Feasibility Study (Preliminary) PDF

FEASIBILITY STUDY (PRELIM) - Each phase has unique characteristics that ultimately contribute to the attainment of the CHAPTER 1 objectives...

FEASIBILITY STUDY (PRELIM) - Each phase has unique characteristics that ultimately contribute to the attainment of the CHAPTER 1 objectives of the study. It should be well PROJECT FEASIBILITY STUDY coordinated and interdependent. - Aspects should support other areas or may be According to CABRERA, it is defined as a used in formulating a solution in other aspects. systematic investigation which ascertains - In case viability is not presented or proven or if whether a business undertaking is viable and if the true picture of the proposed business so, the degree of its profitability. project is not presented in one aspect, the An analysis or research into the practicality of a system will definitely be affected and failure. proposed plan or method, based on factors like marketplace, competition, available technology, PROPOSED BUSINESS ACTIVITY manpower, and financial resources. - A lawful organization engaged in commercial An analysis of the ability to complete a project activities providing or selling products or successfully, taking into the account the legal, services for monetary consideration with the economic, technological, scheduling, and other intent to realize profit. factors. An evaluation and analysis of the potential of the CHARACTERISTICS TO QUALIFY AS A BUSINESS proposed project which is based on extensive ACTIVITY: investigation and research to support the 1. It should be intended for profit. process of decision making. 2. It must be regularly undertaken. A systematic inquiry into a proposed business 3. It must be financial in character. activity to determine its viability in all areas directed towards the measurement of profitability level. In some respects, a feasibility study is similar to other studies, a project proposal or research, KEY TERMS / NATURE OF FEASIBILITY STUDY because it follows scientific procedures. 1. Systematic Inquiry INTENDED FOR PROFIT – a foremost concern 2. Proposed Business Activity is to maximize business profitability or to 3. Viability in All Areas improve the interest of the shareholders. 4. Measurement of Profitability Level REGULARLY UNDERTAKEN – the element of SYSTEMATIC INQUIRY regularity indicates that there is a continuing and progressing economic act, and not a - Implies procedure or a step-by-step process mere single disconnected act. Implies that involved in the conduct of a feasibility study that the act is evenly carried out throughout the are not fixed. year. - An individual conducting a study has to follow - The concept cannot be equated with a definite procedures in investigating the business cyclical process. Regularity denotes opportunity that needs to be addressed. They continuity, but a cyclical process implies can be modified according to the existing a new beginning once the first cycle conditions within which the study is conducted. ends. - Means that the whole study is composed of different phases or aspects.  FINANCIAL IN CHARACTER – a business projects with similar capital base, manpower activity involves an exchange of monetary requirements or management capability, values with another party except for those profitability does not carry any weight in the socio-economic phases, all aspects of the evaluation and implementation process. study have a common denominator - BUSINESS DIFFICULTY – refers to the stage expressed in terms of peso. where the business organization cannot attain normal profitable operations. It can hardly meet VIABILITY IN ALL AREAS the working capital requirements. - The ability of a business to exist, be profitable, PURPOSES OF A FEASIBILITY STUDY and to grow. - Ensures a higher chance of attracting and 1. To enhance the sustainability. convincing prospective investors 2. To facilitate easily the evaluation. - There may be instances when a project is viable 3. To seek the infusion of fresh working capital in one aspect of the study but not feasible in from a financial institution. other areas. 4. Determine the recovery period of capital - As a precautionary measure, researcher should investment or ROI. not immediately conclude that a project is 5. Evaluating actual project results against feasible just because it is proven to be viable in what the study reveals. one area. 6. Reduce business difficulty (Inability to attain normal profitable operations). MEASUREMENT OF PROFITABILITY LEVEL 7. Meet and satisfy investors’ requirements. - Investors may not commit if it involves opportunity cost (refers to the cost or benefits QUALITIES OF A GOOD FEASIBILITY STUDY foregone when one alternative is chosen in favor of another alternative). 1. COMPREHENSIVE – the study should fully - OPPORTUNITY COST – the potential benefits cover all the areas that need to be that an individual, investor, or business misses scrutinized. It should present the overall out on when choosing one alternative over perspective of the proposed project so that another. users are properly guided in making an economic decision. Assume that given $20,000 of available funds, a 2. OBJECTIVE – denotes the unbiased business must choose between investing funds in presentation of the findings of the study securities or using it to purchase machinery. No based on a fair evaluation and critical matter which option the business chooses, the analysis of data from various sources. potential profit that it gives up by not investing in - Should not be distorted by the fact that the other option is the opportunity cost. it is a combination of both facts and the - Profitability is not the essence of the concept. It professional opinion of the project is very important to measure the level of proponent. profitability of a certain project undertaking 3. SIMPLE – the language and expressions used against other possible projects. in the feasibility study should be simple to - Proposed business may appear to be profitable, enhance understanding. but, if its probability level is below those of other  - Verbose expressions are discouraged 4. Party preparing the study. and simple language is promoted. If 5. Requirements of prospective investors. technical terms cannot be avoided, they TYPE OF INDUSTRY should be expressed at the level of the reader’s understanding. INDUSTRY – refers to a group of companies that 4. RELIABLE – means that there is a high degree have common characteristics and are related in of truthfulness in the available data, in the terms of operational processes, products sold, analysis and evaluation, and in the market, functions or services offered. conclusion of the study. INDUSTRIES ARE CLASSIFIED AS: - A study is considered reliable when it satisfies fully the requirements of Extractive or Primary Industry – extract objectivity, considerably free from natural resources & sell the products errors. without further processing. - Also depends on the qualifications of the Manufacturing Industry – process the raw person preparing the study. materials from the primary industry, and sell the finished goods to industrial or individual USEFULNESS OF A FEASIBILITY STUDY consumers. 