Feasibility study of a project: purpose and aspects

Feasibility study

A feasibility study is a detailed examination made by an entrepreneur to confirm that a proposed project is viable. It comes after a business opportunity has been spotted and before resources are committed: not every opportunity can be turned into a real and profitable project, so the promoters investigate every aspect of the business they mean to start.

Suppose a group of farmers' sons near Agra plans a cold-storage unit for the potato crop. Before borrowing a rupee they need to know whether the plant can be built and run, whether there will be enough demand for storage space, what it will cost and earn, and what it will do for the area. Answering these questions is the feasibility study.

Purpose of a feasibility study

1. To test whether the idea can be exploited at a profit. The study examines whether the perceived opportunity can be used profitably, with the help of specialists such as engineers and chartered accountants.
2. To stop unsound projects early. An idea that fails on technical, financial or economic grounds may have to be dropped; only when the investigations give positive results do the promoters go ahead and launch the venture.
3. To provide the basis for appraisal. After the study, the project is analysed in depth to decide whether to accept or reject it, a step called project appraisal.
4. To support the project report. The findings of a selected project are set out in a project report, which is needed to obtain sanction from the authorities concerned, financial institutions included.

Aspects to be considered

• Financial viability. It covers the total estimated cost of the project, the projected cash flows and profitability, how the project will be financed in relation to its capital structure, and the promoters' own contribution. If the outlay is too large to be raised from the available means, the project has to be given up.
• Commercial viability. A project that can be built and financed is of no use unless it can sell. The study looks at present and potential demand in home and foreign markets, profit margins, the degree of competition and the stability of the market, sometimes with an expert's help. Even a project that is technically sound and can be financed may be abandoned if its chance of earning a profit is small.
• Technical viability. It examines location, plant size, raw materials, labour, machinery and infrastructure. The site should allow operations at low cost, and a plant below the optimum size raises the cost of production; the materials, machines and infrastructure needed must actually be available. A good idea may still be technically impossible if a key material or technology cannot be obtained.
• Social and national viability. A social cost-benefit analysis judges the project's value to the nation: its contribution to employment, infrastructure, the development of backward areas, foreign exchange earnings and import substitution.

Conclusion

A feasibility study is a project's test before birth. By checking market, money, technology and social value in advance, it saves promoters from costly mistakes and gives lenders a sound basis for supporting the venture.