Feasibility Study

Feasibility Study

Feasibility Study

The feasibility study defined as: “A scientific tool used to rationalize new investment decisions or to evaluate previously taken decisions, or to make a comparison between the available alternatives on technical and financial grounds and in the light of specific data related to the project location, operating costs, operating capacities, revenues, and the type of technology used and the employed workforce.”

It can also be defined as “a set of tests and estimates that are prepared with the intention of judging the viability of the proposed investment project, or the investment decision, in the light of expectations of direct and indirect costs and benefits, throughout the life of the project.”
The feasibility study is a set of studies conducted by a specialized team that has the ability to form an analytical viewpoint on the investment idea in a distinct way, through which you can achieve large financial profits, all of which is defined for you in a very distinctive way.

The feasibility study is divided into three main sections: the market study, the technical study, and the financial study

Objectives of the feasibility study:
  • Learn about all available investment opportunities in order to choose a successful project.
  • Work on developing new methods that contribute to the development and advancement of existing projects.
  • The economic feasibility study contributes to studying and deepening special concepts in all aspects of projects in terms of technology, technical, financial, and economic aspects.
  • The economic feasibility study helps to know the effective and advanced methods in the marketing process.
  • A feasibility study helps determine the types of operational technologies that can be used in projects.
  • The economic feasibility study aims to provide a set of expansion plans for the industries that the company will undertake and seeks to produce, or the services it will provide.
  • It also aims to know the implications of the investment proposals and to identify the mutual effects between them and the economy.
  • The economic feasibility study also aims to determine the pros and cons of the project that the client will undertake.
  • The study contributes to the selection of appropriate sources to finance the needs related to the project, the period of their availability, and their ability to provide the project with the money it needs.
Stages of the feasibility study and its components:

To understand the stages of feasibility studies and their components for investment projects requires identifying the stages of the project cycle: starting from studying investment opportunities and ending with the operation of those investments.
The investment opportunity is an idea that comes to the investor’s mind and only could be developed and implemented if it represents the optimal opportunity for investing his money and obtaining the maximum returns in the short term by achieving progress over others in transforming the idea into a new investment opportunity that is translated by the establishment of an investment project.
It is self-evident that the investment idea is not feasible and does not turn into an investment opportunity unless the technical knowledge is available and can transform the ideas into commodities or services, and also the size of the market (demand) is big enough to make the cost of production in the project competitive and can make the selling price of the product achieve a compatible profit margin in line with the industry average prices to which the project belongs.

Fields of feasibility studies:
  • Studies presented to entrepreneurs, investors, and owners of new projects to analyze the optimal roadmap for establishing and operating the project.
  • Studies submitted to financing funds for supporting local projects in the various emirates of the country, or to the banks, and other private funding institutions, or for the purpose of allocating lands and obtaining government grants from various governmental regulatory agencies.
  • Studies presented to owners of distressed projects or projects suffering from operational problems, with the aim of identifying weaknesses and diagnosing the best ways to restructure projects in order to improve their performance.
Feasibility Study

Market Study

In the beginning, the market must be carefully studied and the characteristics of the good or service must be determined and the way to deal with them must be defined.
There is a number of information that must be collected about the commodity or service to know whether they would be sold easily in the market.
This study aims to provide information on how to sell the good or service in the market and the ability to form a share in the market by knowing the factors of demand for that good or service.

The market study consists of a number of important items, as follows:

  • Analyzing the situation of the demographic population in general and the project’s customers in particular, and analyzing the market statistical indicators related to the project and within the sector to which it belongs.
  • Accurate analysis of estimates of the volume of demand and the factors affecting the current demand and the expected demand for project services in the target market, which covers the life of the project.
  • An accurate analysis of estimates of the size of the current supply and the expected supply of project services in the target market, an analysis of the current and expected future competitors of the project, and an analysis of their market shares and the characteristics of their competitive strength.
  • Identifying and analyzing the market gap between supply and demand, and determining the best ways to cover this gap with the best possible and practical strategies for the benefit of the project.
  • Determine the target markets for the services, products and activities of the project.
    Defining the marketing and selling plan and target market penetration strategies to bring success to the project.
  • Using a special analysis of the strategic situation of the project and its services, products and activities, which is known as the analysis of the four strategic points, SWOT analysis, which are strength, weakness, opportunities and threats that may face the project.

The demand study and its future expectations occupies a special importance for any economic establishment, not only during the preparation of the feasibility study in the establishing phase, but also in the operation phase, in order to ensure the selling of its products at appropriate prices during the economic life of the project, and to identify the possibilities of expansion and development on the existing production capacities are at the appropriate size and at the appropriate time.
The aim of the market study is the success of the project. Through the market study, it is possible to determine the extent of the market’s needs for the service or product offered by the new project, which makes the person in charge of the project reach a decision about the feasibility of that idea or project. Therefore, the person in charge of the project must perform a comprehensive and integrated study of the market, and one of the most important questions that must be answered when doing a market study is: Is this market good to operate in? Is the market wide enough to allow the presence of a new competitor? How can the new project compete and get the best financial profit?

