Chapter Four :Project preparation

4.1. Feasibility study

 What is a Feasibility Study?
• A feasibility study is an analysis of the viability of an
idea through a disciplined and documented process of
thinking through the idea from its logical beginning to
its logical end.

• A feasibility study provides an Investigating function

that helps answer “Should we proceed with the
proposed project idea? Is it a viable project idea?”

• A feasibility study should be conducted to determine

the viability of an idea BEFORE proceeding with the
investment decision.
 Why we do a Feasibility Study?
• To find out if a proposed project idea can be done:
– ...is it possible? , ...is it justified?

• To provide quality information for decision making- a “go/no-go”

decision
– Provide a thorough examination of all issues and assessment of
probability of project success
– Surface new opportunities through the investigative process
– Identify reasons NOT to proceed
– Enhance the probability of success by addressing and mitigating
factors early on that could affect the project
– Provide documentation that the proposed project was thoroughly
investigated
• Help in securing funding from lending institutions and other
monetary sources
 Data Sources for a Feasibility Assessment
• Data required for a feasibility study can come
from primary or secondary sources
– Primary data can include formal interviews and
surveys
• Collection of primary data can be expensive and time
consuming
– Secondary data can include industry and trade
publications, statistics of industry associations,
and government agency reports.
 Contents of Feasibility Study
• The contents of industrial investment project feasibility study:-
– Cover Page
– Executive Summary
– Table of Content
– Project Background & Basic Idea
– Markets and Demand Analysis
– Raw Materials and Supplies Study
– Location, Site and Environment Impact Assessment (EIA)
– Production Program and Plant Capacity
– Engineering and Technology Selection
– Organizational and Human Resource
– Financial and Economic Analysis
– Conclusion
– Annexes
 Executive Summary
• A feasibility study should begin with a brief executive summary outlining the
project data(both assessed & assumed) and the conclusions &
recommendations
– It should concentrate on & cover all critical aspects of the study
• In general, it should have the same structure as the body of feasibility and
hence, cover(but not limited to) to the following areas:
• Summary of project background &history
• Summary of Market and Marketing concept
• Summary of Raw materials& Supplies, Location, Site & Environment, Engineering&
Technology
• Summary of Organization and Human Resources
• Summary of Financial &Economic impact
• Key points to remember:-
– Write the summary after the content section of feasibility is completed
– Although the summary is written last, it is presented first
– The summary should no be more than one page long
 Project Background & Basic Idea
• Clearly state how the project idea fits into the framework of general economic conditions
&industrial development of a nation.
• The project should be described in detail & sponsors be identified together with the
reasons for their interest in the project including:-
– Description of project idea-
• Major project parameters
• Project Objectives &Project Strategy
• Project Location, product(product mix , plant capacity) & implementation schedule
• Outline economic, industrial, financial, social and other related policies that support the project
• Show different geographical levels(International, regional, national…)
• Highlight the economic, sector & sub sectorial coverage of a project
– Project Promoters or Initiators-name & address, roles with in a project, financial
possibilities ..
– Related feasibility Studies- author, title, ordering party.
– Cost of Preparatory Studies & Related Investigations.
 Market and Demand Analysis
• Objective
– Estimate the potential size of the market for the product proposed to manufacture(or
services to be offered
• What is the likely aggregate demand for the product/service?
– Estimate the market share to be captured
• What share of the market will the proposed project enjoy?
– Develop the marketing concepts of a project
• Determine the marketing strategy and the operative measures required to
implement the strategy
• Steps- involved in market and demand analysis-See Fig 4.1-
– Conduct Market Research
• Situational Analysis and specification of objectives
• Data Assessment(secondary information & market survey)
• Characterization of the market
• Demand Forecasting
• Conclusion , Opportunities and Risk
– Develop Marketing Concepts
 ....Cont’d
Conduct Market Research
Data Demand
Assessment Forecasting
Collection of Characterization
Situational Secondary Of the market
Analysis & information
Specification
of objectives Conduct
Conclusion,
Market Survey Opportunities,
Risks

