Definition of Project Formulation Feasibility Study

Introduction

Project formulation is an investigating process which precedes investment decision. The purpose is to present relevant facts before the decision-makers to enable them to decide as to whether to go ahead signal should be given for the project or not.

Formulation of projects involves scientific procedure. The task of any formidable project is too many. It has to present several information subjective and objective in nature. It explains the objectives, goals and justification for the acceptance of the project. The major task of a project is to assess the financial, technical and managerial involvement and its justification considering the resource constraint. The project formulation stage involves the identification of investment options by the enterprise.

Project formulation is designed to bring the project sponsoring authority and the agencies from whom it has to get concurrence, support etc., on one wavelength. Project formulation by providing a scientifically developed procedure for developing the content as well as the format of the investment proposition, seeks to streamline the process of appraisal of project at government and the aiding agencies level. So, the project formulation is a process involving the joint effort of a team of experts including the economists, the financial analysts and specialists in various fields a well formulated project provides a medium which cut across scientific, social and positional prejudices and provides a common meeting ground for all those who have a contribution to make in successful implementation of a project.

Stages in Project Formulation

The different stages in the project formulation process are briefly described as follows:

Feasibility analysis

Techno-economic analysis

Project design and network analysis

Input analysis

Financial analysis

Social cost-benefit analysis and

Project appraisal.

Feasibility Analysis

Feasibility analysis is the first stage in the process of project development. The purpose of the analysis is to examine the desirability of investing in pre-investment studies. For this purpose it is essential to examine project idea in the light of the available internal (inputs, resources outputs) and external constraints (environment). When a project idea is taken up for developmental three situations can arise. The project may appear to be feasible, project idea is taken up for development three situations can arise.

The project may appear to be feasible, project may turn out to be not feasible or the available data may not be adequate for arriving at reasonable decision regarding further investment. In the last mentioned case, investment in pre-investment studies will obviously have to be deferred till such time as adequate data regarding the project feasibility is available. The project sponsoring body will therefore have to invest in collecting additional data and refer the investment decision for the time being. In the second situation when the project is found to be not feasible, further investment in the project idea is completely ruled out. In the third situation, when the project idea is found to be feasible, the decision-makers can proceed to invest further resources in pre-investment studies and design development.

Techno-Economic Analysis

Techno-economic analysis is primarily concerned with the identification of project demand potential and the selection of the optimal technology which can be used to achieve the project objectives. The analysis provides necessary material on which the project design can be based. It also indicates whether the economy is in a position to absorb the output of the project or not.

Project Design and Network Analysis

Project design is the heart of the project entity. It defines the individual activities which go into the corpus of the project and their inter-relationship with each other. It identifies the flow of events which must take place before a project can start yielding the results for which it has been set up. The inter-relationship between various constituent activities of a project is most conveniently expressed in the form of a network diagram.

Project design and network analysis are concerned primarily with the development of the detailed work plans of the project and its time profile, and the presentation of this plan is the form of a detailed network drawing. Project design and network analysis make available to the project formulation team a clear picture of the work elements of the project and also their sequential relationship. This presentation the way for detailed identification and quantification of the project inputs, an essential step in the development of the financial and cost-benefit profile of the project.

Input Analysis

The objective is to identify and quantify the project inputs and to assess the feasibility of a sustained supply of these inputs all through the effective life span of the project. Resources are consumed in project constituent activities. The best method of identifying the project constituent activities. The best method of identifying the project inputs is therefore to identify these activities determine the resources which each activity will consume individual requirements. Input analysis uses the network plans for developing the input characteristics of the project. If thereafter proceeds to evaluate the availability of the inputs both in quantitative as well as qualitative terms.

Resources required for a successful implementation of a project include not only the material inputs but also human resources which are necessary both for the setting up of the project as also its successful normalisation run. Resource requirements estimates form the basis of costs estimates of the project and are, therefore, essential for developing the financial profile and the cost-benefit profile of the project.

Financial Analysis

The objective of financial analysis is to develop the project from the financial angle and to identify these characteristics. Financial analysis concerns itself with the estimation of the project costs, estimation of project funds requirements. It also involves and appraisal of the financial characteristics of the project so as to establish the relative merits and demerits of the project as compared to other investment opportunities. Financial analysis reduces investment proposition in diverse fields of human activity to one common scale, thereby simplifying the project is developing project financial forecasts.

Cost Benefit Analysis

In judging the overall worth of the project, the effect which the project will have on society as a whole is very material. While financial analysis evaluates a project from the profitability point of view, social cost benefit analysis views it from the point of view of rational viability, the cost-benefit analysis however takes into account not only the direct costs and benefits which will accrue to the project implementing body but also total costs which all entities connected with the project will have to bear and the benefits which will be enjoyed by all such entities. The idea here is to evaluate the project in terms of absolute costs and benefits rather than in terms apparent costs and benefits.

