ES 181 Engineering Economy Chapter 9 PDF

ES 181 ENGINEERING ECONOMY CHAPTER 9 PREPARATION OF INTERNATIONAL STANDARD FEASIBILITY STUDIES MANUALLY AND USING A SOFTWARE ADOPTING THE IAS COURSE PLAN WEEK TOPICS LEARNING METHODOLOGIES ASSESSMENT...

ES 181 ENGINEERING ECONOMY CHAPTER 9 PREPARATION OF INTERNATIONAL STANDARD FEASIBILITY STUDIES MANUALLY AND USING A SOFTWARE ADOPTING THE IAS COURSE PLAN WEEK TOPICS LEARNING METHODOLOGIES ASSESSMENT OUTCOMES TOOLS Week 15 PREPARATION OF Prepare Course Manual/ Quiz (6 hours) INTERNATIONAL STANDARD manually PPT Activity FEASIBILITY STUDIES feasibility -Lecture Assignment MANUALLY AND USING A study of any -Discussion SOFTWARE ADOPTING THE IAS i. Project summary engineering Articles/Reading ii. Market feasibility project Materials iii. Technical feasibility iv. Financial feasibility v. Socio-economic feasibility vi. Management feasibility vii. Appendices ❑ What is a project (or program)? - any undertaking, carried out individually or collaboratively and possibly involving research or design, that is carefully planned (usually by a project team, but sometimes by a project manager or by a project planner) to achieve a particular aim. o An alternative view sees a project managerially as a sequence of events: a "set of interrelated tasks to be executed over a fixed period and within certain cost and other limitations". ▪ A project may be a temporary (rather than permanent) social system (work system), possibly staffed by teams (within or across organizations) to accomplish particular tasks under time constraints. ▪ A project may form a part of wider programme management or function as an ad hoc system. PROJECTS -a temporary effort to create value through a unique product, service or result. -have a beginning and an end. -have a team, a budget, a schedule and a set of expectations the team needs to meet. ❖ Each project is unique and differs from routine operations—the ongoing activities of an organization—because projects reach a conclusion once the goal is achieved. i. Project summary ii. Market feasibility Marketing is essential for the success of business. Sales become a direct interface among customs and products offered by companies, and marketing is an indirect function between customer and the company. ▪ Market feasibility studies -help identify market competition, potential markets, and market analysis to assess a business idea. o They are valuable for anyone looking to start a business.  ❑ Target Market a group of customers that the business has decided to aim its marketing efforts and The following aspects are ultimately its merchandise towards. related with: o A well-defined target market is the first element ▪ Target Market to a marketing strategy. ▪ Market Segmentation o The target market and the marketing mix variables of product, place, promotion and price are the four elements of a marketing mix strategy that determine the success of a product in the marketplace. ❑ Market Segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another. Determination of Market Share This can be done by: ❑ Estimating the total demand of the product ❑ Estimating the market share of the organization Techniques for demand forecasting. Any organization which intends to estimate the present and future demand can depend either on Primary Data or Secondary Data. 1. Primary Data is related with the data generated by the organization intending to use it for a specific purpose. Such kind of data can be generated by the following techniques: ❑ Market Surveys: Market Surveys gather information regarding the practices of the target market group. Under this, the forecaster undertakes a complete survey of all consumers whose demand he intends to forecast, once this information is collected, the sales forecasts are obtained by simply adding the probable demands of all consumers. ❑ Expert Opinion: In this method, the experts on the particular product whose demand is under study are requested to give their opinion or feel about the product. These experts, dealing in the same or similar product, are able to predict the likely sales of a given product in future periods under different conditions based on their experience. ❑ Trend Analysis: An analysis of past information allows us to identify the major trends in demand. This information can be projected into the future to estimate probable demand. ❑ Correlation Analysis: Correlation Analysis tries to identify relationships between two or more variables. These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. The analysis can be carried with varying degrees of complexity. 2. Secondary Data is related with the data collected by the other agencies apart from organization. ▪ It provides the base from which we can develop primary information. ▪ It is very rightly to say that a combination of both primary data and secondary data forms the basis for Demand Forecasting. Market Feasibility Analysis ❑ Market Feasibility Study - determines the depth and condition of a particular market and its ability to support a particular development. ▪ Main objective of a market feasibility study ✓ to understand the market to determine if enough demand exists to make the venture successful. ✓ it provides a more in-depth and thorough analysis than any other type of market research. ❑ Market feasibility studies - are documents that help businesses assess their likelihood of success. - include an analysis of the industry, competitors, and more. Key Takeaways ▪ A market feasibility study helps businesses set expectations and plans. ▪ A good market feasibility study assesses the market environment while also identifying potential customers and other sources of revenue. ▪ Unlike marketing plans, which aim to make your business look as good as possible, market feasibility studies should be an objective assessment. iii. Technical feasibility - this assessment focuses on the technical resources available to the organization. - helps organizations determine whether the technical resources meet capacity and whether the technical team is capable of converting the ideas into working systems. - also involves the evaluation of the hardware, software, and other technical requirements of the proposed system. ❖ Technical feasibility study (TFS) - can provide relevant context to the different aspects of a project - serves as a great planning tool by providing an overhead view of how a project can evolve during the course of its development, troubleshooting and tracking the progress of a project from concept to reality. How to conduct a technical feasibility study Steps to follow in conducting technical feasibility study: 1. Prepare a preliminary analysis; 2. Create a projected income statement; 3. Conduct a market survey; 4. Make a business plan; 5. Prepare a balance sheet; and 6. Review your data and make a decision. 