Feasibility study and its aspects

Meaning of feasibility study

A feasibility study is a detailed examination of a proposed project, made before any money is committed, to find out whether the project is viable. Not every business opportunity that looks attractive can be turned into a profitable project, so promoters study every aspect of the intended business, usually with the help of specialists such as engineers and chartered accountants. In the process of setting up a new enterprise it comes after the business idea has been chosen and before the business plan is prepared. Only if the study gives positive results do the promoters go ahead and launch the business.

Suppose a group in Nashik plans a unit to make raisins and grape juice. The questions below are the ones it must answer before it buys land or machinery.

Aspects of a feasibility study

1. Commercial aspect: is there a market? A project that can be built but cannot sell has no meaning. The study estimates present and potential demand in national and international markets, and looks at the profit margin, the degree of competition and how stable the market is; an outside expert may be needed for this.
2. Financial aspect: can the money be found? The study works out the total estimated cost of the project, the projected cash flows and profits, how the project will be financed with reference to the capital structure, and how much the promoters themselves will contribute. If the outlay is so large that it cannot be raised within the means available, the project has to be dropped.
3. Technical aspect: can it be done? The study examines the location, the size of the plant, the supply of raw materials and labour, the machinery and equipment needed and the infrastructure. The site should allow low-cost operation, and a plant smaller than the optimum size raises the cost of production. An idea may be sound and still technically impossible if a required material or technology cannot be obtained.
4. Economic aspect: will it pay? A project can be technically possible and financially manageable and still have little chance of earning a profit; such an idea too may have to be abandoned.
5. Socio-economic aspect: is it good for the country? A social cost-benefit analysis judges the project's national viability, weighing what it costs the nation against its contribution to goals such as jobs, infrastructure, the development of backward areas, foreign exchange earnings and import substitution.

For the Nashik unit, these questions become: will retail chains and exporters buy its juice at a fair margin, can the promoters and a bank fund the plant, is there a site near the vineyards with power and water, will the unit earn enough after costs, and will it create local jobs.

After the feasibility study

Once the study is complete, an in-depth analysis known as project appraisal decides whether the project is selected or rejected. A selected project's findings are written up as a project report, which is needed to obtain sanction from the authorities concerned, including financial institutions. The experts who help with the study do not become promoters merely because they assisted.

Conclusion

A feasibility study protects the entrepreneur, the lender and the economy from projects that cannot be built, cannot be financed, cannot sell or will not pay. It turns an attractive idea into a tested proposal.