FEASIBILITY STUDIES, REPORT WRITING AND DEVELOPMENT Professor Ajibefun Igbekele Vice Chancellor, Adekunle Ajasin University, Akungba Akoko

GLOBAL ECONOMIC CHALLENGES One in nine people are undernourished

GLOBAL ECONOMIC CHALLENGES

GLOBAL FOOD SITUATION Challenges confronting the world are more severe in the developing countries, particularly the Sub Saharan Africa. World map by quartiles of Human Development Index (2013).

Agriculture has the potential to address global food challenges Agriculture provides livelihood for around 40% of the world population

Agricultural business requires adequate information and planning to determine its viability

NEED FOR FEASIBILITY STUDY Agriculture is Affected By Global Changes

Global Changes Difficult Financial Times Limited Market Opportunities For Commodities Volatility In Commodity Prices Price Increases For Most Input Items, Changes In National Policy and Programmes Unfavorable Weather Conditions. Decline In Demand For Consumer Goods And Services

NEED FOR FEASIBILITY STUDY Significant change in present operating situation Costs associated with making a wrong decision Planning purposes and securing necessary financing

SITUATION REQUIRING FEASIBILITY STUDY New Production or Marketing a new Commodity

SITUATION REQUIRING FEASIBILITY STUDY Diversification

SITUATION REQUIRING FEASIBILITY STUDY Geographical Expansion

SITUATION REQUIRING FEASIBILITY STUDY A new Service or Product Line

Adoption of new technology SITUATION REQUIRING FEASIBILITY STUDY

Consideration of a new location SITUATION REQUIRING FEASIBILITY STUDY

Conducting a Feasibility Study --Feasibility study is organized into three major sections: Market analysis --Organizational/technical analysis --Financial analysis

Expansion or modernization of present facilities Conducting a Feasibility Study

Consideration of a combination or alliance of farms Conducting a Feasibility Study

AREAS OF FEASIBILITY Technical Economic Legal Operational Scheduling.

Technical Feasibility Determining whether the organization has the technical expertise to handle completion of the project understanding of the present technical resources of the organization and their applicability to the expected needs

Economic Feasibility Economic feasibility assessment is to determine the positive economic benefits Includes quantification and identification of all the benefits expected. This assessment typically involves a cost/ benefits analysis.

Legal feasibility Determines whether the proposed system conflicts with legal requirements

Operational feasibility A measure of how well a proposed system solves the problems, and takes advantage of the opportunities Focuses on the degree to which the proposed development projects fits in with the existing business environment and objectives

Schedule feasibility A project will fail if it takes too long to be completed before it is useful. Schedule feasibility is a measure of how reasonable the project timetable is. Given the available technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines. It is necessary to determine whether the deadlines are mandatory or desirable.

Financial feasibility Financial viability can be judged on the following parameters: -Total estimated cost of the project -Financing of the project in terms of its capital structure, debt to equity ratio -Projected cash flow and profitability

Financial Feasibility The financial viability of a project should provide the following information Full details of the assets to be financed and how liquid those assets are Rate of conversion to cash-liquidity (i.e. how easily can the various assets be converted to cash?) Project's funding potential and repayment terms Sensitivity in the repayments capability

THE ELEMENTS OF A GOOD FEASIBILITY STUDY Feasibility study- a definition of a problem or opportunity Involves analysis of current mode of operation It requires definition of requirements Involves evaluation of alternatives Evaluation of course of action

THE PROJECT SCOPE Projects should have a well-defined Scope. Projects without a well-defined scope can wander in and out of their boundaries, causing them to produce either far too much or far too little than what is truly needed Defines the business problem and/or opportunity to be addressed. The scope should be definitive and to the point. The sources of fund for the project should be identified.

CURRENT ANALYSIS Deals with the current method of implementation ……such as a system, a product, etc. Identification of the strengths and weaknesses of the current approach

REQUIREMENTS How requirements are defined depends on the object of the project's attention Requirements depends on the type of products

APPROACH This represents the recommended solution or course of action to satisfy the requirements Various alternatives are considered along with an explanation as to why the preferred solution is selected

EVALUATION Evaluation examines the cost effectiveness of the approach selected Begins with analysis of the estimated total cost Recommended solution, other alternatives are estimated in order to offer an economic comparison Detailed costs are indicated with a project schedule showing the project path and start-and-end dates Summary of cost and evaluation is prepared….. which includes a cost/benefit analysis, return on investment, among others

REVIEW All of the preceding elements are then assembled into a feasibility study and a formal review is conducted with all parties involved. The review serves two purposes: - to substantiate the thoroughness and accuracy of the feasibility study - to make a project decision; either approve it, reject it, or ask for revision before final decision

PHASES OF FEASIBILITY STUDY A feasibility study can be divided into two major phases: -Analysis of direct factors -Analysis of environmental conditions

Analysis of Direct Factors This phase of a feasibility study is designed to provide basic information required to determine the economic viability of the proposed enterprise. The information will likely be required for loan applications and helps determine whether the enterprise can earn profits and generate sufficient cash flow to repay the loan.

