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Feasibility study Chapter 1

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Financal feasibility study
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Feasibility study Chapter 1

  1. 1. Econ 4315 Chapter 1
  2. 2. Feasibility study definition • An evaluation and analysis of the potential of the proposed project that is based on extensive investigations and research to give full comfort making decisions based on the study
  3. 3. • Feasibility study conducted at the project initiation phase before significant expense are engaged. • Feasibility study attempts to answer one main question : Whether the project is Feasible OR Not • Feasibility study should deal with correct facts, correct assumptions and up to date financial data.
  4. 4. Team Vs One • Not a single person can conduct a feasibility study alone , feasibility study is a product of a team of experts, can perform a set of studies (legal, market, financial, profitability, technical, environmental, social, national, regional, international ...Etc.). The feasibility study takes a long time, efforts and cost.
  5. 5. Project definition • Is any economic and financial action by an individual or group of individuals, or by on behalf of the State to meet market needs for the purpose of profitability Project types Public Project Private Project Joint venture Project
  6. 6. Project cycle • Is the process the project has to go from the beginning of idea start up to the implementation and testing operation.
  7. 7. Idea inception Idea refinement Market and costing analysis Project design Feasibility Study Preparation for implementation Business Plan implementation
  8. 8. Concepts and definitions Owner (Wiraswasta): means a person who has character of bravery, superiority, model in taking risk by his ability. Wiraswasta run his business by himself but has no vision for business development, creativity and innovation. Entrepreneur (Wirausata): The Entrepreneur is a person shall create and realize the idea that will be implemented, Entrepreneur is a doer for economic development and its function as an innovator and creator of new projects. Entrepreneurship: is the process of creating something new, or make changing to the old one, that called as (innovation) with purpose in raising individual and community prosperity.
  9. 9. Intrapreneur: The meaning of Intrapreneur or called corporate Entrepreneurship is to develop or maintain the Entrepreneurship spirit in employees at a company. Investment: Mobilizing or using part of wealth of individuals (capital) for the purpose of creating new capacity in the community to generate or increase income of the entrepreneurs. Real investments: create new economic capacity such as creating a new project Financial investments: invest in existed projects such as investing in the secondary market of the financial markets. Assets ownership should be transferred from the seller to the buyer.
  10. 10. Examples for real and financial investment • Building a new House is considered real investment. • Buying an existing constructed house is considered financial investments. • Purchase a piece of land is considered financial investments. • Land reclamation is considered an real investment.
  11. 11. Income: Is a continuous cash flow cascaded and periodically result of productive activity in which requires specific flow, periodic and continuity, and it’s a return for all the elements of production as a result of its contribution to the production process. Factors of production The income name Capital Interests, or profit Land Rents Labor Wages Entrepreneur Profits Return on factors of production
  12. 12. Net income = Return on the production process – total cost – taxation – Interests – distributions. personal income = dividends number of entrepreneurs.
  13. 13. • Wealth: Are the total monetary values of each property movable and immovable for individuals • Capital : Is a part of wealth; Investor used to generate income
  14. 14. • private entrepreneur aim is to achieve maximum profits (profit = sales return -total production costs including taxes and depreciation rat ) • Public sectors efforts are concentrated in maximizing public benefit any inflated social benefit analyses of all public projects
  15. 15. Feasibility study Vs Business Plan • FS should be conducted at initiation phase, BP prepared for existed projects. • FS is filled with calculations, analysis and estimated projections of a business opportunity. While a business plan is made up of mostly tactics and strategies to be implemented in other to start and grow the business. • A feasibility study is all about business idea viability while a business plan deals with business growth plan and sustainability.
  16. 16. How to come up with an idea • Researches and studies. • Magazines and publications • General national statistics. • Idea discussion with family members and friends. • Making market analysis by viewing e.g imported goods. • Internet articles, blogs and social media interaction.
