Feasibility Study

Outline What is a feasibility study?

What to study and conclude?Types of feasibility

TechnicalOperationalEconomicSchedule

Quantifying benefits and costsNet Present Value AnalysisReturn on Investment AnalysisPayback analysis

Comparing alternatives

What is a feasibility study?A feasibility study is designed to provide an overview

of the primary issues related to a project or business idea.  The purpose is to identify any “make or break” issues that would prevent your proposal from being successful in the marketplace or industry or community. In other words, a feasibility study determines whether the proposal or business idea makes sense.

A thorough feasibility analysis provides a lot of information necessary for the business plan.  This information provides the basis for the financial (and/or market) section of the business plan.

Because putting together a business plan is a significant investment of time and money, you want to make sure that there are no major roadblocks facing your proposal or business idea before you make that investment. 

Identifying such roadblocks is the purpose of a feasibility study.

Feasibility studyObjectives of a feasibility study:

To find out if a project can be done: ...is it possible? ...is it justified?

To suggest possible alternative solutions.To provide management with enough information to

know: Whether the project can be done Whether the final product will benefit its intended users What the alternatives are (so that a selection can be made in

subsequent phases)Feasibility study is a management-oriented activity:

After a feasibility study, management makes a “go/no-go” decision.

Need to examine the problem in the context of broader business strategy

Content of a feasibility study

Analysis of the feasibility study addresses these questions:

What benefits the project is expected to provide for its users and major stakeholders?

What specific objectives the project is supposed to achieve?

What are some promising alternatives?What is it likely to cost to develop the new project?

Things to conclude:Feasibility of the projectThe preferred alternative.

1. Technical feasibility

2. Schedule feasibility

3. Operational feasibility

4. Economic feasibility

Technical feasibilityIs the project possible with current technology?

What technical risk is there?

Availability of the technology:Is it available locally?

Can it be obtained?

Will it be compatible with other systems?

Schedule feasibilityIs it possible to build a solution in time to be

useful?What are the consequences of delay?

Any constraints on the schedule?

Can these constraints be met?

Operational feasibilityIf the project is done, how will it be operated?

Human and social issues…Potential labor objections?

Manager resistance?

Organizational conflicts and policies?

Social acceptability?

Legal aspects and government regulations?

Economic feasibility Is the project possible, given resource

constraints?What are the benefits?

Both tangible and intangibleQuantify them!

What are the development and operational costs?

Are the benefits worth the costs?

Economic Feasibility AnalysisMeasures of economic feasibility:Net present value: A measure over time of the

costs and benefits of the project. Their future values are discounted to account for the time value of money.

Break-even point: The time at which all the costs of the system will have been recovered.

Return on investment (ROI): The ratio of the net present value of the system to the net present value of the costs. Synonyms:

ROR: Rate of Return IRR: Internal Rate of Return

Analyzing Costs vs. BenefitsIdentify costs and benefits

Tangible and intangible, one-time and recurringAssign values to costs and benefits

Determine Cash FlowProject the costs and benefits over timeCalculate Net Present Value for all future costs/benefits

determines future costs/benefits of the project in terms of today's money values

A peso earned today is worth more than a potential peso earned next year

Do cost/benefit analysisCalculate Return on Investment:

Allows comparison of lifetime profitability of alternative solutions.

ROI = Total Profit = Lifetime benefits - Lifetime costs

Total Cost Lifetime costs Calculate Break-Even point:

how long will it take (in years) to pay back the accrued costs

Calculating Present ValueA peso today is worth more than a peso tomorrow…

Your analysis should be normalized to “current year” values.

The interest (or discount) ratemeasures opportunity cost:

Money invested in this project means money not available for other things

Benefits expected in future years are more prone to riskThis number is company- and industry-specific.

“what is the average annual return for investments in this industry?”

Present Value Factor:The “current year” value for costs/benefits n years into

the future … for a given discount rate i

1Present Value Factor (n) = (1 + i)n

Calculating Present Values(continued)

Present Value FormulaPV = FV / (1 + i )n

wherePV is the present value of a cost or

benefit for time period n.

FV is the future value of a cost or benefit in time period n.

i is the interest (or discount) rate for discounting future costs or benefits.

1 / (1 + i )n is the present value factor, dependent only on i and n.

Calculating Present ValuePresent Value Factor:

1

Present_Value Factor (n) = (1 + i)n

E.g. if the discount rate is 12%, thenPresent_Value Factor(1) = 1/(1 + 0.12)1 = 0.893Present_Value Factor(2) = 1/(1 + 0.12)2 = 0.797Present_Value Factor(3) = 1/(1 + 0.12)3 = 0.712Present_Value Factor(4) = 1/(1 + 0.12)4 = 0.636Present_Value Factor(4) = 1/(1 + 0.12)5 = 0.567Present_Value Factor(4) = 1/(1 + 0.12)6 = 0.507

Computing the payback periodCan compute the break-even point:

when does lifetime benefits overtake lifetime costs?

