What Is a Feasibility Study? Importance and Key Types Explained

Introduction:

The process of collecting information about a proposed project and then analyzing it to determine its feasibility, minimize risks, and assess profitability is essential. It involves evaluating the potential success or failure of a project in comparison to the local market and its needs, while forecasting the company's ability to remain a profitable business over a specific period. All of this constitutes an economic feasibility study.

Thorough preparation for an economic feasibility study is one of the most important steps for project success. The success and effectiveness of projects depend primarily on sound planning, as precise planning serves as the fundamental pillar upon which the project's expected financial return relies.

To determine economic feasibility, we need to perform two analytical studies: strategic analysis and financial analysis.

The strategic analysis of business projects helps us understand the company's competitive scope. It focuses on the industry in which the company operates as well as the company itself.

The financial analysis helps us understand the company's actual performance. There are two parts to financial analysis: the statement of operations and the balance sheet. We note that the statement of operations tells us the profit or loss achieved by the company based on costs and current sales. The balance sheet tells us the amount of assets the company has to support its current and future operations, providing a snapshot of the company's assets and short-term liabilities at a specific date.

What is an economic feasibility study and what are its types?
The importance of an economic feasibility study.
What are the goals resulting from an economic feasibility study?
What are the foundations that must be taken into account when conducting an economic feasibility study?
What are the necessary steps to conduct an economic feasibility study?
What are the main benefits of conducting a feasibility study?

1. What is an economic feasibility study and what are its types?

There are several definitions for an economic feasibility study. It can be defined as: "A scientific tool used to rationalize new investment decisions, evaluate previously made decisions, or compare available alternatives based on technical and financial foundations in light of specific data related to the project location, operating costs, operating capacities, revenues, technology patterns used, and the employed workforce."

It can also be defined as "a set of tests and estimates prepared with the intention of judging the viability of a proposed investment project or investment decision, in light of projected costs and direct and indirect benefits throughout the project's lifespan."

It can be said that this study analyzes and measures the financial capacity of the project and the probability of its successful continuity, including all factors that could affect it, such as economic, technological, and legal factors.

On the other hand, an economic feasibility study is used to determine the potential positive and negative outcomes of a project before investing in it, to highlight potential problems, and to determine whether the project idea is sound after considering all important factors.

As for its types, they consist of:

1. Technical Feasibility:

This assessment focuses on the technical resources available to the organization. It helps organizations determine whether technical resources meet capabilities and whether the technical team is capable of turning ideas into working systems. Technical feasibility also includes assessing the hardware, software, and other technical requirements of the proposed system.

2. Economic Feasibility:

This assessment usually involves a cost-benefit analysis of the project, which helps organizations determine the viability, costs, and benefits associated with the project before allocating financial resources. It also serves as an independent project assessment and enhances the credibility of the project—helping decision-makers determine the positive economic benefits to the organization that the proposed project will provide.

3. Legal Feasibility:

This assessment checks whether any aspect of the proposed project conflicts with legal requirements such as zoning laws, data protection laws, or social media laws. Suppose an organization wants to build a new office building at a specific location. The feasibility study might reveal that the organization's ideal location is not zoned for this type of business. This organization has saved significant time and effort by knowing that its project was not feasible from the start.

4. Operational Feasibility:

This assessment involves conducting a study to analyze and determine whether—and to what extent—the organization's needs can be met by completing the project. Operational feasibility studies also examine how the project plan meets the requirements identified during the requirements analysis phase of system development.

5. Scheduling Feasibility:

This assessment is the most important for project success; after all, a project will fail if it is not completed on time. In scheduling feasibility, the organization estimates the amount of time it will take to complete the project.

2. The importance of the economic feasibility study.

The importance of an economic feasibility study lies in its significance to the individual investor, its significance to the project, and its significance to society.

For the individual investor:

1. It demonstrates the existence of new investment opportunities that require further detailed study.

2. It enables the investor to choose between available investment opportunities and how to prioritize them.

3. The results of the economic feasibility study serve as a guide for the investor, allowing them to refer back to it at any stage of the implementation process.

For the project:

1. The importance of the feasibility study lies in the decision-making process related to establishing the project, such as purchasing real estate, erecting buildings, and supplying machinery.

2. It shows the project's ability to achieve its objectives.

3. It contributes to identifying the sources of funding needed by the project.

For society:

1. It contributes to solving the problem of relative resource scarcity and meeting the increasing needs of society.

2. It avoids failed projects by focusing on the details and accuracy of the feasibility study report, thereby avoiding the waste of funds.

3. It contributes to providing a level of security for invested capital.

3. What are the objectives resulting from the economic feasibility study?

The economic feasibility study generally aims to determine whether or not to invest in the project. There are several sub-objectives of the economic feasibility study, as you may be interested in viewing the necessary skills in digital marketing.

1. Identify available or alternative investment opportunities.

2. Consider the cost-effectiveness of the feasibility study; there should be no extravagance in this aspect.

3. Determine the economic and reciprocal impacts of investment proposals, whether locally or internationally.

4. Determine the potential for expansion plans for existing products.

5. Deepen the understanding of the core project terminology, whether from an economic, technological, technical, or financial perspective.

4. What are the foundations to be taken into account when conducting an economic feasibility study?

1. Identify the expertise, motives, and personal traits of the project manager to ensure their ability to manage the project successfully, you may be interested in reading about the marketing funnel and whether it is one of the most important secrets of e-marketing.

2. Determine the volume of prospective customers for the goods or services intended to be offered to the market by the project under study.

3. Define the type of market: is it a consumer goods market, an industrial goods market, a market for new products, consumer goods, or local goods? Is it a local market or an external market? And what is the new product's share in the market?

4. Conduct a technical feasibility study for the project in terms of fixed assets and the requirements and stages of product manufacturing.

5. Determine the various characteristics of the market.

6. Identify the factors affecting the demand for the project's products.

7. Determine the degree of competition in the market and estimate the number of competitors and the supply volume of similar products.

5. What are the necessary steps to conduct an economic feasibility study?

1. Select the commodity or product to be produced by the proposed project, which is done through thinking about, surveying, analyzing, and verifying the appropriate project idea, and then deciding which project’s economic feasibility should be studied, you may be interested in reading about what referral marketing is and what its features are.

2. Determine whether people will buy the product or not, by identifying the needs and demand of potential or actual customers and studying whether people will buy what we plan to produce and sell in the potential market.

3. Determine how the project will operate, as a well-considered decision regarding the operation of the project and a complete study of its method of operation must be available.

4. Estimate the income generated from the project, i.e., from sales, by estimating the quantity expected to be produced over a certain period and its expected selling price, thereby predicting the profit returned from the project.

5. Make a decision: is the project idea good or not? It is necessary to ensure whether the project idea is beneficial by answering questions such as:

• What is the profit volume of the project?

• How can profits and cash flow be calculated?

• What are the other benefits resulting from the project?

Developing a detailed feasibility study for the project, including the economic feasibility study, is not a luxury but a necessity to determine the objective of establishing and executing the project, as well as its subsequent success and continuity. It also serves to regulate all details of the project from an economic standpoint and its connection to other detailed parts of the feasibility study. Finally, the execution feasibility study acts as a sales tool for the new product.