Preparing Feasibility Study

By
Khaled Ayesh, MBA
World Bank, InfoDev-funded Business
and IT Incubator,
Islamic University, Gaza

Training Outline

Definitions/introduction
Purpose of preparing feasibilities
Component of the feasibility study
How to prepare a feasibility study
How to analyze the investment climate
How to figure out external business opportunities
Marketing study
Technical study
Financial study
Financial analysis/statements/ratios
Environmental Impact study
Cost and benefits analysis
How to evaluate an investment projects
Payback period
Net present value/Discounted cash flows
Internal rate of return

Definition of feasibility
study
is a comprehensive study that examine
the viability of an idea that has a
business potential and advanced
to a stage where the prospective
project is socially responsible,
commercially viable and feasible
business opportunity exit.

A FRAMEWORK FOR NEW VENTURE CREATION

Policy Environment
Innovative Idea
Entrepreneur

Venture
Concept

Market Opportunity

Test of
Potential

Test of
Feasibility

Prove viability
Create initial
prospectus to
seek resources

Prove feasibility
Prepare for
implementation
Gather resources

Resources III
Resources I

Resources II

Viability Info
(general market,
process, org., etc.)
Sweat Equity

Feasibility Info
(specific market,
process, org., etc.)
Initial Equity

Prop., Plant & Eqmt

Personnel
Management
Buyers
Suppliers
Advisors/Partners
Full Debt & Equity

Industry and Market Environment

New
Venture

The Purpose of feasibility

study
For Startups micro project;
New established small business;
Expanding existing businesses;
Testing the technical viability, financial

viability, market viability.

Developing new product/service,
Advocating the project with key governmental
body, donor agency financing,
Selling the project for further local ownerships.

Sources of Investment
Opportunities

Screening innovative ideas

Reviewing country importing items
Assessing local community needs of public

services: education, health, infrastructure, etc.

Projecting future demands on certain products
and services
Examining current diversified industrial trends
Reviewing available skilled and workforce
Participating in international trade fairs/shows
Market intelligence studies/experts researches

Pre-feasibility study
1. Describing a Product or service
2. Describing market supply and demands
3. Describing Production methodologies
4. Describing initial inputs and
5.
6.
7.

infrastructure supporting services.

Selecting the right location/place
Estimating Capital and operational
costs
Estimating sales/revenues and profit

1. Describing Product or
service

Describing product or services

characteristics
Quality component
Physical shape
Product features/benefits/adding
value
Ingredients/formula
Describe competing product
Describe other product Substitutes

2. Describing market
Where is the product produced?
What is the number of similar factory or

providers of this type of product and in

what capacities?
Estimating the current and future
consumption pattern.
Any incentives provided by government
Reviewing to GDP/Export/Import
lists/market shares.
Projection of market supply vs. demand
Similar product prices and substitute prices

3. Describing Production
methodologies

Describing production processes

Describing the type and kind of equipment,

technical methodologies, etc.

Explaining the technology used, skilled
labor needed, quality control measures,
Process engineering, drawings, technical
flow chart,
The type of maintenance and specialized
knowledge of technicians
The sources and estimate the cost of
machines, equipment, automation
providers
Piloting and testing of the prototype,
formula, product in the market.

4. Describing initial inputs and

infrastructure supporting
services

Availability of inputs of raw materials

Infrastructure services of roads, sewage,

water, electricity, cleaning disposals, etc.

Availability of good relationships with main
suppliers.
Governmental support and tax benefit
brackets
Industrial zone, business support
centers/incubators.
Bank financings
Other supporting industry: packaging,
marketing, logistics, trade facilitation,
technology, etc.

5. Selecting the right

location/place

Access to market
Strategic location fitness
Exhibition shows
Access to industrial support facilities
Access to public infrastructure
services
Environment friendly location
Socially respected location
Community outreach comfort

6. Estimating Capital & operational

costs
Estimating the costs of fixed assets:
Land, factory building,
Capital Machinery, equipment, furniture
and fixtures.
Current assets of stocks, inventory,
Estimating the costs of running expenses:
Salaries for staff, overhead utilities, rent,
electricity, communications, water, fuel,
maintenance, labor, distribution,
advertisement, transportation, etc.