Develop Marketing Concept

Fig 4.1 Steps in
Market &
Demand
analysis
 I- Market Research
• Situational Analysis& Specification of objectives
– Situational Analysis
• “Provide the initial understanding of current status of the
key aspects of the market & its participants- the marketing
tools, and who and what determines the characteristics of
the market that the project is supposed to enter -through
informal means”- Chandra(2003)
» Include customers(customer preferences &
purchasing power), competitors(strategies &
actions of competitors) and practices of
middlemen-Sales agents &brokers-(if any)
 Cont’d…
– Specification of market research Objectives- to carry out formal study,
it is necessary to spell out its objectives clearly & comprehensively
– “As common approach, it would be organized along the
following lines:
» Assessment of the effective demand
» Customer analysis and market segmentation
» Analysis of the channels of distribution
» Analysis of the competition
» Analysis of the governmental policy and socio-economic
environment
» Projections of marketing data-Demand forecasting
» Conclusions, Opportunities and risks” –UNIDO(1991)
 ....Cont’d
• Data Assessment
– Methods-There are basically two options for obtaining the required data:-

• Desk Research-Collection of Secondary Information- Represent the assessment of

information that has already been gathered in some other context and is already
available- Eg. Census report , National Economic Survey reports, Annual survey of industries,
NBE bulletins/reports, Ministry of trade/industry reports.

• A field survey-Conduct of Market Survey- is the assessment of primary

information directly by questioner, interviews and observations.

– Required Data- may include:

• General economic indicators relating to product demand, such as population level

and growth rate, per capita income and consumption, GDP per capita and annual
growth rate, and income distribution
 ....Cont’d
• Government policies, practices and legislation, to the extent directly
related to consumption, production, imports and exports of the
products in question, standards, restrictions, duties, taxes, as well as
subsidies or incentives, credit control and foreign exchange
regulations
• Present level of domestic production, by volume and value, including
production intended for internal consumption and not placed on the
market
• Present level of imports, by volume and value
• Production targets determined in national economic plans
• Present level of exports, by volume and value
• Behavioral patterns, such as consumer habits and responses,
individual and collective, and trade practices
 ....Cont’d
• Characterization of the Market-
– Effective Demand : Past and Present
• Apparent consumption=Production+ Imports-Exports
» This figure should be adjusted for consumption of the
product by the producer and effects of abnormal factor
– The consumption series, after such adjustments may be
obtained for several years
– Breakdown of Demand- Divide the aggregate demand /market into
different segments, on the basis of: i) nature of the product, ii)
Consumer groups, and iii) Geographically
 Cont’d…
– Customers- the customers and their needs and behavior must be
identified. Customers may be characterized along two
dimensions
– Socio-demographic criteria for individuals (age, sex,
income, education, profession, social background etc.)
– Attitudinal criteria (preferences, habits, intentions etc.)
– Price- specify the current prices of the market distinguishing
among manufacturer’s price, whole sale price, retail price
 ....Cont’d
– Methods of Distribution and Sales Promotion- The methods of
distribution and sales promotion employed currently and their
rationale must be specified
• Methods/Channels of Distribution- are the chain connecting
producers and end users.
– Either separately or in combination, the three main routes to
the end-customer are as follows: through wholesalers to
retailers; through retailers only; directly to consumers.
• Methods of Sales promotion-Methods employed for promotion
(advertising, discounts, gift schemes…) may vary from product
to product
 Cont’d…
– Supply and Competition-It is necessary to know and describe
the existing source of supply and competitors. In doing so:-
• Describe Competitor's position-Total sales, Sales in most
important segments, Total market share ,Market shares in
most important segments
• Give special attention to the f/g questions
– What are the aims of the competitors? How do the
competitors behave?
– How do the competitors use their marketing tools?
Which target groups (segments) do they work on and
how extensively? In which segments have they special
strengths and where are their weaknesses?
 ....Cont’d
Government Policy
The role of the government in influencing the market and demand of a
product may be significant such that:
Government policies, plans and legislations that would have a
bearing on market demand should be spelt out
• Wider socio-economic environment
– Describe the social and socio-economic aspects relevant to the preparation of
marketing concept
• Such aspects may reflect the society and its culture, social and economic
policies, and related regulations, customs and habits.
 ....Cont’d
• Demand Forecasting
• A) Qualitative Methods-rely essentially on judgments of experts to translate
qualitative information into quantitative estimates.
– i)Jury of Executive Opinion-involves soliciting the opinions of
managers /experts on expected future demand and then, combining them
into a demand estimate.
– ii)Delphi Method-
• Opinions are sought from a group of experts who don’t know the
identity of each other using mail survey and,
• Any divergent views are then mailed back to experts for further
opinion until the consensus is obtained.
 B. Quantitative methods
• Time Series Projection Methods-generate forecasts on the basis of an analysis of the
historical time series.
– i)Trend Projection method- Involves a) determining the trend of consumption by analyzing past
consumption data and then, b)projecting future consumption by extrapolating the trend. This is given
by the following expression:
Yt=a + bT where, Y is the demand for year t , T is time variable
Slope=
Y intercept=
– ii) Exponential Smoothing method
• Forecasts are modified in light of observed error, as in the following equation
=>

