Definition of Feasibility Study Example
Feasibility Study example (or feasibility analysis) refers to the most initial assessment of a proposed plan or project and investigates the practicality of such a plan or project. In other words, a project manager of an enterprise before undertaking a project and invest money and time of enterprise into it, conduct the feasibility analysis to assess the enterprise’s ability to carry such a project. He checks whether the enterprise has the required tools, technology, efficient workforce and necessary resources or not. The feasibility study also aware of the inherited risks in the project and determines whether the project is able to generate sufficient returns (ROI) as expected (i.e. the profitability of the project).
Example of Feasibility Study (With Excel Template)
Let’s take an example to understand the calculation of the Feasibility Study in a better manner.
Feasibility Study – Example #1
Examples of the feasibility study can be observed in our day to day life.
- When a housewife inspects the quality of the product she is purchasing from a grocery store, she is actually doing a material quality feasibility test.
- The farmer in order to eliminate the use of pesticides studies the operational and economic feasibility of organic methods of farming and its consequences on the output and quality of the crop.
- Due to increasing fuel rates and air pollution, a team of young entrepreneurs in order to launch an electric vehicle performs technical, resource and economic feasibility tests.
In the below example, we are going to create a simple economic feasibility study or business plan.
Economic Feasibility :
It refers to the analysis of the cost-effectiveness of a project in order to determine whether the company should undertake the project on the basis of profitability or not.
Tesla Ltd wants to invest in a new portable solar electricity product with a life of 8 years.
Mr. Will Smith, the project manager is tasked to perform an economic feasibility study about the project and submit a report. Mr. Smith collected the following data about the project to conduct the feasibility analysis:-
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- State Government in order to promote solar energy provides a tax-free subsidy for $1.25 million on initial capital investment.
- The equipment cost at the beginning of the project will be $17.5 million. The project also requires some additional equipment at the end of the third year for $1.25 million.
- The total life of the original equipment is 8 years with zero resale/ salvage value. Life of additional equipment is 5 years and a salvage value of $125,000.
- The working capital requirement at the initiation of the project is $2 million. The working capital will get fully realized in the ending year.
- Full financing for the project is done by issuing equity.
- The estimated sales volume over the 8 year period is:-
- Expected Sales price = $120 per unit.
- Variable expenses will amount to 60% of sales revenue.
- The fixed operating cost will amount to $1.8 million per year.
- The loss of any year will be set- off from the profits of the subsequent two years.
- Tesla is subjected to a tax rate of 30%.
- Tesla follows the straight-line method of depreciation.
Mr. Smith calculates the net present value (NPV) of the project by discounting the cash-flows at 12%. If NPV is positive then the project is feasible and the company can consider the project to be taken.
Solution:
Solar Electricity Project – Tesla Ltd
Statement of Initial Cash Outflow
Calculation of Depreciation:-
Given,
Depreciation = Asset Cost – Salvage Value / Useful Life of Asset
- Total Depreciation = $2,187,500 + $225,00
- Total Depreciation = $2,412,500
Statement of Profit Before Tax (PBT)
The company incurs losses in its first year; therefore it is liable to pay zero taxes. Also, the company is allowed to adjust its losses for two subsequent years for tax purposes. Hence profit before taxes (PBT) for second year will be reduced by losses of first year to (i.e. $ 1,197,000 – 532,000 = 665,000)
Statement of Net Cash Inflow:
Statement for Calculation of Discounted Cash Flows
- At the end of year 3, additional Equipment purchased which caused cash outflow of $1,250,000
- At the end of year 8, initially invested amount against working capital get realized = $2,000,000
- At the end of year 8, the additional equipment gets sold at its salvage value = $125,000
- Total cash inflow for year 8 = $ (2000000 + 125000) = $2,125,000
NPV Calculation
NPV = Trade Discount Cash Inflows – Initial Cash Outflows
NPV Calculation
- NPV = Trade Discount Cash Inflows – Initial Cash Outflows
- NPV = $ (27,553,937 – 17,000,000)
- NPV = $10,553,937
Advice
Project Manager Will Smith after studying the costs and benefits associated with the project concluded that since NPV (Net Present Value) is positive and high, Tesla should accept the project on the basis of Economic Feasibility Analysis.
However, if the NPV of the project comes out to be negative (-ve) and the final verdict of Mr. Smith suggests to drop the project and should not produce the solar products, then the loss incurred by the company is limited to the salary of project manager and other basic costs. But the valuable resources and time are saved and the company can consider carrying some other profitable project.
Conclusion
The feasibility study is the most important test that every entity should perform in advance while undertaking a new project. It gives a clear picture of the proposed project and helps the management to choose the best out of various alternatives available by providing valid reasons to accept one and reject other(s). Feasibility analysis enhances the rate of success by saving an entity’s resources, time and money.
As we have discussed in the article feasibility study is not limited to businesses but has broad dynamics and used everywhere. For example, an automobile prototype is a tool for the feasibility study, an experiment on rats to develop a new medicine is a procedure of feasibility analysis, checking the configuration and features before purchasing a laptop resembles feasibility tests.
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