7. Estimating Revenues and

Profit

Projection of Total annual sales

Projection of cost of goods sold
Projection of overhead,

administrative and variable expenses

Projection of the profit margin
Total Sales Cost of Goods Sold =
Gross Profit
Gross Profit Overhead, admin,
variable expenses = Profit

Writing Exercise
Work in Group of 5 person
Review the success stories
:
:

Chose a business opportunity

Start writing the following pre-feasibility
study key section:

1.
2.
3.
4.
5.
6.
7.

Case study-Pre-feasibility study

format
Description of a product/service
Description of the market
Description of production methodologies
and technology used
Description of available infrastructure
supporting services
Description of the needed labors and
skilled workers
Description of cost estimates: Capital and
operating expenditures
Projection to revenues and profits

Second Training Day

Preparing feasibility study

Why Complete A Feasibility

Study?
A comprehensive feasibility study
allows the user to
Determine if a market for a product
exists
Develop and describe the production
processes required
Determine the costs associated with
producing the product
Determine if the enterprise is
profitable!

1. Marketing Study
Market analysis of the a

product/service
Description of the production capacity
Projection of the demand on this
product/service
Estimating the future
demands/supply/imports/exports on
certain product/service
Analyze the competition and major
competitors

Determine Your Market

This is the most difficult part
Should be divided into seven key parts
1.
2.
3.
4.
5.
6.
7.

Consumption
Markets
Distribution system
Market entry
Buyers
Selling Arrangements
Prices

1. Consumption
What is the current consumption of

the product or service?

What are the current trends in
consumption? Is consumption
increasing or decreasing?
How is the product or service being
consumed? (Packaging, volumes)

1. Consumption cont.
What is the quality of the product that

is being consumed?
Who consumes the product? What are
their demographics? (Age, income,
educational levels, marital status,
family size)
Are these demographic segments
growing or shrinking?

2. Markets
What is the current structure of the

marketplace?
Who is currently supplying these
products to customers?
What will be the reaction of these firms
if a new firm enters the market?
Can a firm compete with existing firms
or other potential entrants?

2. Markets cont.
What are the implications for a firm
who wants to expand its market?
What are the costs?
What revenues can be expected?

Where are the markets (customers)

located? Are they local, regional,

national, or international? What will it
cost to serve them?

3. Distribution System
Will it be necessary to provide delivery
services?
What delivery schedules will be
required?
What common carrier options are
available?
Should the firm provide delivery itself?
Should delivery equipment be
purchased or leased?

4. Market Entry
How will the product or service be

introduced to the market?

Will the product be marketed under
the companys name or under some
other name?
What will attract buyers? (Low prices,
advertising, promotion, customer
service, or some other method)

5. Buyers
Will you sell directly to consumers or
go through a middleman buyer?
What types of buyers will purchase
the product?
Where are they located?
What product specifications will they
require?

5. Buyers cont.
Have potential buyers expressed an

interest in the product?

What type of purchasing commitments
are buyers willing to make?
How reliable are the buyers?
What type of payment schedules will
be encountered? How severely will this
affect the firms cash position?

6. Selling Arrangements
What type of selling services will you

need to provide?
Will you need to employ a sales force
or go through a buyer?
If you employ a sales force, how
many people will this require? What
is their compensation plan?

6. Selling Arrangements
.cont.
How will they be selling the product?
What are the costs of these

activities?
Should you have sales offices located
throughout your geographic market
area?
Why have you chosen one method of
selling activities over another?

7. Prices
Setting a price is a critical activity in
the market portion of the study.

The price must be high enough to

cover all costs and provide you a

profit, but low enough that
customers will purchase the product
or service.