1. Prepare a preliminary analysis A preliminary analysis can help you determine whether your project is worth embarking on potentially costly and time-consuming activities before the time and money are spent. Two main branches: a. Project outline b. Investigation of accessibility a. Project outline With as much detail as possible, describe the necessary elements of the project. can include who your target markets will be, what need you’ll fulfill, whether your product or service currently exists and how you will improve existing offerings. b. Investigation of accessibility Examine possible barriers to entry or any factors that could hinder profitability. These can include unavailable or especially expensive capital requirements, an inability to market or refer your offerings or production costs that exceed projected revenues. ❖ If your preliminary analysis seems optimistic, consider continuing a deeper feasibility study. 2. Create a projected income statement If your preliminary analysis determined that your product or service will fulfill a need, anticipate the income that can be generated and compare it to the costs of producing your offerings, paying your debts and maintaining normal business operations. If your anticipated net income is positive, continue to the next phase in your study. 3. Conduct a market survey A market survey will help you get a more realistic idea of the revenues your project will generate. As this is an in-depth study, the market survey will require several steps, including: Consider population and demographic trends, cultural aspects and the average amount of disposable income of consumers in your target market as they will affect your project’s success Evaluate similar or competing offerings in your target market, including their strengths and weaknesses related to location, products, pricing, marketing, quality and customer loyalty. Estimate expansion opportunities such as adding new products or services, franchising possibilities and projected response by the community. 4. Make a business plan A business plan describes your product or service offerings in detail, outlines a production schedule and offers explanations related to start-up costs, cost of ongoing operations and detailed planning in regards to the following: Organizational chart Materials, equipment and supplies Marketing and merchandising Facility location Labor costs Overhead such as insurance, taxes and utilities 5. Prepare a balance sheet A day-one balance sheet should show the assets and liabilities of the undertaking at the time of project completion, or opening day, before income is generated. Required assets include the project’s initial cash and financing capital as well as buildings, land and equipment, while liabilities involve anticipated investments, rent, finance payments and allowance margins for accounts receivable. 6. Review your data and make a decision When you’ve conducted all of your research and compiled your facts and estimations, a final review is necessary. This final review serves to revisit the preliminary analysis and compare it to the data you’ve obtained since then for the purpose of deciding whether your project is still feasible. This reflection helps you to more clearly assess the risks and costs associated with this undertaking and make a final decision on whether to begin production.  The last step in making a decision regarding whether to move forward with your project involves asking the following questions: Do the analyses show that this project will generate the minimum profitable ROI? Does this project have growth potential? Does potential reward (income, growth and market share) outweigh the risks (time, energy and monetary costs)? Answering ‘yes’ to all three of these questions indicates that your project has a good chance of succeeding. iv. Financial feasibility Financial feasibility study (FFS) -determines if or confirms that a project is potentially profitable, it including financial and scenario analysis and an investment appraisal. -it should include a cost-benefit analysis (CBA) of the project throughout the project's entire economic life, as most costs are incurred post construction from operation of the facilities. -should assess the viability of a project based on major pivotal component: will the project or business have enough cash to complete the project (and generate a profit).  One of the bottom lines of any business is whether a company can sustain itself, pay its employees and of course make a profit. A financial study can help in this assessment. ❑ Components to consider : Company expenses Revenues Assets Liabilities Cash flow (money in, and money out). ▪ An economic or finance feasibility study is developed for companies that seek to understand the amount of capital they need to procure to successfully start and complete any given project. ▪ While a business plan may have a section called the “CBA” or cost-benefit-analysis, in an economic feasibility study it will be greater in detail and have more statistics and numbers in the financials. Importance of a Financial Feasibility Study 1. A financial feasibility study can concentrate on a variety of projects or developments or can focus one specific area or study. 