of collection of data, from primary and secondary sources, and preparation of estimates using certain Demand Forecasting Techniques. Demand analysis throws light on effective demand, Customers choice, the ability and willingness to pay for the product and has a direct corelation with Market Appraisal and the Financial Viability of the project. Any project evaluation would be incomplete if the demand analysis is not correctly made and assessed.
4. Environmental Appraisal
Over the years, due to better understanding of nature and concern and developed nations’ attitude there has been an increasing awareness about and a desire to prevent the damage being caused to environment by different projects either underway or likely to be taken up. Environmental / Ecological appraisal, therefore, assumes a great deal of significance. Such an appraisal/analysis becomes particularly important the case of Power Plants, Dams, major irrigation Projects, Chemical & such other environment polluting industries. An environment appraisal/analysis considers the following questions because answers could have a serious impact with regard to both the time span and costs involved in the project.
- The likely damage caused by the project to the environment
- Whether the damage is irreversible, permanent
- Whether the impact can be reduced or mitigated
- The cost of the restoration measures or mitigation
- What are the acceptable limits the environment can sustain
This philosophy of this aspect is explained by the statement, “You have not inherited the earth. You have borrowed it from the next generation”.
5. Financial Appraisal
A project should be technically feasible and financially viable also before investment is made. Financial Appraisal focus on the aspect of assessing the financial viability From the financial perspective, the following aspects are analyzed:
- Capital cost of the project
- Sources of funds (Meaning of financing and long term funds)
- Production, Sales Projections/Estimates
- Production costs
- Working capital requirements and sources of working capital
These information are then presented as:
- Projected working results/profitability
- Break even point Analysis
- Projected cash flow/Statements
- Projected Balance Sheet