– iii) Moving Average Method

• Forecast for next period is equal to the average of sales for several preceding periods, as in the
f/g equation:-
 Example-Time series
1. Given the demand of a certain product during a 12-year as below
the least square regression for trend projection

Year Demand(‘000) Year Demand(‘000)

2001 28.0 2007 33.5
2002 29.0 2008 31.8
2003 28.5 2009 31.9
2004 31.0 2010 34.3
2005 34.2 2011 35.2
2006 32.7 2012 36.0

2. For the data given in Qn1, assume the forecast for period 1 was 29.0. If
is equal to 0.2 , derive the forecast for the periods 2 to 12 using the exponen
smoothing method

3. For the data given in Qn1, set n equal to 4 and develop forecasts for the p
5 to 12 using the moving averages method
 1. Trend Projection
T Y TY T2
0 28.0 0 0
1 29.0 29 1
2 28.5 57 4 b=2214.8-
(12X5.5X32.2)
3 31.0 93 9 506 - (12X5.5X5.5)

4 34.2 136.8 16 b= 89.6 =0.627

143
5 32.7 163.5 25
6 33.5 201 36
7 31.8 222.6 49
8 31.9 255.2 64
a=32.18-
9 34.3 308.7 81 (0.627X5.5)
a= 28.73
10 35.2 352 100
11 36.0 396 121
Sum=66 Sum=386.1 Sum=2214.8 Sum=506
Average=5.5 Average=32.18
 2. Exponential Smoothing
t Data(St) Forecast(Ft) Error(St-Ft)
1 28.0 29.0 -1.0 F2=29.0 + 0.2(-1.0)=28.8
2 29.0 28.8 0.2 F3= 28.8 + 0.2(0.2)=28.84
3 28.5 28.8 -0.3 F4 =28.84 +0.2(-0.3)=28.7
4 31.0 28.7 2.3 F5 =28.7 + 0.2(2.3)=29.2
5 34.2 29.2 5.0 F6=29.2 + 0.2(5.0)=30.2
6 32.7 30.2 2.5 F7=30.2 + 0.2(2.5)=30.7
7 33.5 30.7 2.8 F8= 30.7 + 0.2(2.8)=31.3
8 31.8 31.3 0.5 F9= 31.3 +0.2(0.5)=31.4
9 31.9 31.4 0.5 F10=31.4 +0.2(0.5)=31.5
10 34.3 31.5 2.8 F11=31.5+0.2(2.8)=32.1
11 35.2 32.1 3.1 F12=32.1 +0.2(3.1)=32.7
12 36.0 32.7 3.3 F13= 32.7 +0.2(3.3)=33.4
 3. Moving Average
t Data(St) Forecast(Ft)
1 28.0
2 29.0
3 28.5
4 31.0 F5=(28.0+29.0+28.5+31.0)/4=29.1

5 34.2 29.1 F6=(29.0+28.5+31.0+34.2)/4=30.7

6 32.7 30.7 F7=(28.5+31.0+34.2+32.7)/4=31.6

7 33.5 31.6 F8=(31.0+34.2+32.7+33.5)/4=32.9

8 31.8 32.9 F9=(34.2+32.7+33.5+31.8)/4=33.1

9 31.9 33.1 F10=(32.7+33.5+31.8 +31.9)/4=32.5

10 34.3 32.5 F11=(33.5+31.8 +31.9+34.3)/4=32.9

11 35.2 32.9 F12=(31.8 +31.9+34.3+35.2)/4=33.3

12 36.0 33.3 F13=(31.9+34.3+35.2+36.0)/4=34.4

 ....Cont’d
• C)Casual Methods- Seek to develop forecasts on the basis of cause &effect
relationship specified in an explicit quantitative manner.
• Include:-
– i) Consumption Level method
• For products that are directly consumed, the consumption level is
estimated on the basis of elasticity coefficients – income elasticity
and price elasticity of demand.

