Chapter Three

Project Preparation (Feasibility Study)

A project feasibility study is a key process that justifies whether to

go ahead with a certain project idea or to disregard it.
 As the name implies, a feasibility study is an analysis of the
viability of an idea from different parameters.
The feasibility study focuses on helping to answer the essential
question of “should we proceed with the proposed project idea?”
Determining early that a business idea will not work saves time,
money and heartache later.

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 Feasibility Study and Business Plan

There is often some confusion between a feasibility study and a

business plan. A feasibility study is not a business plan.
The separate roles of the feasibility study and the business plan are
frequently misunderstood.
 The feasibility study provides an investigating function.
It addresses the question of “Is this a viable business venture?”
 The business plan provides a planning function.
The business plan outlines the actions needed to take the
proposal from “idea” to “reality.”

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 Reasons to Do a Feasibility Study
It focus to the project and outline alternatives by narrowing them-
feasibility study is made for the most promising project ideas and
this will help emphasis on them with better outline or framework.
Surface new opportunities through the investigative process- the
feasibility study for a certain project under consideration will
generate a new project idea.
Identify reasons not to proceed- if the project idea is not attractive,
it will be discarded in the meantime before much resources are
wasted and the reason not to proceed will eventually be identified

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 Components of Feasibility Study
Project feasibility is a test where the viability of the investment is
evaluated.
Some of the components of feasibility analysis in the project
feasibility report include,
1. Technical analysis
2. Market analysis
3. Environmental analysis
4. Financial analysis,
5. Socio-economic analysis
6. Organizational and management analysis
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 Technical analysis
 Technical analysis of a project considers the requirements for specialized
equipment or facilities, copyrights, patents, labor and expertise for the venture
in question, and determines whether or not you either have these resources on
hand or are reasonably able to obtain them.
Particularly, it answers the following questions.
Is the proposed technology or solution practical?
Do we currently possess the necessary technology?
Do we possess the necessary technical expertise, and is the schedule
reasonable?
What kinds of technology will we need?
Is relevant technology mature enough to be easily applied to our problem?

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 Market analysis
 With this information in hand, try to determine whether there is truly
a viable market for the output of the project or business, and whether
it is truly possible to gain market share from existing competitive
forces
 In general, a market analysis searches for the intersection of demand
and supply that will create a market for a product at a given price.
market and demand analysis is concerned with two broad issues;
what is the likely aggregate demand for the product?
What share of the market will the project enjoy?

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The key step in Market Analysis are as follows:

 Situational analysis and specification of

objectives
 Collection of secondary information
 Conduct market survey
 Characterization of the market
 Demand forecasting

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 SITUATIONAL ANALYSIS AND SPECIFICATION OF
OBJECTIVES

To get the relationship between the product and its market,

the project analyst may informally collect information from:
customer
competitors
middlemen, and
others in the industry.

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 The objectives of market and demand analysis is to
answer the following questions:

Who are the beneficiaries (buyers) of the product or the service?

What is the total current demand for product or the service?
How is the demand temporarily distributed (pattern of sales over the
year) and geographically?
What is the break-down of demand for the product or service ?
What prices will the customers be willing to pay?

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 COLLECTION OF SECONDARY INFORMATION

 To answer the market study questions, information may be obtained

from secondary and/or primary sources.
Secondary information is information that has been gathered in
some other context and is already available.
Primary information, on the other hand, represents those
information which are collected for the first time to meet the
specific purpose on hand.
 Secondary information provides the base and the starting point
for market and demand analysis.

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 What are sources of secondary data?
The important source of secondary information which are useful
for market and demand analysis in Ethiopia are mentioned below.
Census of Ethiopia
National sample survey reports
Statistical abstracts
Annual survey of industries/agriculture and export
Economic survey
Annual report by national bank of Ethiopia

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 CONDUCT OF MARKET SURVEY
To undertake the market survey there is a need to have a sample,
which represents the entire market.
Steps in a Sample Survey
 Define the target population
 Select the sampling scheme and sample size
 Develop the questionnaire
 Recruit and Train the Field Investigators
 Obtain information as per the questionnaire from the sample
respondent:

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 CHARACTERISTICS OF THE MARKET
The market for the product may be described in terms of the
following:

Effective demand in the past and present

Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition

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 1, Effective Demand in Past and Present
In most of the developing countries, where competitive markets
do not exist for a variety of products due to exchange
restrictions and controls on production and distribution.
The figure of apparent consumption may have to be adjusted
for market imperfections.

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2 Breakdown of Demand

 To get a deeper insight into the nature of demand, the

aggregate (total) market demand may be broken down
into demand for different segments of the market.
 Market segments may be defined by

(a) nature of product,

(b) consumer good and
(c) geographical division.

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 Nature of product: one generic name of subsumes
many different products: for example, commercial
vehicles covers trucks and buses of various capacities
and so on and so forth.
Consumer groups:
consumers of product may be divided into:
industrial consumers and domestic consumers.
Industrial consumers may be sub divided industry
wise.
Domestic consumers may be further divided into
different income groups.