2. In any finance study, particularly if one is seeking to raise capital from a bank or private backers, the basic minimum of any financial report (and business plan as well) should be to cover the following: ▪ How much capital ones needs to begin the business; ▪ How much capital ones needs to operate the business; ▪ ROI or return on investment, i.e. when will investors see their money back with a return. Why Write a Financial Feasibility Study? Writing a financial feasibility study is good business practice, especially for companies that are planning on raising many millions of dollars and want to have the knowledge readily available to make an educated decision about a project’s viability. It is hard to image a bank or investor infusing capital in a company raising tens of millions of dollars that does not have such a report. By creating such a real estate financial study or for any product study, for example, you will be able to navigate potential pitfalls during development and save needed capital in the process, as well as possibly discover new opportunities in the market. Benefits of Writing a Feasibility Study: ▪ Prepares the companies for up to date information regarding statistical information on any project, i.e. market for products, real estate development, demographics, income streams, etc. ▪ Creates a knowledge of how much capital, if any, is needed for the project’s launch and success. Again, this can be for any business, high tech, real estate, oil, energy etc. Benefits of Writing a Feasibility Study: ▪ Helps with strategies. Since the financing needs are known this can help with strategizing next moves or first mover advantage for new areas. ▪ Identifies areas for growth. ▪ Inspires confidence in the management team since obtaining the numbers can strengthen a business and its leadership belief in the company’s success. ▪ Feasibility studies provide intelligence, statistics for the management team. How to Prepare a Financial Feasibility Study ▪ When business owners have an idea about a new project, they first conduct a feasibility study to determine its viability. ▪ A complete feasibility study would examine the market, analyze the technical and production issues, analyze the economic factors and include the preparation of a financial analysis. ▪ Managers prepare feasibility studies to identify the positive and negative issues before making an investment of time and money. Purpose of a Financial Feasibility Study Financial feasibility o focuses specifically on the financial aspects of the study. o assesses the economic viability of a proposed venture by evaluating the start-up costs, operating expenses, cash flow and making a forecast of future performance. ❖ The results from a financial feasibility study determine whether the proposed project is financially possible and make a projection on the rate of return on invested capital. Three –part preparation of a financial feasibility study: ❖ Determining the start-up costs. ❖ Preparing a profit plan and making cash flow projections. ❖ Assessing the return on invested capital. Identify the Start-up Costs The first step in the preparation of a financial feasibility analysis is to identify the costs needed to start the project. Typical start-up costs are as follows: 1. Purchases for land and buildings. 7. Office furniture and supplies. 2. Acquisition of equipment. 8. Marketing research. 3. Licenses and permits. 9. Employee wages. 4. Deposits required for office space leases. 10. Advertising. 5. Initial purchases for materials. 11. Insurance premiums. 6. Legal and accounting fees for 12. Utilities. incorporation. Many of these costs are one-time expenses, but they'll need funding upfront before the business begins operations Prepare Profit and Cash Flow Projections The preparation of projected sales, expenses and cash flow is next and is the analysis that determines if the proposed venture will be financially viable. These projections include the projected sales, costs of production or services and operating expenses separated into fixed and variable categories. The cash flow projections include the amount of funds needed for start-up and identifies where these monies will come from. The amount of equity capital is determined along with the amount and source of all borrowed funds and leases. Explain Negative Cash Flows If the project will experience negative cash flows during the early months, this amount should be calculated and explanations provided that show how these cash flow deficits will be financed. Pinpoint Needs for Additional Funding Use sales, profits and cash flow projections to calculate periods of negative cash flow and pinpoint when additional funding will be needed to finance growth if internal cash flow generation isn't sufficient. Determine the Return on Invested Capital The projected profits will be used to determine the financial feasibility of the project. This part of the financial study assesses the attractiveness of the project to equity investors and the overall financial return on the project. The financial feasibility of a proposed venture can be estimated using several common methods: Net present value – The net present value method uses a percentage rate to discount future cash flows to the present. If the NPV of the discounted cash flows exceeds the cost of the initial investment, then the project is feasible and should be accepted. Internal rate of return – The IRR method uses the same formula for calculating the net present value of cash flows. The IRR is the discount rate that makes the NPV of cash outflows and inflows equal to zero. This IRR can be used to compare the attractiveness of several projects. Payback period – The payback period is the number of years that it takes for the return from a project to recover the costs of the investment. Shorter payback periods are preferred. The payback method ignores the time value of money that's used in calculating the IRR or NPV of a project.  