• Income Elasticity-The extent to which demand changes in response to

variations in income is measured by the income elasticity of demand.
The following formula gives the income elasticity coefficient:-
 Cont’d…
Ey = Q1-Qo X I1+Io
I1-Io Q1 +Q o
Where, Ey: Income Elasticity coefficient; Q0(I0):Qty demanded
(income level)in base year; Q1(I1):Qty demanded(income level) in
subsequent year.
Example: The following information is available on the quantity
demanded and income level: Q1=50, Q2=55,I0=1,000 and
I1=1,020. What is income elasticity?

Ey= Q1-Qo X I1+Io = (55-50) X (1000 +1020) =4.81

I1-Io Q1 +Q o (1020-1000) (55+50)
 ....Cont’d
 Price Elasticity-The price elasticity of demand, that is, the ratio of relative variations
in the volume of demand to the relative variation in price, may be expressed as a
coefficient:

= Q1-Qo = Q1-Qo X P1+Po

P1-Po P1-Po Q1 +Qo

Where , Ep is the price elasticity coefficient, Q1 is the new demand, Qo is the existing
demand at the present price Po and Pi is the new price.

Example: If 500,000 and 400,000 refrigerators sell at $500 and $600 respectively, the
price elasticity of demand is:

– Ep= Q1-Qo X P1+Po

P1-Po Q1 +Qo

– Ep= 100,000 X 1,100 = -1.22

-100 900,000
 ....Cont’d
– End Use Method-Consumption Coefficient Method
• Suitable for estimating demand for intermediate products that are
consumed for various end uses

• Involves the following steps:-

– 1st. Identify all possible uses of a product

– 2nd.Define the consumption coefficient of a product for various uses
– 3rd. Project the output levels for the consuming industries
– 4th .Compute the aggregate demand for a product
» By multiplying the consumption coefficient of the various uses
with their respective projected outputs and then summing up
the projected demands for various uses
.
 Example-End Use Method
Assume petrol is used by four different types of vehicles, the annual petrol consumption
coefficient for these vehicles and the projected (forecast) # of vehicle for the year 2012, the forecast
of petrol consumption using end use method would be as shown in Table below:

Vehicles Annual petrol Forecast # of vehicle Forecast of petrol

consumption in year 2012 consumption
per vehicle (thousand (thousand cars) (million liters)
liters)
Private Cars 3.2 150 480
Taxi 8.6 60 516
Commercial Vehicle 11.2 110 1232
Motor Cycle, Bajaj 0.12 410 49
Other Uses(10% of 0.32 … 48
private cars)
Total 730 2325
 ....Cont’d
– iii)Regression Method
• Forecasts are made on the basis of a relationship estimated
between the forecast (or dependent) variable and the explanatory
(or independent) variables.
• Different combinations of independent variables can be tested
with data, until an accurate forecasting equation is derived.
– Unfortunately, projection of the independent variables is
difficult.
– iv)Leading Indicator Method
• To use these indicators for forecasting purposes, at first the
appropriate leading indicators would have to be identified, and
then the relationship between them and the variable being
forecast is determined.
 Cont’d…
• Leading indicators are variables that react to change before, and
which can be used to predict, other variables.
• This method obviates the need for projecting an explanatory
variable, but it is not always possible to determine the leading
indicator, and the lead time may not be stable.
– The relationship itself may also change with time. The method is
used to only a limited extent.
 ....Cont’d
• Conclusions , Opportunities and Risks
• At this stage, after having summarized all results obtained so far by the marketing
research:

– The market opportunities that can make the project feasible, as well as the market
risks endangering it, can be summed up.

• These potential opportunities and risks provide the bases for

– The development of the marketing concept, which comprises :-
• the specific marketing strategies (focus on target market and customer needs), and,
measures and means (coordinated marketing) required to achieve the project objectives
in a chosen market - as shown in next section
 II-Develop Marketing Concept
• Includes the following two dimensions :
– Strategic Dimension
• 1st ) Determine Product-target group- Identification of target groups and of the products likely to win
their favor;

• 2nd ) Determine Marketing Objectives -Comprise sales objectives as well as the desired position in
the product and target-group fields.

• 3rd) Determine Marketing Strategies-

– For Saturated Market-Determine Competition Strategy-Aggressive price strategy , Imitation
strategy ,Profile strategy or
– For Growing Market- Determine Market expansion Strategy: Demand expansion ,Demand
intensification
– Operative Dimension
• 4th) Determine the marketing mix-Product, price, promotion and distribution-the components of the
marketing mix-must be seen as interdependent marketing tools, which are to be combined in an
optimal way so as to achieve the marketing objectives

• 5th )Determine measures and Tools-concerned with the preparation of a schedule or plan of action
and the projection of the marketing budget.