7. Prices cont
To help determine the price, look at:

Past prices of the industry

Current price trends
Expectations of buyers (brokers)
Expectations of consumers
Quality levels of substitutes or
competitors

These factors only help you set a

price. They cant set the price for you

Consider price elasticity of demand before changing

prices

2. Technical Study
Description of production methodology
Identifying the required

equipment/technology/machinery
Identifying the location, space, engineering design,
technical drawings, etc.
Description of the required energy, fuel, water,
transport, logistics and other infrastructure services
Estimating the required raw materials, capacity,
machinery maintenance, labor, IT, the size of factory,
etc.
Preparing the manufacturing design, drawings,
leveling, basement, construction, infrastructure,
finishing, electricity, water, health and safety
measures, labor training, etc.
Projection of fixed cost ad operating cost

Production Process
The production process section of the

study is divided into the following parts:

Raw materials
Availability
Future Supply
Facility Determination
Investment Capital Needs
Labor needs
Production costs

Facility Determination
The minimum size facility to make

the enterprise economically feasible

must be determined.
Determining this size plant requires
the simultaneous analysis of both
demand (marketing) and supply
(production including raw product).
The plant must be of sufficient size to
maintain a low enough production
cost per unit and but not large
enough to overload the market niche.

3. Financial Study
Estimate of capital expenditures
Estimate of operational expenditures
Estimate of revenues for the coming 5 years
Estimate the sales over the life of the project
Propose financing plan and equities structure
Projection of the expected profits under
various assumptions
Financial analysis and ratios

Investment Capital Needs

What is the required capital investment
necessary to construct the production
facility?
What form of financing must be utilized
to secure these funds?
What is the cost of these funds and
what restrictions are attached to their
use?

Operational Costs
Includes items such as:

Wage rates
Management costs
Raw material costs
Utility rate structures
Fixed Costs (Depreciation, Taxes, Interest,
Insurance)

Costs should be broken down into a per

unit basis

Profitability
Given the estimated revenues from the
marketing section and the estimated
costs from the production section, the
profitability of the enterprise can be
ascertained.
Profitability is defined as the excess of
revenues over expenses.
There are two distinct measures of
profitability.

Profitability Measures
Tax Profitability
Revenues minus expenses
This is the amount on which you pay
taxes.

Economic Profitability

Revenues minus expenses minus a

return to the owner.
This captures the value of the management input of the owner.
Excess returns are considered economic
profit.

Profitability Charts
Break-even analysis
Shows the level of production where
revenues will just cover costs.
Prepare this on a tax profitability and an
economic profitability basis.

Show the effect of risk on profitability

Prepare sensitivity analysis to determine
effect of various revenue and cost
streams on profitability.

Working Capital
Working capital is the cash used for day-today expenses such as the payroll, utility
bills, etc.
Adequate working capital is crucial to
business survival
The cash flow statement demonstrates the
need for working capital at specific points
in time
Shows the uses of cash
Demonstrates the need for additional
borrowings

4. Management & Organizational

Study
Identify the required organizational structure

for the project, department and units

Description of the main roles and
responsibilities for each department and units
Identifying main positions, jobs descriptions,
roles and responsibilities,
Key competencies and skills among staff
Preparing management structure and HRM
manual
Recommending of the legal entity of the
project
Projecting the required HR and HR
Development plan

Labor
How many employees will be required to
run the production facility?
Compare facility needs to the local labor
force.

What special skills will be required? Are these

available from the current labor force?
The local unemployment rate is not
necessarily an indicator of the labor force.

Where will management and technicians

come from? What costs are involved in
getting them to work for you?

5. Socio-economic Study
The contribution to social benefits
Adding value to local needs
Offering a product/service
Social responsibility and community

outreach support
Contribution to local demands and
Trade balance
Cost and benefits analysis
Contribution to the added value
Contribution to generate more investment
and business opportunities and
employment opportunities.

6. Environmental Impact
assessment study
Assessing environmental impact of the

project
Assessing the project risk assessment on:
natural resources,
pollutions,
solid waste,
disposing industry waste and
biodiversities impact.
Other environmental risk and hazards,
chemical treatment, emissions, poisons, etc.

