DR. MA. TERESA V.

GONZALES

Project feasibility study is the systematic investigation which ascertains whether a business undertaking is viable and if so, the degree of its profitability.

One of the most important uses of a project feasibility study is the minimization of the risk of failure of business ventures thereby reducing the waste of valuable resources. Immediate causes of business failure such as: a. Undetected presence of a more superior competing product, b. Failure to perfect the manufacturing process, c. Failure to sell the goods at a reasonable price d. Failure to raise adequate working capital and many more,

The other benefits that may be derived from the preparation of a project feasibility study are as follows: A. To the Promoters or Proponents of new projects 1. To ascertain viability of new projects. 2. To choose from among the alternative projects or project to be pushed through. B. To Shareholders 1. To evaluate if an investment on a project or existing enterprise should be made or not. 2. To decide to sell an existing company and if so, at what price.

C. To management of existing enterprises 1. To determine feasibility of expansion program 2. To determine a reasonable price of an existing business it is considering taking over. D. To lending Institutions 1. To ascertain whether financial assistance should be extended or not. 2. To determine the term and conditions should the loan be given. E. To the government agencies 1. To determine if a project is entitled to government incentives and level of such incentives. 2. To assess the social desirability of a project. 3. To determine whether provisions for environmental protection have been made.

Limitations A project study may also have certain limitations and these are: 1. Certain necessary and required information may not be available. 2. Error in judgement by the person making the study either due to his incompetence or inexperience may result in formulating wrong conclusions/recommendations. 3. The study is basically a forecast. Any significant change in actual business conditions as compared to the assumptions used in making the forecast will render the study useless.

Sources of Data of a Feasibility Study Although investment and production costs should be estimated as accurately as possible, the costs and time involved in obtaining data are not always justified and it may therefore sometimes be necessary for the project team to rely on assumptions which should be so stated in the study. Investment cost estimates are made by Calling for bids based on specifications and bills of quantities (most accurate but most expensive and time consuming method); Using prices from similar projects; Using the unit cost parameters derived from comparable operational projects (e.g., cost per square meter of built-up area); Estimating the totals for groups of equipments of functional project parts based on costs of comparable, existing projects.

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Investment cost estimates based on cost parameters should be adjusted taking into account such factors as: Annual inflation rates Changes in foreign exchange rates Differences in local conditions Different laws and regulations Accessibility of the construction site
Production cost estimates will depend upon the availability of data on such input requirements as material, manpower and overhead. Sources of data include Quotations from suppliers for materials and other supplies; Prevailing labor laws; Reference data published by industrial associations, equipment manufacturers, development banks and international organizations.

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Project Team It is advisable to have a feasibility study conducted by a team of experts. As a general rule, the members of the team should be selected to cover the major substantive fields of the project.
Cost of Studies There are no established norms governing the cost of pre-investment studies; these differ from project to project and from study to study and depend such factors as 1. The magnitude and nature of the project, 2. The type, scope and depth of the pre-investment study, 3. The agencies commissioning and undertaking the study, and 4. The time and effort required to collect and assess the necessary material.

Areas covered in a project study 1. Organization and management This will cover the study of the type or form of business organization, requirements as to control of Filipinos in the stockholdings of a corporate form of organization and organizational structure within the enterprise. 2. Marketing This will involve the study of the present and future demand and supply for the product, competition, selling prices and marketing plan for the product. 3. Technical This will cover the study of the production process, plant capacity, plant location and layout, structural specifications and other operating requirements. 4. Financing This will cover the determination of the financing requirements, financing leverage as well as the possible sources of financing.

5. Financing This will cover the determination of the financing requirements, financing leverage as well as the possible sources of financing. 6. Financial Projections This will cover the presentation of the expected profitability, cash needs and cash sources based on the results of the study of the marketing technical and financing requirements. 7. Profitability This will show the relationship between capital to be invested and expected net profit known as the return on investment.

8. Social Desirability This will cover the study of the benefits to be obtained from an undertaking in terms of its contribution to the community, to other business firms and to the national economy as a whole. The social benefits that may be derived from a project could be in the nature of 1. Increases taxes paid to the government 2. Provision of employment opportunities 3. Construction of roads, bridges, etc. 4. Increased peso inflows to the country.

Steps in the preparation of a project study The preparation of a project study involves the following basic steps: 1. Gathering and collection of data through research work which are necessary and relevant to all aspects of the undertaking. 2. Evaluation and analysis of the data obtained. 3. Formulation of conclusion and recommendations. Outline of a Feasibility Study A. Executive summary: a. Name of applicant b. Business Name c. Location Head Office Project site d. Brief description of the project e. Highlights of major assumptions and summary of findings and conclusions regarding the following: 1. Market feasibility 2. Social or Economic desirability 3. Technical feasibility 4. Financial feasibility

B. Project background and history: Name and address of project promoter Project orientation: market or raw material oriented Market orientation: domestic or export Economic and industrial policies supporting the project C. Economic aspect: a. Demand and market 1. The estimated existing size and capacities of the industry (specifying market leaders), its past growth, the estimated future growth (specifying major programs of development), the local disperal of industry, its major problems and prospects, generally quality of goods. 2. Past imports and their future trends, volumes and prices; 3. The role of the industry in the national economy and the national policies, priorities and targets related or assigned to the industry. 4. The approximate present size of demand, its past growth, major determinants and indicators;

b. Sales forecast and marketing 1. Anticipated competition for the project from existing and potential local and foreign producers and supplies; 2. Localization of market(s); 3. Sales program; 4. Estimated annual sales revenues from products and by-products (local/foreign); 5. Estimated annual costs of sales promotion and marketing; D. Technical aspect: a. Production program 1. Products; 2. By-Products; 3. Wastes (estimated annual cost of wastedisposal); b. Determination of plant capacity 1. Feasible normal plant capacity 2. Quantitative relationship between sales, plant capacity and material inputs. c. Material inputs 1. Raw materials; 2. Processed industrial materials 3. Components 4. Auxiliary materials 5. Factory supplies 6. Utilities, especially power

d. Project engineering: 1. Preliminary determination of scope of project; 2. Technology(ies) and equipment; a. Technologies and processes that can be adapted, given in relation to capacity size; b. Rough estimate of costs of local and foreign technology; c. Rough layout of proposed equipment (major components); 1. Production equipment; 2. Auxiliary equipment; 3. Service equipment 4. Spare parts, wear and tear parts, tools.

d. Rough estimate of investment cost of equipment (local/foreign), classified as above; 3. Civil engineering works a. Rough layout of civil engineering works, arrangement of buildings, short description of construction materials to be used:
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Site preparation and development; Buildings and special civil works; Outdoors works;

b. Rough estimate of investment cost of civil engineering works (local/foreign), classified as above. E. Management a. Organizational Layout 1. Production 2. Sales 3. Administration 4. Management

F. Manpower: a. Estimated manpower requirements, broken down into labor and staff, and into major categories of skills (local/foreign); b. Estimated annual manpower costs, classified as above, including overheads on wages and salaries. G. Financial aspect: a. Total investment costs
1. Rough estimate of working capital requirements; 2. Estimated fixed assets 3. Total investment costs, obtained by summing the estimated investment cost items; 4. Financial Projection a. Projected Income Statement b. Projected Balance Sheet Statement c. Projected Cash Flow Statement 1. Production cost ( summary of estimated production costs, classified by fixed and variable costs); Estimated expenses/costs a. Factory b. Administrative

b. Project Financing c. Financial evaluation 1. Pay-off period 2. Simple rate of return 3. Break-even point 4. Internal rate of return

H. Social desirability aspect