CHAPTER

PROJECT FEASIBILITY

FEASIBILITY STUDY
The feasibility study involves
Market analysis Technical analysis Environmental analysis Financial analysis Social cost benefit analysis.

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Market Analysis
Aim: To identify the need or the potential demand for the product or service resulting from the project. Objectives for the study are spelt out in question form and can be grouped under the four Ps of marketing. Let us consider a firm that plans a project to set up a unit to manufacture domestic airconditioners
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Objectives of Market Study

Product. Who are the buyers of air-conditioners? What is the current total demand? How is the demand distributed (geographically as well as seasonally)? What is the break up of the demand (by sizes and models)? Price What price is the customer willing to pay? What will be the cost of production? Place What should be the channels of distribution? What should be the trade margins? Promotion How can customers be convinced of the superiority of the air-conditioner over those produced by competitors? How should the customers be made aware of the attributes of the product?
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Secondary Information
Issues to consider
Purpose Person Method Time Sample

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Technical Analysis
Manufacturing process and technology Material inputs and utilities Product mix Plant capacity, location and layout Machines and equipments Civil works and structures Project charts, layouts and work schedules.
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Selection of Technology
What will the technology do? What will it not do? What inputs will it require? What will it cost? How certain are the above? Sources of Technology. Technology may be developed in-house by the firm or may be acquired from outside the organisation either from abroad or indigenously.
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Technology Acquisition - Issues

Long term relationship Components Uncertainty Costs Sources

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Technology Acquisition Process

Identification
Choice of technology is dictated by plant capacity, the principal inputs available, capital outlays, product mix and the ease of absorption Component required Licensing agreement, an outright purchase of technology or a joint venture with the supplier of technology.

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Technology Acquisition Process

Evaluation
Does it use local raw materials which are easily available? Can it be used by the local inhabitants? Does it conform to the knowledge and skills available locally, or will it require that highly skilled and trained man power be brought in from elsewhere to operate the technology? Will the products and services produced or facilitated by the technology meet the basic needs? Is the technology ecologically friendly and will it maintain environmental harmony? Is it in harmony with the local social and cultural norms?

Source Negotiations
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Technology Transfer Agreement

Definition Technology Package Payment Duration Access to improvements Rights and obligations

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Technology Transfer Agreement

Indemnification Exclusivity or non-exclusivity Force Majeure Arbitration Governing law

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Financial Analysis
Financial analysis aims at studying the financial viability of a project. It is concerned with the financial profitability of the project. This involves the estimation of the cost of the project and an estimation of cash flows that will result after the project is completed. Criteria used net present value, internal rate of return, return on investment and benefit cost ratio.
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Project Costs
Land and site development Building and civil works Plant and Machinery Miscellaneous fixed assets Pre-operative expenses Preliminary expenses Capital Issue expenses Provision for contingencies Technical know-how fees Margin money for working capital
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Means of Finance
Equity Preference Capital Term loans Debentures Deferred credit Miscellaneous sources

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Profit Loss Statements

A. B. C. D. E. F. G. H. I. J. K. L. Revenue from sales and other income. Operating expenses. Gross profit A B. Interest on term loans and short term borrowings Depreciation and amortisation of preliminary expenses Profit before tax C D E Tax Profit after tax F G Dividend on preference shares and equity shares Repayment of loans Retained profit Net cash accrual K + E
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Profit Loss Statements

Stream of cash flows is obtained from the profit and loss statements. In the final year of the life of the project, salvage value of assets, final settlement of all loans and working capital are also taken into account.

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Net Present Value

Managements minimum desired rate of return is used as a discounting rate
n

NPV
I0 Ft k

I0
t 1

Ft where t (1 k )

Initial investment (since it is an outflow, it is negative) Net cash flow for period t Required rate of return

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Internal Rate of Return (IRR)

Discount rate at which NPV is zero.
n

I0
t 1

Ft t (1 k )

0 where

I0 Ft k

Initial investment (since it is an outflow, it is negative) Net cash flow for period t Internal rate of return

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Return on Investment
Commonly used methods
Average income after tax/Initial investment Average income after tax/Average investment Average income after tax but before interest/Initial investment Average income after tax but before interest/Average investment Average income before interest and tax/Initial investment Average income before interest and tax/Average investment
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Other Methods
Benefit cost ratio
Benefit Cost Ratio = Present value of benefits/Initial Investment

Pay back period - the time that would elapse before the initial investment is fully recovered.

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Environmental Analysis
Environment. The environment of man consists of everything that is outside him. According to The Environment (Protection) Act, 1986, environment includes water, air, land and the inter-relationship that exists between water, air, land and human beings, other living creatures, plants, micro-organisms and property. The definition includes interaction between the nonlife components and their interaction with living beings.
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Definitions
Environmental pollutant. The Act defines an environmental pollutant as any solid, liquid or gaseous substance present in such concentrations as may be, or tend to be injurious to environment. Environmental pollution. It is the presence in the environment of an environmental pollutant.
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Environmental Impact Assessment (EIA)

It is a tool used to identify the environmental, social and economic impacts of a project prior to decision-making. Aims
to predict environmental impacts at an early stage in project planning and design find ways and means to reduce adverse impacts shape projects to suit the local environment present the predictions and options to decisionmakers.
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EIA Study - Steps

Scoping Identifies key issues and concerns of interested parties. Helps in site selection and in identifying possible alternatives Screening Identifying and evaluating alternatives Mitigating measures

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Environmental Impact Statement (EIS)

A description of the project, its purpose, its location, its size its design and technical details such as materials to be used and so on. Description of the significant effects of the project. This should include the effect of the project on each component of the environment, describing the nature and severity of the impact. For Government projects, the effect on plans for land usage and surrounding areas should also be included. Private projects which would affect land usage in surrounding areas are not permitted to be undertaken.
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Environmental Impact Statement (EIS)

Possible alternatives should be spelt out in the EIS, both in terms of alternate sites and alternate projects which do not cause adverse effects to the same degree as foreseen in the project under review. The report should list details of the possible remedial and mitigating measures that will be adopted to prevent, avoid and reduce the adverse effects and the extent to which these effects will be reduced. The residual adverse effects of the project despite the mitigating measures adopted.

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Environmental Impact Statement (EIS)

Evaluation of the commercial and social desirability of the project vis--vis the adverse impact on the environment caused by it. Amount of resources that have to be committed irretrievably to the project.

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Mitigating Measures
Life cycle Assessment Environmentally sound technologies Cleaner production Eco-design Supply chain management Environment Management System

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