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The feasibility study phase

 Objective of a feasibility study;

Feasibility study  To find out if a development project can be done
 … is it possible?
• what is a feasibility study?  … is it justified?

• what to study and conclude?  To suggest possible alternative solutions

 To provide management with enough information to know:
• types of feasibility: technical, economic,  Whether the project can be done
schedule, operational  Whether the final product will benefit its intended users
 What are the alternatives are
• quantifying benefits and costs: payback  Whether there is a preferred alternative
analysis, net present value analysis, return on  A feasibility study is a management-oriented activity
investment analysis  After a feasibility study, management makes a “go/no-go”
decision
 Need to examine the problem in the context of broader business
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Content of a feasibility study Four types of feasibility

Things to be studied in the feasibility study Technical feasibility
 The present organizational system
Economic feasibility
 Stakeholders, users, policies, functions, objectives
 Problem with the present system Schedule feasibility
 Inconsistencies, inadequacies in functionality, Operational feasibility
performance………
 Possible solution alternatives
 “Sticking with the current system” is always an alternative
 Different business processes for solving the problem
 Different levels/types of computerization for the solutions
 Advantages and disadvantages of the alternatives
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Technical feasibility Economic feasibility

 Is the proposed technology or solution practical?  Cost-benefit analysis
 Do we currently possess the necessary technology?
 Purpose-answer questions such as:
 Do we possess the necessary technical expertise, and is the
schedule feasible?  Is the project justified(i.e. will benefits overweight costs)?
 Is relevant technology mature enough to be easily applied  Can the project be done, within given cost constraints?
to our problem?  What is the minimal cost to attain a certain system?
 What kind of technology will be need?  Which alternative offers the best return on investment?
 Some organizations like to use state-of-art technology
 Selection among alternative financing
….but most prefer to use mature and proven technology
arrangements(rent/lease/purchase)
 A mature technology has a larger customer base for
obtaining advice concerning problems and improvements  Difficulties
 Is the required technology available “in house”?  Benefits and costs can both be intangible, hidden
 Is the technology is available….. Does it have the capacity
and/or hard to estimate
to handle the solution?
 If the technology is not available……..can it be acquired?  Ranking multi-criteria alternatives

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Types of benefits Types of costs

 Examples of particular benefits: cost reduction, error
reduction, increased flexibility of operation, improved Project related costs
operation, better and more timely information
Preliminary planning costs:
 Benefits may be classified into one of the following
categories (internally or contracted out)
 Monetary Construction costs: all resources
 Tangible
 intangible
Operational costs(on-going)
 How to identify benefits Maintenance
 By organizational level
Personal
 By department

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Accounting methods Discount rates

 Money value today is worth more than tomorrow
 Assuming that both benefits and costs can be  Money values used in this type of analysis should ne
normalized to refer to current year money value
identified and evaluated, how do we compare
 For this, we need a number, the discount rate, which
them to determine project feasibility? measures the opportunity cost of investing money in
other project, rather than the proposed project. This
number is company-and industry-specific
 Payback analysis  To calculate the present value, i.e., the real money value
given the discount rate i, n years from now we use the
formula
present value= 1
 Return on Investment analysis
(1  i) n
 For example, if the discount rate is 12%, then
 Present value(1)=1/(1+0.12)1=0.893
 Net Present analysis  Present value(2)=1/(1+0.12)2=0.797

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Payback Analysis Payback Period calculation

Consider the following example
 Simple payback is the amount of time it will take  Cash outflows: the initial cost of the investment is
to recover development/construction costs based a cash outflow of $ 800 in year 1, followed by a cost
on annual cost savings.
of $ 150 in year 2. there are no expected costs in
 Shorter payback period is more prefer; year 3-5
 The investment costs are recovered sooner and are
available again for further use  Cash inflows: the investment will bring $300 cash
 A shorter payback period is viewed as less risky flow each year, for years 1-5
 There can be more than one payback period for a given  Net Cash flow: the net of cash inflows and cash
cash flow stream outflows for each year
 Payback period can be considered as a decision
 Cumulative Cash flow: the sum of all cash inflows
making criteria for management
and out
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Payback Period calculation Payback Period calculation

Investment Year 1 Year 2 Year 3 Year 4 Year 5

Cash Flow

Cash 300 300 300 300 300

Inflows
Cash – 800 –150 0 0 0
Outflows
Net Cash – 500 150 300 300 300
Flow
Cumulative – 500 – 350 – 50 250 550
Cash Flow