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3 Price
Price statistics must be gathered along with statistics pertaining
to physical quantities. It may be helpful to distinguish the
following types of prices.

landed price for imported goods

average wholesale price, and
average retail price

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 3.6.4.4 Method of Distribution and Sales
Promotion

The method of distribution may vary with

the nature of product.
Capital goods,
 industrial raw materials or
 intermediates, and
consumer products tend to have differing distribution
channels.
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 3.6.5 DEMAND FORECASTING
After gathering information about various aspects of the
market and demand from primary and secondary
sources, an attempt may be made to estimate future
demand.
A wide range of forecasting method is available to the
market analyst.
This may be broadly divided into two categories:
1. qualitative and
2. quantitative methods. College og Management, Dept of Public Administration, ©2021 19
 Qualitative Methods
These methods rely essentially on the judgment of experts to
translate qualitative information into quantitative estimate.
The important qualitative methods are:
Jury of executive opinion method: this method calls for the
pooling of views of a group of executive on expected future
sales and combining them into sales estimates.
Delphi method: involves converting the views of a group of
experts, who do not interact face to face into a forecast through
an iterative process.
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Quantitative Methods
This method broadly comprises of two techniques of
forecasting demand: these are
time series projection and
causal methods.

Time series projection methods:

this method generates forecasts on the basis of an
analysis of the historical time series.

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The important time series projection methods are:
 Trend projection method: this method involves in
extrapolating the past trend on to the future.
 Exponential smoothing method: forecasts are
modified in the light of observed phenomena.
 Moving average method: the forecast for next period
represents a simple arithmetic, average or a weighted
arithmetic average of the last few observation.
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 3. Environmental Analysis
EA is a process whose breadth, depth and type of analysis depend
on the nature, scale and potential environmental impact of the
proposed project.
EA evaluate a project's potential environmental risks and impacts
in its area of influence,
It examine project alternatives, identifies ways of improving
selection, siting, planning, design and implementation by
preventing, minimizing, mitigating or compensating for adverse
environmental impacts and enhancing positive impacts and
 includes the process of managing adverse environmental
impacts throughout project implementation. 23
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 III. Impact Assessment &Evaluation
When decision to proceed with a full EIA is made,
the next stage of the process is the most exhaustive and
consequently expensive part of the assessment.

the identification and prediction of all the

environmental impact of the proposed project,
their likely affects both positive and negative,
the way to enhance or mitigate these impacts.
The outcome of this stage will be a report of the assessment, this
is commonly called an Environmental Impact Statement (EIS).
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 VI. Monitoring & Environmental Auditing
environmental auditing is conducted when a project has moved to
implementation stage
This is the final stage of the (EIA) process,
This is linked to the environmental monitoring of the project.
Auditing can be undertaken either by the project itself or by an
external agency.
The objective of auditing is to assess the impact of the project
against established standard.
Monitoring and auditing require resources and a commitment by
the project operator and regulatory authorities.
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 3.4. Financial/Commercial/ Profitability Analysis
Financial feasibility: The financial feasibility examines the workability of project
proposal in respect of raising finance to meet the investment required for the
project, be it equity, (by way of public issue of shares or by other means) or debt,
(by way of term loans from financial institutions or by other means). This apart,
the financial feasibility also consists of calculations of cost of debt, cost of
procuring capital, cost of servicing the debt and equity and anticipated profits to
checkup whether the financial benefits expected are in excess of the financial
costs involved.
Commercial feasibility: Before embarking upon any product/service, the scope
for successfully marketing the product/service shall be carefully and accurately
assessed.
 If the product/service proposed is new to the industry, conducting a systematic
market survey is a pre-requisite for assessing the probable estimates of likely
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3.4.1 Project Statements
There are four kinds of statements that show the financial situation
of a project from different viewpoints and these are:

i) Cash Flow or Resource Flow Statement

The beginning of the financial and economic analysis of a project is drawing

up of a statement of project costs and benefits that is an investment of

the project. Different types of projects will have different profiles for the cost and
benefits, and project statement will differ partly between statements for
economic and financial analysis of projects.

ii) Fund Flow Statement (for Liquidity)

This type of project statement presents the sources (inflows) and

application (outflow) of funds committed
College og to a project.
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iii) Profit and Loss Statement (for profitability)

Mainly this statement provides the financial performance of a

project during a fiscal or accounting period (a year).
 It gives details of revenues to get earned and costs to be incurred
including expected gains and losses in a financial year.

iv) Balance Sheet (for Business Worth)

The balance sheet for business worth is a financial statement that

gives the status of directly productive investment undertaking. The
common practice is to divide into:

a) assets that is what a project would own;

b) liability that is what a project would owe; and

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3.4.2. The Time Value of Money
The most important concept that any investor must
understand is the money value of time. The passage of time and
the multiplication of one’s invested wealth are so closely
interrelated that they can never be separated. For investment
management decisions, the importance of time as money-
multiplier must be properly understood by investors.

The essence of the concept of monetary value of time is that

identical amount money, received or parted with at different
points of time, are not materially the same.

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