Feasibility study of a project: its purpose and the aspects it covers

Meaning of a feasibility study

A feasibility study is a detailed examination that an entrepreneur carries out to make sure that a proposed project is viable. When promoters form a company, they first identify a business opportunity and then investigate every aspect of the business they plan to start, often with the help of specialists such as engineers and chartered accountants, to judge whether the opportunity can be exploited profitably.

The study has a definite place in setting up an enterprise. It comes after a business idea has been chosen, an idea that must promise sufficient demand, inputs the entrepreneur can arrange and a reasonable return. It comes before the project is appraised, written up in a project report and turned into a business plan.

Purpose of a feasibility study

1. To separate workable ideas from attractive ones. Not every opportunity that has been spotted can be turned into a real or profitable project, which is why promoters study its feasibility in detail. A company is actually launched only when these investigations give positive results.
2. To confirm that the inputs can be arranged. The chosen line of business must be one for which the promoter can arrange the finance, technology, labour and materials it needs.
3. To weigh return against risk. The expected rate of return must be fair in view of the risk and the investment involved, and the risk must be one the entrepreneur can accept.
4. To give a factual base for the final decision. The completed study is the basis on which the project is analysed in depth and then selected or rejected.
5. To support the request for sanction. Its findings are written up in the project report that the authorities and financial institutions need before they sanction the project.

In short, the study protects the entrepreneur's money and effort by testing the project on paper before anything is committed on the ground.

What the study must examine

Take the example of a young entrepreneur in Ludhiana who plans a unit to assemble electric bicycles. Before investing, she would examine the following aspects.

1. Commercial aspect. A project may be technically sound and still have no meaning if it is not commercially viable. The study therefore looks at present and potential demand for the product in national and international markets, the margin of profit, the degree of competition and the stability of the market; an expert may sometimes be needed to judge this. Our entrepreneur would estimate how many electric bicycles commuters and delivery riders in Punjab are likely to buy, and at what price, against the brands already on sale.
2. Financial aspect. Financial viability is judged from the total estimated cost of the project, its projected cash flows and profitability, how it will be financed with reference to the capital structure, and how much of the cost the promoter will contribute. If the outlay is so large that it cannot easily be raised within the available means, the project has to be given up.
3. Technical aspect. This involves a critical study of the location, the size of the plant, raw materials and labour, machinery and equipment, and infrastructure. The site should allow cost-effective operation, and a plant smaller than the optimum size raises the cost of production. The optimum size is the one at which average cost per unit is lowest. The entrepreneur must also check that the raw materials, machinery and infrastructure she needs are actually available. If a vital input cannot be obtained in the country or imported, the project remains technically unfeasible until another source is arranged; for the electric bicycle unit, a steady supply of battery cells would be such an input.
4. Economic aspect. A project can be technically workable and financially possible and still offer very little chance of profit; in that case too the idea may have to be dropped.
5. Socio-economic aspect. A social cost-benefit analysis judges the project's viability for the nation, since every project imposes some costs on the country and yields some benefits. Its contribution to employment, infrastructure, the development of backward areas, foreign exchange earnings and import substitution is assessed. An assembly unit that employs local workers and replaces imported bicycles would score well on this test.

After the study: appraisal and project report

Once the feasibility study is complete, the project is analysed in depth to decide whether to select or reject it; this analysis is called project appraisal. If the project is selected, the findings of the study are presented as a project report, which is needed for sanction from the authorities concerned, including financial institutions. The report brings together the market potential, the financial details such as the sources of finance and the working capital, the inputs required, a short summary of the project, its importance to the national economy and the particulars of the entrepreneur. A business plan then follows, setting out the action needed to put the project into effect and helping the entrepreneur raise funds.

Conclusion

A feasibility study asks one question from several angles: can this project succeed? It tests whether there is a market, whether the money can be found, whether the technology and inputs are available, whether the venture will earn a profit and whether it is worthwhile for society. Only a project that passes these tests should go forward to appraisal and the project report.