Pre-Investment Appraisal

Pre investment appraisal is the process of consolidating the results of feasibility analysis, the techno-economic analysis, the design and network analysis, the input analysis, the financial analysis and the cost benefit analysis, so as to give the investment proposition a final and formal shape.

It naturally involves selection of appraisal format, the material which should go into pre-investment report and the form of presentation of various conclusions. The sum total of the pre-investment appraisal is to present the project idea in a form in which the project sponsoring body, the project implementing body and the outside agencies can take investment decision regarding the proposals.

Criteria to be Followed

The main criteria in the project formulation process are:

Forecasting - understanding and precisely identifying the objec-tives/needs/goals (regional/ state/ national/ international) of the unit/society/economy on a sustained basis.

Setting up priorities and choosing the goals that are more urgent

Searching for alternations and carrying out feasibility studies to pick up projects that appear most beneficial and desirable.

Carrying out detailed studies of the project so selected.

Estimating the needed resources (human and physical) and finding the yearly cost and benefit of project.

Arranging funds -both approval and allocation. The successful implementation of any project depends upon the timely availability of the required resources as per projections.

Preparing of time schedule for all jobs so that the physical and financial targets of the projects are phased appropriately.

Distributing the works to various departments or agencies having the appropriate technical expertise.

Execution and controlling the project. This requires frequent reviewing, updating and constant action to restore the operation to its planned characteristics.

Evaluating the performance of each project to ensure the worth of good or service for each rupee to be spent.

Feasibility

A feasibility report is an investment proposal base on certain information and factual data appraising the project. This type of feasibility study may be required by the financing institutions, project sponsor, project owner.

The feasibility report enables the project holder to know the inputs required and if rightly prepared confirms to the convictions that he is proceeding in the right direction. In other words, a project needs to be fully defined in order to provide terms of reference for the management of the project.

A project can be considered to have been fully established when the following conditions are fulfilled.

The technical configuration of the project has been fully defined.

The performance requirement for the various technical system and the key equipment have been specified.

Cost estimate for the project is frozen.

Techno-economic viability of the project has been examined, appraised and approved.

An overall schedule for implementation of the project has been drawn-up.

The feasibility report is prepared during the definition phase of a project. It lies in between project formulation stage and appraisal and sanction stage. It is prepared to present an in-depth techno-commercial analysis carried out on the project idea for consideration of the financial institutions and other authorities empowered to take the investment decision.

Components of Feasibility Study

Project feasibility study comprises of market analysis, technical analysis, financial analysis, and social profitability analysis. The analysis is mainly interested only in the commercial profitability and thus examining only the market, technical and financial aspects of the project. But, generally the gamut of feasibility of a project covers the following areas.

Commercial and economic feasibility

Technical feasibility

Financial feasibility

Managerial feasibility

Social feasibility or acceptability

Commercial and Economic Feasibility

The economic feasibility aspect of a project relates to the earning capacity of the project. Earnings of the project depends on the volume of sales. If taken into consideration the following important indicators.

Present demand of the goods produced through the project. i.e. market facility (or) getting a feel of the market.

Future demand: a projection may be made about the future demand. The period normally depend upon the scale of investment.

Determining the extent of supply to meet the expected demand and arriving at the gap.

Deciding in what way the project under consideration will have a reasonable chance to share the market.

Anticipated rate of return on investment. If it is positive the project justifies the economic norm in the relationship between cost and demand.

Future demand can be estimated after failing into consideration the potentialities of the export market, the charges in the income and prices, the multiples use of the product, the probable expansion of industries and the growth of new industries. The share of the proposed project in the market could be identified by considering the factors affecting the supply position such as competitive position of the unit, existing and potential competitors, the extent of capacity utilisation, units costs advantages and disadvantages, structural changes and technological innovations bringing substitute into the market.

The commercial feasibility of a project involves a study of the proposed arrangements for the purchase of raw materials and sale of finished products etc. This study comprises the following two aspects.

Arriving at the physical requirement of production input such as raw materials, power, labour etc., at various level of output and converting them into cost. In other words, deciding costing pattern.

Matching costs with revenues with a view to estimating the profitability of the project and the break-even point. The possibility ultimately decides whether the project will be a feasible proposition.

Technical Feasibility

The examination of this aspect requires a thorough assessment of the various requirements of the actual production process and includes a detailed estimate of the goods and services needed for the project. So, the feasibility report should give a description of the project in terms of technology to be used, requirement of equipment, labour and other inputs. Location of the project should be given special attention in relevance to technical feasibility. Another important feature of technical feasibility relates the types of technology to be adopted for the project. The exercise of technical feasibility is not done in isolation. The scheme has also to be viewed from economic considerations; otherwise, it may not be a practical proportion however sound technically it may be.

The promoters of the project can approach the problem of preparation of technical feasibility studies in the following order:

Undertaking a preliminary study of technical requirements to have a quick evaluation.

