The Nature of

Feasibility Study
Module 1
 Definition
Cabrera (2000), for instance, defines a project feasibility study as a:

“systematic investigation which ascertains whether a business

undertaking is viable and if so, the degree of its profitability.”
 Nature of Feasibility Study
Based on the given definition, the key terms to remember are:

1. Systematic 2. Proposed Business

Inquiry Activity

3. Viability in All 4. Measurement of

Areas Profitability Level
 Systematic Inquiry
The term systematic in this context implies two things. First, that there is a
procedure or a step-by-step process involved in the conduct of a feasibility study.

Second, systematic means that the whole study is composed of different phases
or aspects. Each phase unique characteristics that ultimately contribute to the
attainment of the objectives of the study.
 Proposed business activity
A project feasibility study applies only to a business endeavor. A business is an
organization engaged in lawful commercial activities of selling products or services for
monetary consideration with the intention of realizing profit.

An activity should have the following characteristics to qualify as a business activity:

1. It should be intended for profit

2. It must be regularly undertaken

3. It must be financial in character

 Proposed business activity
Intended for Profit.

A foremost concern of a project feasibility study is to maximize business profitability or to

improve the interest of the shareholders. In a feasibility study, the term profit refers to the
accounting definition which means the excess of all costs and expenses over revenue.

Regularly Undertaken.

The element of regularity indicates that there is a continuing and progressing economic act
and not a mere single disconnected act.

Financial in Character.

A business activity involves an exchange of monetary values with another party. Except for
the socio-economic phase, all aspects of the study have a common denominator expressed
in terms of Philippine peso.
 Viability in all areas
A project feasibility study tests the viability of a business
endeavor, not only in one but in all aspects. Viability of
the activity is the primary concern of prospective
investors.
 Measurement of profitability level
As it has always been pointed out, a feasibility study is directed towards the
determination of a project’s viability.

Viability can be expressed in different terms, one of which is in terms of

profitability, not only within a short period but during the entire life of the business.

Opportunity cost refers to the cost or benefits foregone when one alternative is
chosen in favor of another alternative.

A business that cannot achieve the profitability level required in the industry where it
belongs experiences business difficulty. “Business difficulty refers to the stage where
the business organization cannot attain normal profitable operations.
 Purposes of a Feasibility Study
The underlying concept behind the conduct of a feasibility study is to test the viability of a
business project in all areas. This is the general purpose why a feasibility study is
undertaken.
Corollary to this underlying premise, a feasibility study is conducted.

01
To enhance the To facilitate easily the
sustainability of a particular
business currently
02 evaluation of a project’s
success in all areas covered by
undertaken the study
To seek the infusion To determine the
of additional fresh
working capital from a
03 04 recovery period of
capital investment or expected
financial institution return on investment
Purposes of a Feasibility Study
To reduce, if it cannot

05
To serve as measuring
instrument in evaluating actual 06 be totally avoided, the
expected business difficulty
project results against what the that maybe experienced
study reveals during actual implementation

To meet and satisfy the requirements set by the

07 investors of the proposed business project
 Qualities of a Good Feasibility Study
Investors consider a number of factors before investing in a certain project, most especially if the amount
involved is material.

Comprehensive. The study should fully cover all the areas that need to be scrutinized. It should present the
overall perspective of the project so that users are properly guided in making an economic decision.

Objective. Being objective denotes the unbiased presentation of the findings of the study based on a fair
evaluation and critical analysis of data from various sources.

Simple. The language and expressions used in a feasibility study should be simple to enhance
understanding.

Reliable. Reliability means that there is a high degree of truthfulness in the available data, in the analysis
and evaluation and in the conclusion of the study.
 Usefulness of a Feasibility Study
A proposed project can benefit from the results of a feasibility study in various ways,

• One, for the benefit of project proponents, it is still the most scientific instrument, with different
interdependence aspects, that can be used in project design or redesign

• Two, it can minimize, if not totally eradicate, the business difficulty that maybe experienced in the
actual implementation of the project.

• Three, it is considered as the most reliable instrument in making a decision whether to implement or
discard a project, which again, would directly benefit the investors.

• Fourth, it is the most comprehensive medium with which to evaluate a project in terms of funding
or additional fresh capital or tax exemption incentives.

• Fifth, it is an effective tool in evaluating the profitability level and sustainability of a proposed
project. Prospective investors put much weight on this aspect of a project during the analytical process.
 Limitations of a Feasibility Study
Though a feasibility study provides substantial benefits to users, it has some inherent limitations.

• One, valuable information greatly needed in the study is not readily available.

• Two, the cost of gathering the necessary data required in the analysis, formulation of conclusions
and drafting of recommendations is very high.

• Three, the competitors may have available data directly related to their operations, but they may
hesitate to share such information because of confidentiality in terms of effects on taxation, production
process, marketing strategies, market share and other related aspects of the business.

• Four, the person undertaking the study may not have acquired the necessary professional expertise
and competency in making the feasibility study.