  17. 17. Feasibility Study general template • Introduction • Legal study. • Marketing feasibility study. • Technical feasibility study. • Financial feasibility study. • Economic feasibility study. • National feasibility study. prepared by: Abd ElRahman j. AlFar
  18. 18. Introduction A Pre-feasibility Study is conducted to obtain an overview of the problem and to roughly assess whether feasible solutions exists prior to committing substantial resources to a project, or even before spending a lot of money for the feasibility Study itself. • Cover page • Table of contents • Purpose of the document • Brief description of the project • Executive summary • SWOT analysis • Methodology • Study team • Market entry timing prepared by: Abd ElRahman j. AlFar
  19. 19. Legal study This study is considered the first step in the detailed feasibility study, conducted by experts and specialists in the field of law and legislation concerning investment and employment, insurance, taxes etc. Legal and environmental feasibility study contains several elements: • The investment environment analysis. • Investment laws analytical study. • Choosing the legal frame work of the project nature . • Is it legal to purchase the technology. • The nature of taxes. • The total cost of legal investment registration. prepared by: Abd ElRahman j. AlFar
  20. 20. Marketing feasibility study. Factors determining supply and demand in the market. • Study of the determinants of demand and supply. • Examine the main structure and characteristics of the market. • Historical analysis of supply and demand size (past and present). • Market share estimate for your project. • The market prices for the products (goods or services). • The estimation of total revenue for the project. prepared by: Abd ElRahman j. AlFar
  21. 21. Technical feasibility study. The technical Feasibility study is done by specialists and experts for judging the validity of the technical aspects necessary to create the new project. The series of questions below is helpful in deciding the technical requirements of the business: • Are enough raw materials available of the correct quality when needed for full year-round production? • Is the cost of the raw materials satisfactory? • Is the correct size and type of equipment available for the expected production level and at a reasonable cost? • Can it be made by local workshops and are maintained and repair costs affordable? • Designing project layout. prepared by: Abd ElRahman j. AlFar
  22. 22. Technical feasibility study. (cont.) • Is sufficient information and expertise available to ensure that the production is consistently made at the required quality? • Are suitable packaging materials available and affordable? • Are distribution procedures to retailers or other sellers established? • Are enough raw materials available of the correct quality when needed for year-round production? • Is the correct size and type of equipment available for the expected production level and at a reasonable cost? prepared by: Abd ElRahman j. AlFar
  23. 23. Financial feasibility study financial feasibility study for providing the necessary capital funding to cover all costs estimated previously in the technical study This phase of the study goes through for: • To estimate total needed capital must be provide. • Appropriate financial structure on the bases of the available financial sources. • The financial structure Cost estimate. prepared by: Abd ElRahman j. AlFar
  24. 24. Economical and commercial feasibility • The Economical and commercial feasibility estimates expected costs and revenues during the life span of the project. The economic study have to focus on several indicators such as • Depreciation . • Return on capital. • Pay back period. • Net present value(NPV). • Cost /Benefit Analyses Profit index or. • Internal Rate of Return(IRR). • Rate of Return/cost . • Net Return/ Cost. prepared by: Abd ElRahman j. AlFar
  25. 25. social and national feasibility study social and national feasibility study (SNF) measures the project contribution to the society and in the national economy. Criteria for social profitability: • Project contribution in job creation. • The enterprise's contribution balance of payments. • The enterprise's contribution to value added (GDP). • Project contribution in strengthening national currency. • The negative effects of the project on the local environment prepared by: Abd ElRahman j. AlFar
  26. 26. Don’t forget to make your final decision Wither the project is Feasible or Not prepared by: Abd ElRahman j. AlFar
  27. 27. Implementation phase: After the specialist conduct all feasibility studies, the phase of pre- implementation will start, at this stage phase the following steps take place: • Specifying the terms of contracts. • Obliging the contracts. • Signing the contracts. • Operational and experimental testing.
  28. 28. Follow up and evaluation phase • this phase continue during the project lifetime it is the criteria for judging the project's feasibility studies
  29. 29. Don’t forget the five Phase of the feasibility study : • Brain storming and thinking for selecting the project • Conducting the Preliminary feasibility study • Conducting the Detailed feasibility study • Implementation phase • Follow up and evaluation phase
  30. 30. Background for the Successful feasibility study Successful feasibility study must fulfill the following conditions: • Setting and preparing should be prepared by experts in their respective fields. • Neutrality any dealing with data and information should be objectively and impartially. • Free of errors: in the preliminary examination we could allow some simple mistakes, but in the final feasibility study we do not allow any error whatsoever small it is.
  31. 31. costs of the project 1. Direct costs 2. Indirect cost
  32. 32. Direct costs Direct costs are those costs that can be allocated immediately and directly related to the project size and volume of production. Two types of costs - Investment costs. - Annual costs.
  33. 33. Investment costs all cost elements from the moment of the emergence of expenditure project concept and preparation of special studies until operational tests it includes: • Construction costs and land purchasing price. • Purchasing price of machinery and equipment with installation and operation, and testing costs. • Working capital stock. • Expenses of Foundation and establishments.
  34. 34. Annual cost The operating costs during the first year Annual operating costs include: - machinery costs. - costs of production. - market cost. - administrative cost.
  35. 35. Indirect costs are those costs that cannot be customized for a particular process or a specific department of production which is not directly related to the product and does not occur unless you create and run the project.
  36. 36. Sunk cost • A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.
  37. 37. Premium and dumped costs the cost of a particular decision, such as the resolution on the worker number of overtime entails additional costs also adding the cost of consumed energy required to run the machinery for additional number of working hours.
  38. 38. the project benefits which are divided into two types of benefits: Tangible or quantifiable (such as a profit and loss, remuneration……….. etc). Intangible benefits: this consists from the project to others and to society (such as return on the province or territory return, project impact (benefits) on society, brand name, reputation .... ... etc.
  39. 39. Examples of some prices that are used in the analysis of costs and benefits. • Market price (accounting): Price that is direct paid for ownership of something it’s directly used in the process of analyzing profitability and benefits. Because it depends on Accountants and accounting operations, they have easy accessibility. • Economic price (shadow prices): Type of prices which reflect the real economic cost of merchandise for goods from the national or social side. That is almost the social cost of the national economy. An economic analysts use the economical price in analyzing profitability, because they reflect the cost of the goods to national economy.