What Is a Feasibility Study?
A feasibility study is a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the likelihood of it succeeding.
Success in business may be defined primarily by return on investment, meaning that the project will generate enough profit to justify the investment. However, many other important factors may be identified on the plus or minus side, such as community reaction and environmental impact.
Although feasibility studies can help project managers determine the risk and return of pursuing a plan of action, several steps should be considered before moving forward.
- A company may conduct a feasibility study when it's considering launching a new business, adding a new product line, or acquiring a rival.
- A feasibility study assesses the potential for success of the proposed plan or project by defining its expected costs and projected benefits in detail.
- It's a good idea to have a contingency plan on hand in case the original project is found to be infeasible.
Understanding a Feasibility Study
A feasibility study is an assessment of the practicality of a proposed plan or project. A feasibility study analyzes the viability of a project to determine whether the project or venture is likely to succeed. The study is also designed to identify potential issues and problems that could arise while pursuing the project.
As part of the feasibility study, project managers must determine whether they have enough of the right people, financial resources, and technology. The study must also determine the return on investment, whether this is measured as a financial gain or a benefit to society, as in the case of a nonprofit project.
The feasibility study might include a cash flow analysis, measuring the level of cash generated from revenue versus the project's operating costs. A risk assessment must also be completed to determine whether the return is enough to offset the risk of undergoing the venture.
When doing a feasibility study, it’s always good to have a contingency plan that is ready to test as a viable alternative if the first plan fails.
Benefits of a Feasibility Study
There are several benefits to feasibility studies, including helping project managers discern the pros and cons of undertaking a project before investing a significant amount of time and capital into it.
Feasibility studies can also provide a company's management team with crucial information that could prevent them from entering into a risky business venture.
Such studies help companies determine how they will grow. They will know more about how they will operate, what the potential obstacles are, who the competition is, and what the market is.
Feasibility studies also help convince investors and bankers that investing in a particular project or business is a wise choice.
How to Conduct a Feasibility Study
The exact format of a feasibility study will depend on the type of organization that requires it. However, the same factors will be involved even if their weighting varies.
Although each project can have unique goals and needs, there are some best practices for conducting any feasibility study:
- Conduct a preliminary analysis, which involves getting feedback about the new concept from the appropriate stakeholders
- Analyze and ask questions about the data obtained in the early phase of the study to make sure that it's solid
- Conduct a market survey or market research to identify the market demand and opportunity for pursuing the project or business
- Write an organizational, operational, or business plan, including identifying the amount of labor needed, at what cost, and for how long
- Prepare a projected income statement, which includes revenue, operating costs, and profit
- Prepare an opening day balance sheet
- Identify obstacles and any potential vulnerabilities, as well as how to deal with them
- Make an initial "go" or "no-go" decision about moving ahead with the plan
Once the initial due diligence has been completed, the real work begins. Components that are typically found in a feasibility study include the following:
- Executive summary: Formulate a narrative describing details of the project, product, service, plan, or business.
- Technological considerations: Ask what will it take. Do you have it? If not, can you get it? What will it cost?
- Existing marketplace: Examine the local and broader markets for the product, service, plan, or business.
- Marketing strategy: Describe it in detail.
- Required staffing: What are the human capital needs for this project? Draw up an organizational chart.
- Schedule and timeline: Include significant interim markers for the project's completion date.
- Project financials.
- Findings and recommendations: Break down into subsets of technology, marketing, organization, and financials.
Examples of a Feasibility Study
Below are two examples of a feasibility study. The first involves expansion plans for a university. The second is a real-world example conducted by the Washington State Department of Transportation with private contributions from Microsoft Inc.
A University Science Building
Officials at a university were concerned that the science building—built in the 1970s—was outdated. Considering the technological and scientific advances of the last 20 years, they wanted to explore the cost and benefits of upgrading and expanding the building. A feasibility study was conducted.
In the preliminary analysis, school officials explored several options, weighing the benefits and costs of expanding and updating the science building. Some school officials had concerns about the project, including the cost and possible community opposition. The new science building would be much larger, and the community board had earlier rejected similar proposals. The feasibility study would need to address these concerns and any potential legal or zoning issues.
The feasibility study also explored the technological needs of the new science facility, the benefits to the students, and the long-term viability of the college. A modernized science facility would expand the school's scientific research capabilities, improve its curriculum, and attract new students.