• Five, a feasibility study, though conducted by a competent individual and with all necessary data
available, still remains a forecast and nobody can vouch for the attainability of the forecast.
 Factors Affecting Preparation
of a Feasibility Study
A variety of factors can affect the preparation of a feasibility study. These factors maybe in terms of length of
time and funds required to undertake and finish the study.
Some of these factors are:

1. Type of 4. Party Preparing

Industry the Study and
3. Purpose of
the Study
2. Size of the 5. Requirements of
Project Prospective
Investors
 Type of industry

Industry refers to a group of companies that have common

characteristics and are related in terms of operational
processes, product sold, market, functions or services
offered.
 Size of the project

The size of the project has a direct relationship to the

different factors affecting the preparation of the feasibility
study.
 Purpose of the study
It is common notion that a feasibility study is solely intended for a new project. This is not the case,
though. It is also applies to existing businesses by providing the following information:

1. Market information on the plan to expand

2. Product information on the plan to offer new product to the market

3. Competition analysis because of entrance of a new competitor or

4. Demand study on the plan to launch a new service

 Party preparing the study
A feasibility study covers wide and different areas of specialization thus it cannot be performed by only one individual. A group
conducting the study may include:

1. an economist, who will study the trends on supply and demand of goods, including prices;

2. an industrial engineer, who will study the production processes, waste management and the efficient
use of resources, particularly energy;

3. a mechanical engineer, who will design the manufacturing plant. Machinery and other mechanical
equipment required for the project;

4. a marketing consultant, who will design marketing strategies, create a marketing plan and determine
the appropriate marketing mix;

5. an accountant, who will prepare the necessary projected financial statements and schedules;

6. a lawyer, who will prepare the legal documents required by the different agencies, banks and other
monitoring offices and

7. a human resource officer, who will provide the necessary inputs on staffing, job descriptions and
qualifications standards of personnel
Requirements of prospective investors

There is no standard template for a feasibility study. The

arrangement of the different parts and sections is often
prescribed by the funding agency or the prospective
investors.
 Classification of Feasibility Studies
Feasibility studies are prepared for business enterprises only. Though there is no straightforward
classification of feasibility studies, discussion of the concept may easily be facilitated by using the following
categories:

1. As to Amount of Investment

2. As to Status of the Project

3. As to Industry Classification

4. As to Nature of Management

5. As to Liability of Investors
 Classification of Feasibility Studies
As to amount of investment. In terms of capital base, a business entity can either be a micro entity, a small
entity, a medium-size entity or a large entity.

As to status of the project. In terms of status, a feasibility study can either be for a new project or for a
new project or for the expansion of an existing business enterprise.

As to industry classification. A feasibility study can be classified according to industry, whether it is for

1. Manufacturing 5. Entertainment

2. Real Estate 6. Agriculture

3. Electronics 7. Merchandising or

4. Transportation 8. Utilities

The focus of the study may differ slightly from one industry to another.
 Classification of Feasibility Studies
As to nature of management. The proposed business entity may either be administered by a newly-hired
managerial personnel or by the existing set of officers. Oftentimes, the nature of a proposed project is
highly influenced by whether it will be under a new management or not.

As to liability of investors. The liability of the investors or owners depends entirely on the type of the
proposed business. The proposed business under study can either be a sole proprietorship, a partnership
or a corporation
 Parties Requiring Feasibility Study
Different parties require different feasibility studies depending on the specific purpose of the party
concerned.

The different parties that may require a feasibility study are:

1. Prospective Investors

2. Management

3. Proponents

4. Financial Institutions

5. Shareholders

6. The Government
 Prospective investors
Prospective investors are primarily interested in knowing the viability of

a proposed project taken as a whole. In addition, they are very much interested in conducting a feasibility
study because they want to:

1. Determine if the profitability of the business can be sustained during its entire life

2. Determine the amount of funds to be committed

3. Determine the rate of return on invested capital

 Management
The management of an existing project is interested in conducting a feasibility study because they may
want:

1. to determine the viability of a proposed expansion such as the opening of a new manufacturing plant, a
new branch or a new product line

2. to determine the appropriate selling price of an existing business which the organization is planning to
dispose of

3. to determine the appropriate price of a particular business which the company plans to buy and

4. to determine the gap between expected demand and estimated supply for a new product line that the
business plans to introduce
 Proponents
Proponents of a new project are interested in conducting a feasibility study because they want to:

1. Test the viability of a new project through the application of appropriate projection tools

2. Answer the queries of other interested parties

3. Identify possible ways to improve project specifications, particularly through a market study

4. Use the study as an instrument in attracting prospective investors

 Financial institutions
Lending institutions or creditor banks take interest in feasibility studies to:

1. Determine the capacity of proposed projects to settle their financial obligations before they extend the
necessary credit

2. Define the terms and conditions for credit extended, particularly the interest rates, repayment period or
collaterals used to secure the amount borrowed.
 Shareholders
Shareholders of an existing business are interested in feasibility studies because they:

1. Need to have a basis for making decisions on the sale of an existing business or the purchase of a new
one

2. Need to decide whether to commit or not additional fresh capital on a proposed new project

3. Need to determine the expected return on their investments on a new project

 The Government Agencies
Government agencies are interested in feasibility studies in order to:

1. Determine whether the project complies with the minimum requirements

2. Determine whether the project needs to be supported in terms of providing incentives or grants

3. Ascertain whether the project contributes to the socio-economic program of the government
End of Module
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