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Feasibility Studies 7th Material
The Areas of Feasibility Studies
1. Feasibility studies for a new project.
2. The expansion of an existing project
3. Introducing a new product to an existing project.
4. Choosing a new location facility, or place for the same product in the same
project but in a new area.
5. Buying a new machine or equipment requires same analysis in order to decide
whether it is feasible to buy or not.
6. When we choose among alternatives or investment opportunities
7. For some nonprofit social project
Notes
In the study of the social projects we apply the social cost benefit analysis
concept instead of dealing only with the private one.
Some projects are privately speaking profitable and accepted but after adding
the social dimension they turn to be rejected and the opposite is true in other
cases.
The Steps of the Feasibility Studies
The pre-feasibility studies:
Is the first step in any feasibility studies through which we study the feasibility
of the feasibility studies
It is an important step especially when we know that the cost of feasibility
studies ranges sometimes from 5 to 10 % out of the total cost of the project
In the pre-feasibility studies stage normally we focus quickly on the legal
situation of our project, the location, the government regulation, culture,
religion,.etc. in order to know if there certain constraints concerning (facing)
this project.
Detailed feasibility studies:
The detailed feasibility studies consists of more than one study including studies
of the market (market study) finance (financial study), technical study, finally we
gather this in an economic study.

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Marketing Study
It is the study through which we study the potential market for the project in
order to be able to determine the expected revenues of the project during its
economic life. The economic life not necessarily equals to the technical life.

The technical life is the life of the machines while the economic study is the life
in which the project can generate revenues
Sep One: Segmenting the Market (Targeting the Market)
The segmentation of the market as usual might be based on income, age, sex,
geographical, etc.
Step Two: Studying the Potential Market or Potential Demand
Its made to estimate the potential demand we would apply some measures to
know whether market is large enough to absorb the production of the project or
not.

Basically here we have to stick to historical data about the following:
1. Total sales of the product.
2. Domestic production.
3. Imports and exports.

Five main indicators exist as follows:

1. Demand GAP.
2. Implicit GAP.
3. Other indicators.
4. Projection of market demand.
5. Projection of exports.

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Demand GAP:
Its the difference between the quantity demanded domestically and the quantity
produced domestically at the international price of product [the price prevailed
in the international market assuming free trade]

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D S


50

100 230 Q
GT= QD-QS= 230-100=130
K= demand GAP / min level of optimal size= 130/140 = 0.9
K: The number of projects that the market can absorb
Min level of optimal size: Min quantities that can the producer produce

We have Three Options:

K< 1: means that even a demand for the project exist, however this demand is
not sufficient compared to the optimum size of the project.
K>1: means that the market is large enough to absorb the production of the
project.
K=4: means that the market can absorb four projects. Each producing the
optimum size.
So when K increases, the investment opportunities increase.






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In order to apply the demand GAP concept, we should follow the following
conditions:
1) Quality: The quality of the product must be at least similar to the
international one.
2) Selling price: It is the ability of selling product with the international price,
which means that the local producer should be as efficient as international
producer.
Implicit Demand GAP:
Sometimes the government imposes prohibited tariffs which are imposed at an
extremely high rate to restrict the imports of a certain product

If the prohibited tariffs equal to the difference between the domestic price and
the international price, hence the amount of imports = zero. Nobody will import
such product.

Hi= PI / PD
1) Hi: implicit demand GAP.
2) PI: international price.
3) PD: domestic price.

We have the following options:

1) Hi>1: this means that international price is higher than domestic price, The
project is able to export its product to the international market and, therefore
the strategy should be based on penetrating the international market.
2) Hi<1: this means that there is an implicit Gap where international price is lower
than the domestic price. So the international government is able to impose high
tariffs.







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How to benefit from the implicit Gap?
1) To be large enough in such a way to increase the supply of the product and in
this case the project could cover the demand GAP and create a market for the
product.
2) The project should be capable of producing the commodity with at least same
quality.

Other indicators for determining the potential demand:
So instead of producing a product then trying to search for a demand GAP, we
could stick to other indicators such as:
A] waiting list of the consumers to buy the product.
B] The deterioration of the quality
Accordingly even if k<1 and the market isn't large enough to absorb a new
project we can still open a new project depending on the other indicators

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Projection of the market demand:
One of the most popular methods of forecasting is the trend method in which we
have a dependent variable (total sales) and independent variable (time).

1) Simple linear method for forecasting:
Yt= + t + Ut
Yt: total sales overtime
: amount of sales in current year.
t: sales/ Time
Ut: error term
We have three cases:
Y > 0 sales is increasing

= 0 sales is constant
< 0 sales is decreasing

T
Quadratic Regression Method:
Yt= + 1 t1 + 2 t + UT
We have only 2 cases:
Y
1>0, 2<0 sales is increasing then
decreasing

1>0, 2>0 sales is increasing

T

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Projection of Exports:
If the project is oriented towards exports totally or partially it is necessary to
estimate sales in the external market using the projection of exports indicator

In order to do this we have to use historical data by determining the total
national exports of the product to the foreign market (x1) and total exports of
the product in the international market (x)
R = Penetration Power =X1 / X
1) X: Total world Exports.
2) X1: country Exports

To determine the projected exports and to check the capability of foreign market
to absorb these exports, we apply the following formula:
N = X / Q
1) N: Number of projects that the foreign market can absorb.
2) X: Expected increase in the international and market.
3) Q: Capacity of the project.

When N > 1: The foreign market is able to absorb more than one project or the
international market is wide enough to absorb the production of the project and
this known to be the necessary condition.

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Example:
Assume that the following is a time path of total sales (Yt/St) for commodity x
and for output Qd is estimated through a period of time of ten years from 1999
to 2008, where 1999 is the base year
St = 100 + 5t + 0.5 t .
Giving that min level of optimum size is 10 million and Qd = 75 + 2t.
Estimate the demand GAP (Gt) through the period of 2009 to 2015, nothing that
the total output of the product is domestically produced.
Step One:
Gt = demand gap =St Qd
Gt = 100 + 5t + 0.5t -(75 + 2t)= 100 + 5t + 0.5t -75-2t =25 + 3t + 0.5t
2

Step Two:
Substitute in the equation example:
G10 = 25 + 3(10) + 0.5(10) = 105
G11 = 25 + 33 + 0.5 (11) = 118.5
Year Number Of Years (t)
GT
substitute with
t in Gt
Equation
K
=GT/10
2009 2009-1999=10 105 10
2010 2010-1999=11 118.5 11
2011 2011-1999=12 133 13
2012 2012-1999=13 148.5 14
2013 2013-1999=14 165 16
2014 2014-1999=15 182.5 18
2015 2015-1999=16 201 20


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The market is able to absorb more projects every year which means that there is
a good investment opportunity

Y
ST
100
GT Qd
75

T