Feasibility Study

Technical Study

The technical study helps the project’s owner to identify several important aspects and basics of operations of the project, through which the possible and appropriate size of the project is determined, the appropriate geographical location for it is chosen, and the appropriate production system and production lines are decided, as well as it helps to accurately organize the project from the inside, and to identify all the necessary needs to start implementing and operating the new investment project.
On the other hand, the technical study helps provide the necessary data and information to estimate the capital requirements for the investment project. Hence, care must be taken to ensure that the results of this study are very accurate, as any defect in the results will affect decisions related to the sources of financing the project.
The technical study consists of a number of important items, as follows:

First: determine the size of the project and its production capacity:

As it enables the project owner to effectively and efficiently use all project resources. It also helps describe the characteristics of the product and the methods of using and benefiting from it. The production capacity of the project can be measured by estimating the number of units that can be produced in a specific period of time within the cost limits.

Second: Determine production methods:

It depends on the available technological methods and their quality in achieving the project’s desired objectives, and producing products and describing the availability of the raw materials and human resources to the project, and determining the operating cycle through which the product is produced in its final form.

Third: Determine the necessary technical means and equipment:

After carrying out all the previous steps, the necessary technical equipment is determined in terms of the quantity and the quality of the devices and machines required by the project for production, and means of transportation according to the project’s capabilities, and their cost is estimated and compared accordingly.

Fourth: Studying the internal structure of the project:

The internal structure of the project and the study of the project’s segments and the locations of production lines, storage, administration, and public facilities. The importance of the logical and sequential division of the project must be taken into account, and the transition between these sections should be taken into account according to the studied foundations.

Fifth: Determine production inputs and their costs:

Determine the production inputs and their costs required for production, and storage, and the types of raw materials needed to produce the project’s products or services and their sources, as well as determining the need for means of transportation.

Sixth: Determine the human resources needed to run the project:

It is essential that the qualifications of personnel, starting with administrative workers, specialized technical workers, maintenance workers, security officers, and cleaners, are taken into account and determined in advance, as is the type of expertise required for human resources, the compensation structure for employment, training expenses, health insurance, transportation, and any financial resources needed.

Seventh: Determine the location of the project:

So that the location is determined according to its nature and the study of the characteristics of the location and the necessary facilities to fulfill the needs of consumers for the products or services of the project.

Eighth: The legal environment of the project:

Determine the legislative environment and the requirements for commercial licenses to start the work of the project, and to know the possibility of establishing the project or not from a legal point of view.

Service projects are not much different from manufacturing projects in their need to determine what they offer, the way they are provided, and the method used to deliver them to the public.

Feasibility Study

Financial Study

The financial study of the project is defined as one of the components of the feasibility study in general, and it focuses on measuring the profitability of the project from a commercial point of view and from the point of view of the investor, in addition to identifying the funding sources and the proposed financing structure for the project (i.e., the components of the funds that will finance the assets of the project such as capital and loans).
In general, the investment project is considered financially (commercially) feasible if it gives a return on the invested money at a rate that exceeds the rate of return that can be obtained from using the money in alternative fields. The project is also considered commercially feasible if capital costs can be recovered within the period specified by the investor.

Components of the financial study:
  • Initial revenue and cost assumptions.
  • Determine the sources of funding for the project and the optimal structure for its capital.
  • Determine expected operational and capital costs.
  • Determine project revenues, types, size, and timing.
  • An analysis of the payment schedules for the various project financing sources.
  • Preparing and then analyzing the three Pro-forma financial statements: (income statement, financial position statement, and cash flow statement).
  • Analysis of the project’s break-even point (balance between revenues and expenses) to find out the strengths and weaknesses of the project financially.
  • Analyzing the project payback period to find out the timing of recovering the capital invested in the project.
  • Financial analysis of the project by calculating and analyzing the financial ratios of the project.
  • Analyze the sensitivity tests of the project and find out the impact of the different hypothetical scenarios on the expected project performance.
  • The investment valuation of the project through the approved standard valuation methods, which are the internal rate of return and the net present value of the project.
The importance of the financial study:
  • Determining the best project among the other options available, since the investor may have more than one investment idea and can implement only one investment idea due to the limited resources available to him, the feasibility study will contribute to helping the investor choose the best project to invest in, through which he achieves strong competitive advantage in the market and a higher rate of profitability.
  • Obtaining financing, whether from the government or from private funding institutions, since the feasibility study is always a guarantee of whether or not to lend the project, and a feasibility study is an essential tool in determining the optimal financing structure or what is known as financing leverage.
  • Determine the profitability of the project by studying the income statement of the project and the expected returns, the financial study shows the profitability of the project in the first year of the project and in all later years of operation.
  • Determine fixed and variable investment costs and the percentage of each type out of total costs. Some projects need larger fixed costs, which makes the payback period longer.
  • The financial study reflects the size of the market that the project can enter based on estimating of the size of demand and supply for the project’s products and services, and by knowing the share of the project in the market, it is possible to determine what is the optimal size of the project that achieves its objectives according to the criteria used in the valuation.
  • Reducing the degree of risk that the project may be exposed to by studying all the risks surrounding the project, such as low prices below cost, higher raw material costs, or low sales volume, and finding the best ways and means to avoid these risks.

All rights reserved, Kunooz for Financial and Economic Consultancy 2023

All rights reserved, Kunooz for Financial and Economic Consultancy 2023

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