Case studies review

Housing Construction Company

Bakeries

Third Training Day

Evaluating Feasibility Study

Factors That Drive Costs

Economies of scale
Asset utilization
Capacity utilization
pattern
Seasonal, cyclical
Interrelationships
Order processing
and distribution
Value chain linkages
Marketing & sales
Logistics &
operations
Service

Product features
Performance
Mix & variety of products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation

Factors That Drive

Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Extensive personal relationships with
buyers and suppliers

Evaluating Feasibility Study

Implementation check and

Fitness of time schedules,
Cost estimates,
Viability and validity of the assumptions,
Financial feasibility:
1. Capital expenditures,
2. working capital,
3. cash flows,
4. equities structures,
5. debt ratios,
6. financial analysis and profitability.

Financial Assessment
Payback period
Rate of return
Break even analysis
Rate of internal returns
Net Present value
Discounted cash flows

Payback period
Payback period = total $

investment/annual income

Example:
One project spent $50,000 and
earned annual income $10,000
Payback period =
Calculate: ???

Rate of return
Average annual accounting income from project
Average annual investment in the project
= Return on investment (ROI)
Average annual investment =
Salvage value at end) 2

(Initial investment +

Advantages of ROI method:

Simple to explain and compute using financial
statements
Rate of return = average profit after tax/average total
investment
Average profit after tax= Total annual profit/number of years
Average total investment = Total investment (value of
starting assets) + (value of ending assets)/2

Breakeven Analysis
Breakeven point QBE is the number of units that must be
sold at price P such that total revenues (TR) equal total
costs (TC).
TR
(P QBE) =
[(P - VC) QBE]
QBE
QBE

=
=

=
TC
[FC + (VC QBE)]
=
FC
[FC(P - VC)]
(FCCM)

At breakeven, the total contribution margin equals fixed costs.

(CM QBE)
=
FC

Use break even analysis to determine sales volume

needed to become profitable

Rate of internal returns

Internal rate of return (IRR) is the interest rate that
equates the present value of future cash flows to the
cash outflows.
By definition: PV = FV (1 + irr)
Solution for a single cash flow: irr = (FV PV) - 1
Comparison of IRR and DCF/NPV methods
Both consider time value of cash flows
IRR indicates relative return on investment
DCF/NPV indicates magnitude of investments return
IRR can yield multiple rates of return
IRR assumes all cash flows reinvested at projects
constant IRR
DCF/NPV discounts all cash flows with specified
discount rate

Net Present value

1. Identify after-tax cash flows for each period
2. Determine discount rate
3. Multiply by appropriate present-value factor
(single or annuity) for each cash flow. PV
factor is 1.0 for cash invested now
4. Sum of the present values of all cash flows =
net present value (NPV)
5. If NPV 0, then accept project
6. If NPV < 0, then reject project
NPV is also known as discounted cash flow
(DCF).

Value of a firm is equal to the present

value of its expected cash flows

Example: Valuation of Coca Cola using

DCF method

Main components of an income

statement
Sales
Cost of goods sold
Gross profit
Operating expenses
Total operating
expenses
Net income before
taxes
Taxes
Net income

Main components of a
balance sheet

Assets

Liabilit
ies and
Owner
s

Cash flow is not a stand alone

statement

Balance sheet and income statement are not

considering the timing of receipt and payment
of cash in recognizing assets, liabilities, owners
equity, income and expenses.

Cash flow statement tracks the timing of

receipts and payments of cash to help the
business analyze its cash flow situation.

Cash flow statements is prepared on the basis of

financial information in the income statement

and balance sheet.

Cash flow statement is divided to 3

sections
Operating activities: principal operating activities of the
business. Main items considered are:
Revenues
Accounts receivable
Expenses
Accounts payable
Prepaid expenses
Investing activities: long term items. Main items considered are:
Fixed assets
Long-term investments
Financing activities: how the business is financed. Main items
considered are:
Capital
Dividends
Loans
Interest

How the cash flow statement is

prepared?

There are 2 ways to prepare the operating section

of the cash flow statement:

Direct method: translates income statement items
item by item using information in the balance
sheet. For example; revenues in the income
statement are translated to cash receipts from
customers using the change the accounts
receivable from the comparative balance sheet.
Indirect method: starts with net income in the
income statement and reconciles it to net cash
provided
by
operating
activities
through
considering items in the balance sheet and income
statement.