Financial Feasibility Study vs. Business Plan ❑ feasibility study ▪ isn't a business plan. ▪ intended to determine if the proposed venture is a profitable idea. ❑ business plan ▪ is a detailed plan on how the venture will be implemented and managed successfully. Start with a Financial Feasibility Study A financial feasibility study should be conducted at the onset to determine the economic viability of a proposed venture before proceeding to the preparation of a business plan. It identifies the start-up costs, makes projections of profits and cash flows and determines the return of the investment. v. Socio-economic feasibility ❑ socio-economic study - shows the contribution of the study to the government and to the society. This area proves that the business existed not only for profit purposes, but also for the improvement of the welfare of the people. ▪ Socio-economics (also known as social economics) - the social science that studies how economic activity affects and is shaped by social processes. o In general, it analyses how modern societies progress, stagnate or regress because of their local or regional economy, or the global economy.  The study of socio-economic component incorporates various facets related to prevailing social and cultural conditions and economic status of the study region. The socio-economic study includes: 1. analysis of demographic structure 2. population dynamics 3. infrastructure resources 4. status of human health 5. economic attributes (like employment, per-capita income, agriculture, trade, and industrial development in the study region. Baseline Status Baseline information is collected after delineation of the baseline study area in order to study the socio-economic profile of the project affected area. The process related to baseline database analysis includes: Demographic Structure Infrastructure Base Economic Structure Health Status Cultural Attributes Salient Observations Public Awareness and their concerns regarding the proposed project Socio-economic status in relation with ‘Quality of Life’ vi. Management feasibility ❑ Managerial feasibility studies - the objective and rational way of uncovering the strengths and weaknesses of an existing business or proposed venture, opportunities and threats which are presented by the environment, the resources required to carry through, and ultimately the prospects for success. ❑ Managerial feasibility study ▪ an analysis of the viability of an idea ▪ focuses on helping answer the essential question of “should we proceed with the proposed project idea?” ❖ Two criteria to judge feasibility study : 1. cost required 2. value to be attained Four-Step Managerial Feasibility Study Method 1. Examine the Market 2. Review Technical Requirements 3. Explore the Business Model 4. Look for an Escape Route vii. Appendices ❑ Appendices ▪ contain material that is too detailed to include in the main report, such as long mathematical derivations or calculations, detailed technical drawings, or tables of raw data. The content should be summarized and referred to at the appropriate point in the body of the report. ❑ Rules for appendices: each appendix must be labelled with a number (or letter) and title the appendix numbers and titles must be listed on the Contents page under the heading Appendices (if more than one) or Appendix (if only one) each appendix must be referred to by number (or letter) at the relevant point in the text How do I create an APPENDIX in APA style? What is an appendix? A section at the end of a paper that includes information that is too detailed for the text of the paper itself and would "burden the reader" or be "distracting," or "inappropriate" (APA, 2019, p. 41-42). The content in the appendices should be "easily presented in print format" (APA, 2019, p. 41). o Examples: ▪ lengthy lists (short lists belong in the paper itself) ▪ detailed descriptions (essential details should be in the paper itself) ▪ instructions to participants; tests, scales, inventories ▪ demographic details for subpopulations studied by the paper  Where does the Appendix appear in the paper? The appendices section, if there is one, is close to the last section of your APA-style paper: o title page o abstract o text of paper o references list o tables o figures o appendices How to format an appendix: You may have more than one appendix (aka appendices) Each appendix should deal with a separate topic Each appendix must be referred to by name in bold font (Appendix A, Appendix B, Appendix C, etc.) in the text of the paper o To refer to the Appendix within your text, write, (see Appendix A) at the end of the sentence in parentheses. Example: ▪ In addition to the limitations of email, Cummings et al. (2002) reviewed studies that focused on international bank employees and college students (see Appendix B for demographic information).  Each appendix must be labeled with a letter (A, B, C, etc.) according to where it appears in the paper. o ▪ The first appendix referred to in the paper would be named Appendix A ▪ The second appendix referred to in the paper would be named Appendix B ▪ If you have more than 26 appendices, start the alphabet over with AA, BB, CC, and so on. ▪ If there is only one appendix, it is just called Appendix Each appendix must also have a title Begin each appendix on a separate page with page number  Place the label and title of each appendix at the top of the page, centered, bold, using normal capitalization. Label first, title second. Paragraphs o The first paragraph is flush left and not indented. o The second and following paragraphs are indented as "normal" paragraphs are. o All paragraphs are double spaced.  If your appendices include tables or figures, treat them as they would be treated in the main text. o Exception to the tables/figures numbering rule: add the letter of the appendix (A, B, C, etc.) to the figure or table number (e.g., Table B3 would be the third table in Appendix B). If your appendices use information from an outside source, cite it parenthetically within the text of the appendix and include the reference in the main references list for the paper (do not create a separate references list). A sample appendix , as shown: