Feasibility study

Feasibility report is prepared to present a in-depth techno commercial analysis carried out on the
project idea for consideration of financial institutions and other authorities empowered to take
investment decision. It’s prepared during the definition phase of a project.

Feasibility study

Generation of ideas

PRELIMINARY WORK Initial screening

Is the idea prima facie promising

YES NO
Terminated
Plan Feasibility Analysis

Conduct Market Analysis Conduct Technical Analysis

ANALYSIS
Conduct Financial Analysis

Conduct Economic and Ecological Analysis

EVALUATION
Is the project worth while

YES NO
Terminated
Prepare Funding Proposal
Analysis

Key Issues in Project Analysis

Potential Market
Market Analysis
Market Share

Technical viability
Technical Analysis
Sensible choices

Risk
Financial Analysis
Return

Benefits and cost in shadow prices

Economic Analysis Other impact

Environmental damage
Ecological Analysis
Restoration measures

MARKET ANALYSIS

● Market analysis:- key steps in market and demand analysis are:-

o Situational Analysis and Specification of objective:- Through contacts, the

preferences and purchasing power of the customer, actions and strategies of
competitors and practises of middle man can be studied. To carry out such a
study it is necessary to spell out its objectives clearly and comprehensively. This
can be done by structuring them in the form of questions.

o Collection of secondary information:- Secondary information provides base and

the starting point for market and demand analysis. It indicates what is known
and often provides leads and cues for gathering primary information required
for further analysis.
 ● General sources of secondary information:-

o Censes of India:- Economic Survey

o National sample survey report:- Guidelines to industries

o Plan reports:- Annual survey of industries

o Statistical abstract of the Indian union:- Techno-Eco. Survey

o India year book:- The stock exchange directory

o Statistical year book:- Monthly bulletin if RBI

INDUSTRY SPECIFIC SOURCES OF SECONDARY INFORMATION

INDUSTRY TITLE

Automobiles
● Annual report of Association of Indian
Automobile manufacturers.

Chemicals (Fertilizers, Drugs, etc.)

● Fertilizers statistics

● Indian drugs and Pharmaceutical

Industry

● Chemical Age of India

Electrical and electronics

● Annual Electric Power Survey of India

● Electric India

Industrial Machinery
● Build machine Build India

● Textile Machinery Accessories and

stores Journal

Metallurgical
● Iron and steal control bulletin

● Steal Furnace

Textile
● Indian Textile Bulletin

● Man made fibres

EVALUATION OF SECONDARY INFORMATION

The reliability, accuracy and relevance for the purpose under consideration must be carefully examined.

1. Who gathered the information? What was the objective?

2. When was the information gathered? When was it published?

3. What was the target population?

4. How was the sample chosen?

5. How representative was the sample?

6. What was he degree of misrepresentation by respondents?

7. Was established Analysis properly applied?

⮚ Key Stages in Market and Demand Analysis and their inter- Relatioship

Collection of
secondary Bio monal
information forecasting

Situational
Characterisation
Analysis and
of the market
specification of
objectives

Market
Conduct of market Planning
survey

CONDUCT OF MARKET SURVEY

⮚ Censes survey- Entire population is covered.

⮚ Sample survey- A sample of the population is contacted. Censes survey are employed
principally for intermediate goods used by small number of firms. They are costly and
infeasible.

SAMPLE SURVEY OVERCOME THESE LIMITATIONS:- The information may relate to:-
 ⮚ Total demand and rate of growth of demand.

⮚ Demand in different segments of the market.

⮚ Motives for buying.

⮚ Satisfaction with existing products.

⮚ Attitudes towards various products.

⮚ Socio-Eco. Characteristics of buyers.

STEPS IN A SAMPLE SURVEY:-

1. Define the Target population.

2. Select the sampling scheme and sample size.

3. Develop the Questionnaires.

4. Recruit and Train the field investigators.

5. Obtain information as per the questionnaires from the sample of respondents.

6. Scrutinise the information gathered.

7. Analyse and interpret the information.

SOME PROBLEMS:-

⮚ Heterogeneity of the country.

⮚ Multiplicity of languages.

⮚ Design of Questionnaires.

CHARACTERISATION OF THE MARKET:-

1. Effective Demand in the past and present:- Consumptions = Production + Import – Export –
Change in stock level

2. Breakdown of demand:- The aggregate market demand may be broken down into demand
for different segments of the market. On the basis of:-

a. Nature of product

b. Consumer groups
 c. Geographical division

3. Price:- Price statistics may be gathered to distinguish:-

a. Manufacture’s price quoted as FOB(Free on board) or CIF(Cost, Insurance and

Freight)

b. Landed price for imported goods

c. Average wholesale price

d. Average retail price

4. Methods of distribution and sales promotion:- vary with the native of the product

5. Consumers:- can be characterised along two dimensions:-

a. Demographic and Sociological:- Age, Sex, Income, Profession, Residence, Social

background

b. Attitudinal:- Preferences, Intentions, Habits, Attitudes, Responses.

6. Supply and competition:-

a. Domestic

b. Foreign

7. Government policy:- Plans, Policies, legislations reflected in:-

a. Production targets in national plans

b. Import and export trade control

c. Import duties, export incentives

d. Excise, sales, industrial licensing, etc.

DEMAND FORCASTING

1. Qualitative Method:-

a. Jury of executive opinion method

b. Delphi method

2. Time Services Projection Method:-

a. Trend projection method

b. Exponential smoothing method

c. Moving average method

3. Casual method:- Causes:-

 a. Effect relationships specified

b. Chain ratio method

c. Consumption level method

d. End use method

e. Leading indicator method

f. Econometric method

MARKET PLANNING:- The market plan should cover:-

⮚ Pricing:- Ex factory prices, Taxes, Trade margins or discount, Selling price

⮚ Distribution:- Packaging transportation, Channels of distribution

⮚ Promotion:- Branding, Advertising, Personal selling

⮚ Services:- Installation, User education, Warranties after sales services.

TECHNICAL ANALYSIS

Technology should be determined in relation to:-

● The objectives of the project.

● The impact on intended beneficiaries.

● The local conditions including availability and cost of capital, raw material and labour, the size of
market and present and potential plant capacity.

Various Trade-offs in consideration are:-

● The technology may often have to be reduced in complexity to fit the capability of local
institutions or the socio-cultural traditions of the beneficiaries.

● The range of choice is very wide; from sophisticated, high technology for long distance
telecommunications even in the least developed countries.

● Biased by government interventions or price distortion.

Various technical aspects of a project are:-

1. Material inputs and utilities

 2. Manufacturing process or technology

3. Product mix

4. Plant capacity

5. Location and site

6. Machineries and equipment

7. Structures and civil works

8. Project chart and layout

9. Work schedule

Material Input and utilities

● Defining the materials and utilities required

● Specifying their properties in some details

● Setting up of the project

Materials inputs and utilities may be classified into the following categories:-

● Raw Material may be classified into four types:-

o Agricultural products

o Mineral products

o Livestock and forest products

o Marine products

● Processed Industrial Materials and components

o Base Metals

o Semi-Processed Material

o Manufactured parts

o Components

o Sub-Assemblies

● Auxiliary Materials and Factory supplies

o Chemicals, Additives, Packaging Materials, Paints, Oil, Grease, Cleaning Materials, Etc.
Utilities :- Power, Water, Steam, Fuel, Etc.

Manufacturing Process or Technology:-

Usually two or more alternative technologies are available

● Cement can be made either by dry process or wet process

● Soda can be made by electrolysis method or chemical method

Choice of Technology influenced by

1. Plant Capacity

2. Principal Inputs

3. Investment outlay and production cost

4. Use by other units

5. Product Mix

6. Plant Capacity

Acquiring Technology

● Technology Licensing:- A popular method of acquiring technology, gives the license the right to
use potential technology and get related know- how on a manually agreed basis.

● Purchase of technology:- Appropriate when

o There is no possibility of significant improvement in technology in the foreseeable

future.

o There is hardly any need for technological support from the seller of technology

Joint Venture Arrangement:- Technical and Financial

Appropriateness of Technology

Those methods of production which are suitable to local, economic, social and culture conditions.

Product Mix :- Influenced by Market requirement, variation in size quality etc. to satisfy a broad range
and customers. While planning the production facilities, some flexibilities must be sought that enables
the firms to alter its product mix in response to changing market conditions and enhances the power of
the firm to survive and grow.

Plant Capacity:- Volume of no. of units that can be manufacture during a given period. Factors affecting
capacity decisions:-

Technological requirement Certain minimum economic size is specified for a particular task
Input constrains. Raw material, foreign exchange, skilled labour

Market conditions :- if the market for a product is very strong than a plant of higher capacity is required.

Resources of the firm

Government policy. Policy of ‘minimum economic capacity’.

Location and site

● Location:- Fairly broad area like a city, an individual zone or a coastal area

● Site:- specific piece of land where the project would be set up

Choice influenced by:-

Proximity to raw material and market

Availability of Infrastructure:- Power, Transport, Water, Communication

Government Policies

Other factors:- climate, labour, situation, etc.

Machinery and Equipment

To determine the kind of machinery and equipment required may be calculated as follows:-

1. Estimate the likely level of production overtime

2. Define the various machinery and other operations

3. Calculate the machine hours required for each type of operation

4. Select machinery and equipment required for each functional. The types of equipment required
may be classified as:-

a. Plant(process) equipment

b. Mechanical equipment

c. Electrical equipment

d. Instruments

e. Controls

f. Internal transportation systems

g. Others

h. Spare parts and tools:-

i. To be purchased with original equipment

 ii. Required for operational wear and tear

Constraints in selecting machine and equipment

● Limited availability of power

● Difficulty in transporting

● Inefficient workers

● Import policy of government

Procurement of plant and machinery

Contract may be given to single supplier

Structures and Civil Works

May be divide into eight categories

● Site preparation and development

● Buildings and structures

● Outdoor works

Project Charts and Layouts

● General functional layout

● Material flow diagram

● Production live diagram

● Transport layout

● Plant layout

Work schedule plan of work concerning installation as well as initial operations.