Determine the fraction of a year when payback actually occurs:

| beginning Year amount |

endYear amount + | beginningYear amount |For our last example, from the year 3 and year

4: 51,611 / (70,501 + 51,611) = 0.42

Therefore, the payback period is 3.42 years

Return on Investment (ROI) analysisFor comparing overall profitability

Which alternative is the best investment? ROI measures the ratio of the value of an investment to its

cost.ROI is calculated as follows:

ROI =Estimated lifetime benefits - Estimated lifetime costsEstimated lifetime costs

or:ROI = Net Present value / Estimated lifetime costs

For our example at the year of year 6: ROI = (795,440 - 488,692) / 488,692 63%, or ROI = 306,748 / 488,692 63%

Solution with the highest ROI is the best alternativeBut need to know payback period too to get the full picture

E.g. A lower ROI with earlier payback may be preferable in some circumstances

Feasibility Study Contents1. Purpose & scope of the study

Objectives (of the study) who commissioned it & who did it, sources of information, process used for the study, how long did it take,…

2. Description of present situation organizational setting, current

system(s). Related factors and constraints.

3. Problems and requirements What’s wrong with the present

situation? What changes are needed?

4. Objectives of the new system. Goals and relationships between

them

5. Possible alternatives …including ‘do nothing’.

6. Criteria for comparison definition of the criteria

7. Analysis of alternatives description of each alternative evaluation with respect to criteria cost/benefit analysis and special

implications.

8. Recommendations what is recommended and

implications what to do next;

E.g. may recommend an interim solution and a permanent solution

9. Appendices to include any supporting

material.

Comparing AlternativesHow 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 outputease of usevendor supportcost of maintenance load on system

Feasibility Criteria Wt. Candidate 1 Candidate 2 Candidate 3 Candidate ÉOperational Feasibility

Functionality. Describes towhat degree the alternativewould benefit the organizationand how well the systemwould work.

Political. A description ofhow well received thissolution would be from bothuser management, user, andorganization perspective.

30% Only supports MemberServices requirementsand current businessprocesses would have tobe modified to takeadvantage of softwarefunctionality

Score: 60

Fully supports userrequired functionality.

Score: 100

Same as candidate 2.

Score: 100Technical Feasibility

Technology . An assessmentof the maturity, availability (orability to acquire), anddesirability of the computertechnology needed to supportthis candidate.

Expertise. An assessment tothe technical expertise neededto develop, operate, andmaintain the candidate system.

30% Current productionrelease of PlatinumPlus package is version1.0 and has only beenon the market for 6weeks. Maturity ofproduct is a risk andcompany charges anadditional monthly feefor technical support.

Required to hire or trainC++ expertise toperform modificationsfor integrationrequirements.

Score: 50

Although currenttechnical staff has onlyPowerbuilderexperience, the senioranalysts who saw theMS Visual Basicdemonstration andpresentation, hasagreed the transitionwill be simple andfinding experiencedVB programmers willbe easier than findingPowerbuilderprogrammers and at amuch cheaper cost.

MS Visual Basic 5.0is a mature technologybased on versionnumber.

Score: 95

Although currenttechnical staff iscomfortable withPowerbuilder,management isconcerned with recentacquisition ofPowerbuilder bySybase Inc.MS SQL Server is acurrent companystandard and competeswith SYBASE in theClient/Server DBMSmarket. Because ofthis we have noguarantee futureversions ofPowerbuilder willŅplay wellÓ with ourcurrent version SQLServer.

Score: 60

Feasibility Criteria Wt. Candidate 1 Candidate 2 Candidate 3 Candidate É OperationalFeasibility

30% Score: 60 Score: 100 Score: 100

TechnicalFeasibility

30% Score: 50 Score: 95 Score: 100

Economic Feasibility

Cost to develop:

Payback period(discounted):

Net present value:

Detailed calculations:

30%

Approximately$350,000.

Approximately4.5 years.

Approximately$210,000.

See AttachmentA.

Score: 60

Approximately$418,040.

Approximately 3.5years.

Approximately$306,748.

See Attachment A.

Score: 85

Approximately$400,000.

Approximately 3.3years.

Approximately$325,500.

See Attachment A.

Score: 90Schedule Feasibility

An assessment of howlong the solution will taketo design and implement.

10% Less than 3months.

Score: 95

9-12 months

Score: 80

9 months

Score: 85

Ranking 100% 60.5 92 83.5