1. Can be used in project design or redesign. Service Industry – are composed of 2. It can minimize business difficulty. companies rendering services to the market. 3. Considered as the most reliable instrument INDUSTRIES CAN ALSO BE CLASSIFIED ACCORDING in making a decision whether to TO THE PRODUCT THEY SELL: implement/discard a project or making a sound decision. Automotive Industry 4. Evaluate a project in terms of funding. Fish Industry 5. Evaluating the profitability level and Meat Packing Industry sustainability of the proposed project. Entertainment Industry LIMITATIONS OF A FEASIBILITY STUDY Electronic Industry Software Industry 1. Unavailable information. Utility Industry 2. The cost of gathering the necessary data Chemical Industry required in the analysis, formulation of conclusions, and drafting of SIZE OF THE PROJECT – has a direct relationship to recommendations is very high. the diff. factors affecting the preparation of the 3. They may hesitate to share such information feasibility study. because of confidentiality. - Usually expressed in terms of investment 4. Researchers' expertise and competency. requirements. 5. It is a mere forecast. PURPOSE OF THE STUDY FACTORS AFFECTING THE PREPARATION OF A FEASIBILITY STUDY 1. Market information on the plan to expand. 2. Product information on the plan to offer 1. Type of industry. new product to the market. 2. Size of the project. 3. Purpose of the study.  3. Competition analysis because of entrance of As to status of the project. (In terms of status, a a new competition feasibility study can either be for a new project 4. Demand study on the plan to launch a new or expansion.) service. As to industry classification. (Can be classified according to industry: manufacturing, real PARTY PREPARING THE STUDY estate, electronics, transportation, 1. ECONOMIST, study the trends on supply and entertainment, agriculture, merchandising or demand of goods, including prices. utilities.) 2. INDUSTRIAL ENGINEER, who will study the As to nature of management. (Proposed production processes, waste management & business entity may either be administered by a efficient use of resources, particularly newly-hired managerial personnel or existing set energy. of officers.) 3. MECHANICAL ENGINEER, who will design As to liability of investors. (Proposed business the manufacturing plant, machinery & other under study can either be a sole proprietorship, mechanical equipment required for the partnership, or corporation.) project. 4. MARKETING CONSULTANT, who will design PARTIES REQUIRING FEASIBILITY STUDY marketing strategies, create a marketing 1. Prospective Investors plan & determine the appropriate marketing 2. Management mix. 3. Proponents 5. ACCOUNTANT, prepare the necessary 4. Financial Institutions projected financial statements and 5. Shareholders schedules. 6. Government 6. LAWYER, prepare the legal documents PROSPECTIVE INVESTORS – primarily interested in required by the different agencies, banks, knowing the viability of a proposed project taken as and other monitoring offices. a whole. They are much very interested in 7. HUMAN RESOURCE OFFICER, provide the conducting a feasibility study because they want to necessary inputs on staffing, job descriptions & qualification standards of personnel. Prospective investors profitability. REQUIREMENT OF PROSPECTIVE INVESTORS – additional data and evaluation means more time PROFITABILITY – refers to the ability to and cash requirements. generate profits or grains from an investment or economic activity. - Arrangement of the different parts and sections - It is a measure that indicates the is often prescribed by the funding agency or performance or efficiency of an prospective investors. investment in terms of economic return. CLASSIFICATION OF FEASIBILITY STUDIES - The higher the profitability, the greater the ability to obtain the profits. It is used As to amount of investment. (In terms of capital to assess the viability and attractiveness base, a business entity can either be a micro, of an investment, as it indicates how small, medium-size, or a large entity.) effectively available resources are utilized.  - PROFITABILITY can be expressed as a management of dividend before receive interest the company. payment to equity income. percentage or a rate of return, and is shareholders. used in various contexts such as Can be business, finance, and investment categorized as promoters and projects. institutional Prospective investor's funding. investors. Prospective investor's rate of return on invested capital. GOVERNMENT AGENCIES MANAGEMENT Compliance to minimum requirements. Viability of proposed expansion. Provision of incentives or grants. Appropriate selling price (dispose business). Socio-economic impact. Appropriate buying price (buy a new business). Determine the gap between expected demand and expected supply. PROPONENTS Viability through appropriate projection. Answer the queries of other interested parties. Improve project specifications through market study. Attract prospective investors. FINANCIAL INSTITUTIONS Determine the capacity to settle financial obligations. Define the terms and conditions for credit extended. SHAREHOLDERS To have a basis for making decisions. Need to decide whether to commit or not additional fresh capital. Determine expected return on investments. EQUITY PREFERENCE DEBENTURE SHAREHOLDERS SHAREHOLDERS SHAREHOLDERS Owners of the No right to Not owners but company. question the creditors of the management. company. The right to The right to Instead of question the receive the dividends, they