Financial projections showed the cost and scope of the project and how the school planned to raise the needed funds, which included issuing a bond to investors and tapping into the school's endowment. The projections also showed how the expanded facility would allow more students to be enrolled in the science programs, increasing revenue from tuition and fees.
The feasibility study demonstrated that the project was viable, paving the way to enacting the modernization and expansion plans of the science building.
Without conducting a feasibility study, the school administrators would never have known whether its expansion plans were viable.
A High-Speed Rail Project
The Washington State Department of Transportation decided to conduct a feasibility study on a proposal to construct a high-speed rail that would connect Vancouver, British Colombia, Seattle, Washington, and Portland, Oregon. The goal was to create an environmentally responsible transportation system to enhance the competitiveness and future prosperity of the Pacific Northwest.
The preliminary analysis outlined a governance framework for future decision-making. The study involved researching the most effective governance framework by interviewing experts and stakeholders, reviewing governance structures, and learning from existing high-speed rail projects in North America. As a result, governing and coordinating entities were developed to oversee and follow the project if it was approved by the state legislature.
A strategic engagement plan involved an equitable approach with the public, elected officials, federal agencies, business leaders, advocacy groups, and indigenous communities. The engagement plan was designed to be flexible, considering the size and scope of the project and how many cities and towns would be involved. A team of the executive committee members was formed and met to discuss strategies, lessons learned from previous projects and met with experts to create an outreach framework.
The financial component of the feasibility study outlined the strategy for securing the project's funding, which explored obtaining funds from federal, state, and private investments. The project's cost was estimated to be between $24 billion to $42 billion. The revenue generated from the high-speed rail system was estimated to be between $160 million and $250 million.
The report bifurcated the money sources between funding and financing. Funding referred to grants, appropriations from the local or state government, and revenue. Financing referred to bonds issued by the government, loans from financial institutions, and equity investments, which are essentially loans against future revenue that needs to be paid back with interest.
The sources for the capital needed were to vary as the project moved forward. In the early stages, most of the funding would come from the government, and as the project developed, funding would come from private contributions and financing measures. Private contributors included Microsoft Inc., which donated more than $570,000 to the project.
The benefits outlined in the feasibility report show that the region would experience enhanced interconnectivity, allowing for better management of the population and increasing regional economic growth by $355 billion. The new transportation system would provide people with access to better jobs and more affordable housing. The high-speed rail system would also relieve congested areas from automobile traffic.
The timeline for the study began in 2016 when an agreement was reached with British Columbia to work together on a new technology corridor that included high-speed rail transportation. The feasibility report was submitted to the Washington State land Legislature in December 2020.
What Is the Main Objective of a Feasibility Study?
A feasibility study is designed to help decision-makers determine whether or not a proposed project or investment is likely to be successful. It identifies both the known costs and the expected benefits.
In business, "successful" means that the financial return exceeds the cost. In a nonprofit, success may be measured in other ways. A project's benefit to the community it serves may be worth the cost.
What Are the Steps in a Feasibility Study?
A feasibility study starts with a preliminary analysis. Stakeholders are interviewed, market research is conducted, and a business plan is prepared. All of this information is analyzed to make an initial "go" or "no-go" decision.
If it's a go, the real study can begin. This includes listing the technological considerations, studying the marketplace, describing the marketing strategy, and outlining the necessary human capital, project schedule, and financing requirements.
Who Conducts a Feasibility Study?
A feasibility study may be conducted by a team of the organization's senior managers. If they lack the expertise or time to do the work internally it may be outsourced to a consultant.
What Are the 4 Types of Feasibility?
The study considers the feasibility of four aspects of a project:
Technical: A list of the hardware and software needed, and the skilled labor required to make them work.
Financial: An estimate of the cost of the overall project and its expected return.
Market: An analysis of the market for the product or service, the industry, competition, consumer demand, sales forecasts, and growth projections
Organizational: An outline of the business structure and the management team that will be needed.
The Bottom Line
Feasibility studies help project managers determine the viability of a project or business venture by identifying the factors that can lead to its success. The study also shows the potential return on investment and any risks to the success of the venture.
A feasibility study contains a detailed analysis of what's needed to complete the proposed project. The report may include a description of the new product or venture, a market analysis, the technology and labor needed, as well as the sources of financing and capital. The report will also include financial projections, the likelihood of success, and ultimately, a go-or-no-go decision.