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Payback Period calculation

A
Payback period=  y
B
Where;
y= the number of years before final payback year
A=total remaining to be paid back at the start of the payback year , to bring
cumulative cash flow to 0
B=total (net) paid back in the entire payback year
50
payback  3 
300
payback  3  0.17

=3.17 years

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Payback Period calculation with discount rate Example: Payback Period

Investment Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5
Consider one organization has two alternative to invest
Cash Inflows 300 300 300 300 300 money. Following table gives the cash flow
Cash Outflows – 800 –150 0 0 0 information. Decide which option is more suitable for
Net Cash Flow – 500 150 300 300 300 investment. Consider two cases ;without discounting
Discounted Net Cash -500 133.95 239.10 216.30 190.80 and discounting
Flow
Cumulative Cash Flow -500 -366.05 -126.95 89.35 280.15
Discount factor 1 0.893 0.797 0.712 0.636 Year Alternative A Alternative B
0 -5000 -2000
1 500 500
Payback Period= 3+ 126.95/(126.95+89.35) 2 1000 1500
= 3+ 0.59 3 1000 1500
= 3.59 years 4 1500 1500
5 2500 1500
Considering 12% discount rate
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Example: Payback Period

solution 6000
Cumulative
cashflow
Year 0 1 2 3 4 5 4000
Cash flow-alt A -5000 500 1000 1000 1500 2500
Cumulative cash -5000 -4500 -3500 -2500 -1000 1500 2000
flow
A
0
Cash flow alt B -2000 500 1500 1500 1500 1500 B
0 1 2 3 4 5
Cumulative cash -2000 -1500 0 1500 3000 4500
-2000
flow
1000 0
4
Payback period for B= 2  1500
-4000
Payback period for A = 2500
4  0.40 2
4 .4 -6000

years
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Example: Payback Period with discount factor Example: Payback Period with discount factor
Cash flow description Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
solution
Development cost (418,040)
Year 0 1 2 3 4 5
Operation and Maintenance
Cash flow-alt A -5000 500 1000 1000 1500 2500 cost (15,045) (16,000) (17,000) (18,000) (19,000) (20,000)
Discount factor 1 0.893 0.797 0.712 0.636 0.567
Discount factor (12%) 1.000 0.893 0.797 0.712 0.636 0.567 0.507
Discounted -5000 446 797 712 954 1417
cashflow
Time-adjusted costs -418040 -13435.19 -12752 -12104 -11448 -10773 -10140
Cumulative cash -5000 -4554 -3757 -3045 -2091 -674
flow
cumulative time adjusted cost -418040 -431475 -444227 -456331 -467779 -478552 -488692
Cash flow alt B -2000 500 1500 1500 1500 1500
benefits derived from
Discount factor 1 0.893 0.797 0.712 0.636 0.567 operation of new project - 150,000 170,000 190,000 210,000 230,000 250,000
Discounted -2000 446 1195 1068 954 850
cashflow Discount factor (12%) 1.000 0.893 0.797 0.712 0.636 0.567 0.507
Cumulative cash -2000 -1554 -359 709 1663 2513
Time -adjusted benefits 0 133950 135490 135280 133560 130410 126750
flow
cumulative time adjusted
benefits 0 133950 269440 404720 538280 668690 795440
cumulative time adjusted cost
+ benefits -418040 -297525 -174787 -51611 70501 190138 306748
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Net Present Value Analysis

Net Present Value Analysis
 NPV is the difference between the present value of cash
 A dollar earned today is worth more than a dollar earned five inflows and the present value of cash outflows.
years from now
 NPV compares the value of a dollar today to the value of
 Net present value (NPV) analysis is a method of calculating
the expected net monetary gain or loss from a project by that same dollar in the future, taking inflation and
discounting all expected future cash inflows and outflows to returns into account.
the present point in time  For example, if a retail clothing business wants to
 Projects with a positive NPV should be considered if financial purchase an existing store, it would first estimate the
value is a key criterion because that means the return from a future cash flows that store would generate, and then
project exceeds the cost of capital (the return available by
discount those cash flows into one lump-sum present
investing the capital elsewhere)
value amount, say $565,000.
 The higher the NPV, the better

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Net Present Value Analysis

 NPV = Net Present value = Present value of net cash
Net Present Value Analysis flows
 Each cash inflow/outflow is discounted back to its PV and then
 If the owner of the store was willing to sell his they are summed.
business for less than $565,000, the purchasing
company would likely accept the offer as it or shortened
presents a positive NPV investment.
 Conversely, if the owner would not sell for less t - the time of the cash flow
than $565,000, the purchaser would not buy the N - the total time of the project
store, as the investment would present a r - the discount rate (the rate of return that could be earned on an
investment in the financial markets with similar risk.)
negative NPV at that time and would, therefore, Ct - the net cash flow (the amount of cash) at time t
reduce the overall value of the clothing company C0- the initial investment

