FEASIBILITY STUDY

Introduction
Feasibility study
Main components of a feasibility study are:
• Market Study (quantity and quality wise)
• Technological study (raw materials, equipments, labour)
• Financial study
A. The Investment Project Cycle and Types of
Preinvestment Studies
 1. Pre-Investment Phase
• Identification of investment opportunities (opportunity
studies)

• Analysis of project alternatives and preliminary project

selection as well as project preparation (prefeasibility and
feasibility studies)

• Project appraisal and investment decisions (appraisal report).

• Support or functional studies

 1.1. Opportunity studies
The following should be analyzed:
• Natural resources with potential for processing and
manufacture, such as timber for wood-based industries
• The existing agricultural pattern that serves as a basis for
agro-based industries
• Future demand for certain consumer goods that have growth
potential as a result of increased population or purchasing
power or for newly developed goods such as synthetic fabrics
or domestic electrical products
• Imports, in order to identify areas for import substitution
• Environmental impact
• Manufacturing sectors successful in other countries with
similar economic background and levels of development,
capital, labour and natural resources
 1.1. Opportunity studies
• Possible inter-linkage with other industries, indigenous or
transnational
• Possible extension of existing lines of manufacture by
backward or forward integration, linking, for example, a
downstream petrochemical industry with a refinery, or an
electric-arc steel plant with a steel rolling-mill
• Possibilities for diversification, for example, from a
petrochemical complex into the pharmaceutical industry
• Possible expansion of existing industrial capacity to attain
economies of scale
• The general investment climate
• Industrial policies
• Availability and cost of production factors
• Export possibilities
 1.1. Opportunity studies
Opportunity studies can be classified into:
• General opportunity studies
✓ Area studies designed to identify opportunities in a given
area such as an administrative province, a backward region or
the hinterland of a port
✓ Industry studies designed to identify opportunities in a
delimited industrial branch such as building materials or food
processing
✓ Resource-based studies designed to reveal opportunities
based on the utilization of natural, agricultural or industrial
products such as forest based industries, downstream
petrochemical industries and metalworking industries
• Specific project opportunity studies
 1.2. Pre-Feasibility Study
The principal objectives of which are to determine whether:
• All possible project alternatives have been examined;
• The project concept justifies a detailed analysis by a feasibility
study;
• Any aspects of the project are critical to its feasibility and
necessitate in-depth investigation through functional or
support studies such as market surveys, laboratory tests or
pilot-plants tests;
• The project idea, on the basis of the available information,
should be considered either non-viable or attractive enough
for a particular investor or investor group;
• The environmental situation at the planned site and the
potential impact of the projected production process are in
line with national standards.
 1.2. Pre-Feasibility Study
The review should cover the various alternatives identified in the
following main fields (components) of the study:
• Project or corporate strategies and scope of project
• Market and marketing concept
• Raw materials and factory supplies
• Location, site and environment
• Engineering and technology
• Organization and overhead costs
• Human resources, in particular managerial (entrepreneurial)
staff, labour costs and training requirements and costs
• Project implementation schedule and budgeting
 1.3. Support (functional) studies
Support or functional studies cover specific aspects of an
investment project, and are required as prerequisites for, or in
support of, prefeasibility and feasibility studies, particularly
large-scale investment proposals.
Examples of such studies are as follows:
• Market studies of the products to be manufactured, including
demand projections in the market to be served together with
anticipated market penetration;
• Raw material and factory supply studies, covering current
and projected availability of raw materials and inputs basic to
the project, and the current and projected price trends of
such materials and inputs;
• Laboratory and pilot-plant tests, which are carried out to the
extent necessary to determine the suitability of particular raw
 1.3. Support (functional) studies
• Location studies, particularly for potential projects where
transport costs would constitute a major determinant;
• Environmental impact assessment, which covers current
environmental conditions in the area surrounding the
envisaged site (current emissions and potential long-range
transport of pollutants), possible low-emission technologies
or environnemental protection technologies, alternative sites,
the use of alternative raw materials and auxiliary materials.
An environmental impact analysis will have to be carried out
particularly for projects involving, for example, chemical plants,
paper and cellulose mills, petroleum refineries, the iron and
steel industry, and nuclear, thermal and hydropower plants;
 1.3. Support (functional) studies
• Equipment selection studies, which are required when large
plants with numerous divisions are involved and the sources
of supplies and the costs are widely divergent. The ordering of
equipment, including preparation of and invitations for bids,