If preliminary investigation indicate favourable prospects working out further details of the project. The exercise begins with engineering and technical specifications and covers the requirements of the proposed project as to quality, quantity and specification type of components of plant & machinery, accessories, raw materials, labour, fuel, power, water, effluent disposal transportation etc.

Thus, the technical feasibility analysis is an attempt to study the project basically from a technician’s angle. The main aspects to be considered under this study are: technology of the project, size of the plant, location of the project, pollution caused by the project production capacity of the project, strength of the project. Emergency or stand-by facilities required by the project sophistication such as automation, mechanical handling etc. required collaboration agreements, production inputs and implementation of the project.

Financial Feasibility

The main objective of this feasibility study is to assess the financial viability of the project. Here, the main emphasis is in the preparation of financial statement, so that the project can be evaluated in terms of various measures of commercial profitability and the magnitude of financing required can be determined. The decision about the financial feasibility of a project should be arrived at based on the following consideration:

For existing companies, audited financial statements such as balance sheets, income statements and cash flow statements.

For projects that involve new companies, statements of total project cost, initial capital requirements, and cash flow relative to the projective time table.

Financial projections for future time periods, including income statements, cash flows and balance sheets.

Supporting schedules for financial projections stating assumptions used as to collection period of sales, inventory levels, payment period of purchases and expenses and elements of production cost, selling administrative and financial expenses.

Financial analysis showing return on investment return on equity, break-even volume and price analysis.

If necessary sensibility analysis to identify items that have a large impact on profitability or possibly a risk analysis.

Managerial Feasibility

The success or failure of a project largely depends upon the ability of the project holder to manage the project. Project is a bundle of activities and each activity has its own role. For the success of a project, a project holder has to co-ordinate all the activities in such a way that the additive impact of different inputs can produce the desired result.

The ability to manage and organise all such inter related activities come within the concept of management. If the person incharge of the project, has the ability, has the ability to manage all such activities, the desired result can be anticipated.

There are three ways to measure the managerial efficiency.

Heredity skill

Skill acquired through training.

Skill acquired in course of work.

Social Feasibility

A project may cross all the above barriers mentioned above and found very suitable but it will lose its entire creditability, if it has no social acceptance. Though the social customs, conventions such as caste community, regional influence etc. are creating hindrance for development of a project should avoid all such social conflicts which will stand on the successful implementation of the project.

(e.g) Considering the interests of the general public; projects which offer large employment potential, which channelise the income from less developed areas will stimulate small industries.

In a nut shell, the feasibility report should highlight on these five testing stones before it can be declared as complete and only after judging through these indicators a project can be declared as viable and can be submitted for finance or any other assistance from any institutions.

Format of Feasibility Report

The sketch of feasibility report of project is given below:

Introduction

Summary and Recommendations

Product- Capacity, Chemistry of the product, specifications,

properties, application and uses.

Market potential

Process and know-how

Plant and machinery

Location of the unit

Plot plan and building

Raw materials availability

Utilities, requirements

Effluents treatment

Personnel requirement

Capital cost

Working capital

Mode of finance

Manufacturing cost

Financial analysis

Implementation schedule

Check List for Feasibility Report

The following key elements must be presented in the feasibility report.

Examination of public policy with respect to the industry project

Broad specification of outputs and alternative techniques of production.

Listing and description of alternative locations

Preliminary estimates of sales revenue, capital costs and operating costs of different alternatives.

Preliminary analysis of profitability for different alternatives.

Marketing analysis

Specification of product pattern and product price

Raw material investigation and specification of sources of raw material supply.

Estimation of material energy, flow balance and input prices.

Listing of major equipment by type, size and cost.

Listing of auxiliary equipment by type, size and cost.

Specification of sources of supply for equipment and process know-how.

Specification of site and completion of necessary investigation.

Listing of buildings, structures and yard facilities by type size and cost.

Specification of supply sources connection costs and other costs for transportation services, water supply and power

Preparation of  layout.

Specification of skill-wise labour requirements and labour costs.

Estimation of working capital requirements

Phasing of activities, and expenditure during construction

Analysis of profitability

Determination of measures of combating environmental problems

State the preparedness to implement the project rapidly.

Conclusion

Thus the process of project formulation involves a stage by stage development of the project idea into an investment proposition. The conclusion drawn at the end of each stage form the basis of development of the ensuing stage. These conclusions also provide necessary materials for re-checking of the initial premises from which a beginning was made. There must be forward and backward look at the completion of every stage. So, the project formulation team has to be ready to revise its opinions and conclusions in the light of further evidence.

It also narrates the very purpose of a feasibility report in a lucid manner, covering components of feasibility reports, principal features of project feasibility study and also checklist for feasibility study. It helps in defining and analysing the alternative approaches to production processes and outcomes. It focuses attention on the material inputs and various other techno-economic variables. It describes the optimisation process, justifies the assumptions and hypothesis set thereby selecting the better alternative solutions and defines the clear boundaries of a project viability.