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Net Present Value Analysis

Net Present Value Example

$943.39
Note that
totals are
equal, but
NPVs are
not because
of the time
value of
money

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Return On Investment
Discount Rate 10%
Return on Investment
 Return on investment (ROI) is calculated by
Project 1 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TOTAL
Benefits 0 2000 3000 4000 5000 14000
subtracting the project costs from the benefits and then
0.90909091 0.826446 0.751315 0.683013 0.620921 dividing by the costs
0 1652.893 2253.944 2732.054 3104.607 9743.497 ROI = (total discounted benefits - total discounted costs)
Costs 5000 1000 1000 1000 1000 9000
0.90909091 0.826446 0.751315 0.683013 0.620921
/ discounted costs
4545.45455 826.4463 751.3148 683.0135 620.9213 7427.15  The higher the ROI, the better
Cashflow -5000 1000 2000 3000 4000 5000
NPV $2,316.35
 Many organizations have a required rate of return or
minimum acceptable rate of return on investment for
projects
Project 2 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TOTAL
Benefits 1000 2000 4000 4000 4000 15000  Internal rate of return (IRR) can by calculated by
0.90909091 0.826446 0.751315 0.683013 0.620921 finding the discount rate that makes the NPV of all cash
909.090909 1652.893 3005.259 2732.054 2483.685 10782.98 flows equal to zero
Costs 2000 2000 2000 2000 2000 10000
0.90909091 0.826446 0.751315 0.683013 0.620921
1818.18182 1652.893 1502.63 1366.027 1241.843 7581.574
Cashflow -1000 0 2000 2000 2000 5000
NPV $3,201.41
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Schedule feasibility
Return On Investment  How long will it take to get the technical expertise?
 We may have the technology, but that doesn’t mean we
(Discounte d Benefits - Discounted Costs) have the skills required to properly apply that technology
ROI   May need to hire new people or re-train existing staff
Discounted Costs  Whether hiring or training, it will impact schedule
 Asses the schedule risk
 Given our technical expertise, are the project deadlines
Project 2 desirable?
Project 1
 If there are specific deadlines, are they mandatory or
(9743  7427) (10783  7582) desirable?
ROI  ROI   If the deadlines are not mandatory, the analyst can propose
7427 7582 several alternative schedules
ROI  31% ROI  42%  What are the real constraints on project deadlines?
 If the project overruns, what are the consequences?
 Missed schedules are bad, but inadequate systems are
worse!
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Operational feasibility Legal Feasibility

 How do end-users and managers feel about?  Is the project legally feasible?
The problem you identified It ensures that the project can be performed in
The alternative solutions you are exploring accordance with current legal requirements and
 You must evaluate that key aspects of the project have been
analysed from a legal perspective. In this stage,
Not just whether a system can work… issues like planning permission, land
…but also whether a system will work ownership/easements and taxation are all
 Any solution might meet with resistance: considered by the project team.
Does management support the project?
How do the end-users feel about their role in the  Legal requirements.
new system?  Building planning law
How will the working environment of the end-  Environmental related law
users and management adapt to the change?  Disability act
 Fire regulation, etc.
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Comparing Alternatives
How do we compare alternatives?
When there are multiple selection criteria?
When none of the alternatives is superior across the board?
Use a Feasibility Analysis Matrix!
The columns correspond to the candidate solutions;
The rows correspond to the feasibility criteria;
The cells contain the feasibility assessment notes for each candidate
Each row can be assigned a rank or score for each criterion
 e.g., for operational feasibility, candidates can be ranked 1, 2, 3,
etc.
A final ranking or score is recorded in the last row.

Other evaluation criteria to include in the matrix

quality of output
ease of use
vendor support
cost of maintenance

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Feasibility Report
1. Purpose and the scope of the study 5. Possible alternatives
 Objectives of the study
• ….including ‘do nothing’
 Who commissioned it and who
did it 6. Criteria for comparison
 Sources of information • Definitions for criteria
 Process used for the study 7. Analysis of alternatives
 How long did it take
• Description of each alternative
2. Description of present situation
 Organizational settings, current
• Evaluation with respect to
systems criteria
 Related factors and constraints • Cost/benefits analysis and
3. Problems and requirements special implications
 What’s wrong with the present 8. Recommendations
situation • What is recommended and
 What changes are needed implications
4. Objectives of the new project • What to do next
 Goals and relationship between
them 9. Appendices
• To include any supporting
materials

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