Comparative Financial Analysis:

Key Ratios
Type

Examples

Measures

Indicators
Productivity of

Profitability

Return on
Equity (ROE)

Profit after taxes

firms value-adding
Shareholders equity activities

Liquidity

Current Ratio

Current Assets
Current Liabilities

Measure of
financial solvency

Asset Turnover

Sales_________
Total Assets

Asset use
efficiency

Inventory Turnover

Sales_________
Inventory

Turnaround of
inventory

Debt/Equity Ratio

Corporate
Liabilities______
financing; financial
Shareholders equity risk; default risk

Activity

Leverage

Basic ways to improve ROA and ROE

Exercise: ROE and ROA

A firm has the
following financial
data:
Assets =$ 200,000
Liabilities = 0
Equity = $ 200,000
Revenues = $200,000
Expenses = $180,000
Complete the ratio
decomposition and
determine
the ROA and ROE.

Exercise: ROE and ROA

A firm has the following

financial data:
Assets = $200,000
Liabilities = 0
Equity = $200,000
Revenues = $200,000
Expenses = $170,000
Complete the ratio
decomposition and
determine
the ROA and ROE.

Economic Assessment
Cost and benefit analysis
Can an estimate of required capital

investment be made?
Contribution to economic development
Contribution to job creation and
employment
Contribution to trade balance and
export market
Contribution to added value and
GDP

Environmental Assessment
What is the expected environmental

effect of the option?

How significant is the estimated
reduction in wastes or emissions?
Will the option affect public or
operator health (positive or negative)?
If so, what is the magnitude of these
effects in terms of toxicity and
exposure?

Information required when

undertaking feasibility
study
Population statistics:
Demographics statistics
Socio-economic factors
Education
Housing Statistics

Income Levels
Income per capita
Income distribution
Income and consumption distribution
Consumer preferences
Consumption trends

Law and legal data and policies

of public services
Restriction on imports
Customs tariff
Pricing policy
Regulation and de-regulation
Trade agreement
Industry free tax zones
Incubators

Data about the

product/service

Local production
Local demand and supply
Import/export products
International trends in international
markets

Data on Product Prices

Prices of competitors products
Prices of similar products
Prices of related products
Price wars and strategies adopted
Prices of wholesales and in retail

prices
Trends on international market prices

Competitor analysis &

market intelligence studies
Competitor analysis
Market intelligence studies

Research and Development

Researchers and Scientific Centers
Others market researches and

development
Hi-tech industry development center
Technology laboratory
Innovation and product development
institution

External Environmental
Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment

The External
Environment
Strategic Intent
Strategic Mission

General Environment
Socio-cultural segment

Women in the workplace

Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences

General Environment
Economic segment

Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product

General Environment
Political/Legal Segment

Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies

General Environment
Technological Segment

Product innovations
Applications of knowledge
Focus of private and government-supported
R&D expenditures
New communication technologies

General Environment
Global Segment

Important political events

Critical global markets
Newly industrialize countries
Different cultural and institutional attributes

General Environment
Demographic Segment

Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution

Industry Environment
A set of factors that directly influences a

company and its competitive actions and

responses
Interaction among these factors determine an
industrys profit potential

Threat of new entrants

Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry

Five Forces Model of

Competition
Identify current and potential competitors
and determine which firms serve them
Conduct competitive analysis
Recognize that suppliers and buyers can
become competitors
Recognize that producers of potential
substitutes may become competitors

Five Forces Model of

Th
g
n
Competition
re
mo r ms
a
to
fN
ew

ut e
bstit
f Su
ts
eat o
Thr Produc

Five Forces of
Competition
Bargaining Power of
Buyers

En
tr a
nt
s

Bar g
aini n
g Po
w
Sup
pl ier er of
s

A Fi
y
lr ing
a
v
t
Ri pe
m
o
C

Threat of New Entrants

Barriers to entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation

Bargaining Power of
Suppliers
A supplier group is powerful when:
it is dominated by a few large companies
satisfactory substitute products are not available

to industry firms
industry firms are not a significant customer for
the supplier group
suppliers goods are critical to buyers
marketplace success
effectiveness of suppliers products has created
high switching costs
suppliers are a credible threat to integrate
forward into the buyers industry