The purpose is to:-

● Anticipate problems

● Establish the phasing of investment

 ● Develop a plan of operations covering the initial period

Need for considering Alternatives

● To suit the nature of product

● Consistent with production process

● Product quality improvement

● Scale of operation and time phasing adjustment

● Location, trade off between economics of scale

FINANCIAL ANALYSIS

The main objective of financial analysis:-

● Economic efficiency

● Economics of scale(optimum utilisation of resources)

● Income Distribution

● Equity and Borrowings

● Revenue generation

Information required to judge a project from financial angle are:-

● Cost of project :- represents the total of the outlay associated with a project which are
supported by long-term funds:-

o Purchase of fixed and current asset

o Land and site development

o Plant and machinery

o Technological know how to use and engineering fees.

o Expenses of foreign technicians and training of Indian technicians in abroad

 o Miscellaneous fixed assets:-furniture, tools, vehicles, railway sidings, transformers,
patents and licenses, etc.

o Preliminary and capital issue expenses

o Pre operative expenses

o Provisions for contingencies

o Margin money for working capital

o Initial cash losses

● Means of finance :-

o Share capital :- equity ,preference

o Term loans :- rupee terms loan, foreign currency term loan

o Debenture capital :- convertible, non- convertible

o Deferred credit:- payment delay

o Incentive sources:- seed capital assistance, capital subsidy

o Miscellaneous sources:- public deposit, leasing and hire purchase

● Estimation of sales and production:-

o Estimation of sales Revenue

▪ Assumptions for capacity utilisation should be low in the first year and rise
gradually to reach the maximum level in 3rd or 4th year of operation.

1. It is not necessary to make adjustment for stocks of FG

2. S.P. should be price realisable by the co. net of excise duty.

3. The S.P. used may be the present S.P.

o Cost of Production:- The components of cost of production.

▪ Material Cost

▪ Utilities :- Power, Water and Flue

▪ Labour:- Wages

▪ Factory Overhead
 o Working Capital requirement and It’s financing

▪ Sources of working capital finance are

1. Working capital advances, approval

2. Trade credit

3. Accruals and Provision

4. Long term sources of financing

o Estimation of working results

o Break Even Point :- Th level of operation at which the project neither makes profit nor
incurs losses.

▪ Sales – Variable cost = Contribution – Fixed cost = EBIT = 0 = BEP

▪ BEP = FC/ Unit S.P. – Unit V.C.

o Projected Cash Flow Statement

Sources of Funds Uses of Funds

o Profitable operations o The Lose from Operations

o Decrease in Assets o Increase in Assets

o Increase in Liabilities o Decrease in Liabilities

o Sale proceed from issue of o Redemption of redeemable preference

shares shares

o Cash dividends

o Projected Balance sheet

Liabilities Assets

o Share Capital o Fixed Assets

o Reserve and Surplus o Investment

o Secured Loans o Current Assets, Loans and

advances

o Unsecured Loans o Misc. expenditure and losses

Socio Economic Analysis

Social cost Benefits Analysis is a system to conduct socio economic analysis of any business enterprise. It
refers to all those harmful consequences and damages which community on the whole sustain as a
result of production processes and for which private entrepreneurs are not held responsible.

The need for Social Cost Benefits Analysis:-

● To measure adequately social benefits and social cost. Under this in developing economics
are set low despite there economic importance while prices of less essential goods are set high
thus projects which appear profitable are unattractive from view point of national economy.

● To suitably adjust the actual recei+pts and expenditure so that differences between them will
reflect the social gain.

Steps under taken to Conduct Social Cost Benefits Analysis :-

⮚ Estimates of cost and benefits which will approve to the project implementing body.

⮚ Estimates of cost and benefits which will approve to individual mentors of society as consumers
or as suppliers of factor input.

⮚ The cost and benefit which will occur to the community.

⮚ The cost and benefit which will occur to the national ex. Chequer

⮚ Discounting the cost and benefits which occur over a period of time to determine the feasibility
of the project.

Social Cost and Benefits tends to differ from the monetary cost and benefits. The principle sources of
differences are :-

⮚ Market Imperfection:- Under perfect competition the monetary cost and benefits reflect social
values which are rare the common market imperfection are:-

o Rationing

o Prescription of minimum wage rates

o Foreign Exchange Regulation

⮚ Externalities:- A project may have beneficial external effects and harmful external effects these
externalities are relevant in Social Cost Benefit Analysis.