their evaluation, contracting and deliveries, is usually carried
out during the investment or implementation phase.
When very large investments are involved, the structure and
economics of the project depend heavily on the type of
equipment, its price and production costs; even the operational
efficiency of the project is a direct function of the selected
 1.4. Feasibility Study
A feasibility study should provide all data necessary for an
investment decision. The commercial, technical, financial,
economic and environmental prerequisites for an investment
project should therefore be defined and critically examined on
the basis of alternative solutions already reviewed in the pre-
feasibility study.
The result is then a project whose background conditions and aims
have been clearly defined in terms of its central objective and
possible marketing strategies, the possible market shares that
can be achieved, the corresponding production capacities, the
plant location, existing raw materials, appropriate technology
and mechanical equipment and, if required, an environmental
impact assessment.
The financial part of the study covers the scope of the investment,
including the net working capital, the production and marketing
costs, sales revenues and the return on capital invested.
 The term "feasibility study" is often misunderstood and
deliberately misused by suppliers of equipment or technology.
Frequently, an outline of a project primarily oriented to the
supply of equipment or the choice of a particular technology
is called a feasibility study, although it is rather a technical or
support study, not covering all feasibility aspects, as required
for an unbiased project appraisal.
Sometimes production or sales estimates are based on
conditions observed in a developed country and bear little
relation to those in a developing country. As these studies are
unrelated or ill-adapted to the local business environment,
they can be misleading and result in the misallocation of
resources, as has often occurred in developing countries.
• A feasibility study must be related to available production
factors and local market and production conditions, and this
requires an analysis that has to be translated into costs,
income and net gains.
 1.5. Appraisal Report
When a feasibility study is completed, the various parties
involved in the project will carry out their own appraisal of the
investment project in accordance with their individual
objectives and evaluation of expected risks, costs and gains.
Large investment and development finance institutions have
formalized project appraisal procedures and usually prepare
an appraisal report.
This is the reason why project appraisal should be considered an
independent stage of the pre-investment phase, marked by
the final investment and financing decisions taken by the
project promoters.
 1.5. Appraisal Report
The better the quality of the feasibility study, the easier will
be the appraisal work. Until this point is reached, considerable
amounts of time and funds may already have been expended
since the initiation of the project idea. The appraisal report
will prove whether these pre-production expenditures were
well spent. Project appraisal as carried out by financial
institutions concentrates on the health of the company to be
financed, the returns obtained by equity holders and the
protection of its creditors.
The techniques applied to appraise projects in line with these
criteria centre around technical, commercial, market,
managerial, organizational, financial and possibly also
economic aspects. The findings of this type of appraisal enter
into the appraisal report.
1.5. Appraisal Report
 2. The Investment Phase
The investment phase can be divided into the following
stages:
• Establishing the legal, financial and organizational basis for
the implementation of the project
• Technology acquisition and transfer, including basic
engineering
• Detailed engineering design and contracting, including
tendering, evaluation of bids and negotiations
• Acquisition of land, construction work and installation
• Pre-production marketing, including the securing of supplies
and setting up the administration of the firm
• Recruitment and training of personnel
• Plant commissioning and start-up
 3. The Operational Phase
The problems of the operational phase need to be considered
from both a short- and a long-term viewpoint.
The short-term view relates to the initial period after
commencement of production when a number of problems
may arise concerning such matters as the application of
production techniques, operation of equipment or inadequate
labour productivity owing to a lack of qualified staff and
labour. Most of these problems have their origin in the
implementation phase.
The long-term view relates to chosen strategies and the
associated production and marketing costs as well as sales
revenues. These have a direct relationship with the
projections made at the pre-investment phase. If such
strategies and projections prove faulty, any remedial
measures will not only be difficult but may prove highly
expensive.

Rehabilitation and expansion projects can be used to resolve

problems due to flaws in the pre-investment phase although
it is not an easy job
 Feasibility Study
Outputs and organization of a feasibility study report
according to United Nations Industrial Development
Organization (UNIDO):

• Executive summary • Project engineering

• Project background & history • Plant organization
• Market and plant capacity • Manpower
• Material & inputs • Implementation scheduling
• Location & site • Financial and economic
evaluation