Bargaining Power of Buyers

Buyers (customers) are powerful when:
they purchase a large portion of an industrys

total output
the sales of the product being purchased
account for a significant portion of the sellers
annual revenues
they could easily switch to another product
the industrys products are undifferentiated or
standardized, and buyers pose a credible threat
if they were to integrate backward into the
sellers industry

Threat of Substitute
Products
Product substitutes are strong threat when:

customers face few switching costs

substitute products price is lower
substitute products quality and performance
capabilities are equal to or greater than those
of the competing product

Intensity of Rivalry
Intensity of rivalry is stronger when competitors:

are numerous or equally balanced

experience slow industry growth
have high fixed costs or high storage costs
lack differentiation or low switching costs
experience high strategic stakes
have high exit barriers

High Exit Barriers

Common exit barriers include:

specialized assets (assets with values linked to

a particular business or location)

fixed costs of exit such as labor agreements
strategic interrelationships (relationships of
mutual dependence between one business and
other parts of a companys operation, such as
shared facilities and access to financial markets)
emotional barriers (career concerns, loyalty to
employees, etc.)
government and social restrictions

Case study
Complete feasibility study format
and writing exercises:
Topics to be determined:
1.
2.
3.
4.
5.
6.

Agribusiness
Retail Industry
Service industry
Manufacturing industry
ICT
others

Feasibility outline format

1.
2.

Executive Summary
Regional Socio-Economic Situation (General
Description of the current situation). Most likely
including brief on your local economy.
3. Legal Study
4. Financial Plan
5. Project Implementation Schedule
6. Market Study and Marketing
7. Detail Description of Activities
8. Environmental protection
9. Control
10. Financial Analysis and Projections
11. 11) Social Economic Effects / Multiplier effects,
related studies
12. 12) Options Analysis on different hypothesis and
scenarios

Writing pitfall for feasibility

study

Summary guide when writing key

components

Feasibility Study Contents

Venture Concept
Market Assessment
Technical Feasibility of your idea
Your Marketing Plan
Managing the Supply Situation
Conduct cost and profitability
assessment
Plan for future action

Feasibility Study Contents

Venture Concept
Explain clearly and concisely the principal
concept underlying your venture and what sets
it apart from other businesses
Market Assessment
Describe the profile of your principal target
customers
Indicate current market size, trends and
seasonal patterns
How do you plan to test your idea?
Describe any market research or customer
surveys you plan to conduct
Assess the nature of your competition
Estimate your expected sales and market share

Feasibility Study Contents

Technical Feasibility
Indicate the degree of innovativeness of your
venture idea and the risks associated with it
Does it need to be subjected to some form of
technical evaluation or assessment?
Does the business need accreditation?
Do you have a prototype? Has it been
tested from a technological point of view?
Will it have the specifications to meet the
needs and expectations of the market?
Can it be mass produced? Job shop
production? Sub contracted?

Feasibility Study Contents

Your Marketing Plan
Detail the marketing strategy you plan to
use
Describe your marketing plan including
your sales strategy, advertising and
promotion plans, pricing policy and
channels of distribution.

Feasibility Study Contents

Managing the Supply Situation
How do you plan to assure continuing
access to critical supplies of raw materials
and component parts at reasonable prices?
Will you produce or subcontract your
production?

Feasibility Study Contents

Cost and Profitability Assessment
Estimate funds required to set up your
business
Develop short-term financial projections
including:
Cash flow forecasts
Pro forma profit and loss statements
Pro forma balance sheet
Break even analysis

Feasibility Study Contents

Plan for future action
What were the strong and weak points of
your venture idea?
Did your assessment indicate the business
was likely to be profitable?
Is it sufficiently attractive to proceed with
the development of a complete business
plan?

Any comments?
Thanks for participation
If you need any help, feel free to send your
queries/questions through:
Consulting Group for Development, CGD
By: Khaled Ayesh
Chief Technical Advisor and Team Leader
Email: k.ayesh@hotmail.com
Jawwal: +972-599-689118