Analysis of Direct Factors This phase is designed to answer three questions: ✓ What factors must be considered to determine whether the proposed venture should be pursued? ✓ How much will it cost to enter the business and what facilities will be needed? ✓ How much profit can be made and when can this profit be expected? The analysis of direct factors can be divided into market determination, raw product supply and the production process

Market Determination Determination of market for a product or service- most difficult part of analysis feasibility studies Degree of difficulty related to the accessibility of potential customers.

Availability of a market is critical to the success of any business venture If a market does not exist for a product or service, then there is no economic rationale for producing the product or offering the service Market Determination

Analyzing market potential for a product involves: Determination of current and potential consumption -Types and locations of available markets -Types of available distribution systems -Ways the market can be entered -Types of buyers within the market -Types of selling arrangements used Market Determination

Analysis of Market Potential Consumption : Current product consumption and trends for proposed and competing products ✓ In what forms, qualities and volumes is the product consumed? ✓ Which segments of the population consume the product? ✓ Are these segments getting larger or smaller? ✓ Are these markets domestic or international? ✓ What will it cost to serve these markets? ✓ Who is currently serving these markets? ✓ How will competitors react if another firm enters the market? ✓ At what capacity are current competitors operating? ✓ Can a new firm compete with existing firms or potential entrants?

Distribution System : Determine the type of distribution system appropriate for the proposed business ✓ Will it be necessary to perform any delivery activities? ✓ Will transportation of the product to the market be required? If so, what methods are available? ✓ What delivery schedules will be required? ✓ Should the firm provide transportation services? If so, should equipment be purchased or leased? ✓ What will be the cost of providing distribution services? Analysis of Market Potential

Market Entry : Determine how the product will be introduced into the market. ✓ Will the product be marketed under the firm's brand or a buyer’s brand? ✓ What will get the buyer’s attention: lower prices, advertising and promotion, or some other method? ✓ How long will it take to build the market to the desired sales volume? ✓ What costs are associated with entering the market?

Buyers : It is important to identify buyers. ✓ What types of buyers (retail stores, wholesalers, farmers, manufacturing institutions or others) are expected to purchase the product? ✓ What volume is each buyer expected to purchase? ✓ Where are the buyers located? ✓ What product specifications will buyers require? ✓ Have potential buyers indicated an interest in the product? ✓ What kind of commitment will potential buyers make to buy the product? ✓ How reliable are buyers of this product? ✓ What kind of payment schedules will be encountered? Analysis of Market Potential

Selling Arrangements : The types of selling arrangements that may be encountered also needs to be addressed. ✓ What kinds of selling services must be provided with the product ✓ what costs will be involved? ✓ Should a sales force be maintained or should a broker be used? ✓ Should the firm have sales offices? ✓ If so, where should they be located? ✓ How many salespeople should the firm have? ✓ What type of compensation plans should be implemented for salespeople? ✓ What will be the cost of providing these selling activities?

Prices : A critical element of the analysis is the price the firm can expect to charge for the product. This can be determined in part by analyzing past prices and price trends. Price projections can be developed in the light of expected future consumption. Expectations of buyers and other suppliers of the product should be included in the price predictions. Price prediction is often a difficult task. Analysis of Market Potential

Raw Product Supply This part of the analysis determines availability of raw product inputs for the proposed enterprise.

Production Process : This phase of feasibility study analyzes the production component of the proposed activity. It assesses specific facility needs, capital requirements, cost and quantity of labor needed, necessary financing, and the potential costs and returns associated with the business venture. Raw Product Supply

Facility Determination : The facility determination phase of the analysis include specific facility needs for the entire operation. In this stage, special emphasis must be placed on current technology that the enterprise must consider to compete within the desired business environment. Raw Product Supply

Investment Capital : How much capital will be required to meet initial investment needs? Labor : Labor requirements. Raw Product Supply

Analysis of Environmental Conditions This phase of the feasibility study deals with factors affecting the location of the facility Availability of services such as electrical power, gas service, telephone service, water and sewer service, fire protection, police protection, medical services, cultural and recreational facilities, postal service, financial services, educational facilities and vocational training facilities

APPRAISAL OF CAPITAL INVESTMENT Capital Investment Appraisal Techniques The capital investment appraisal techniques that are used to measure viability of investment: Net Present Value (NPV): Measures the cash in-flow, whether excess or shortfall, after the routine financial commitments are met. All capital investment appraisals have a single objective – drive towards a positive NPV. The NPV is a mathematical calculation involving net cash flow at a particular present time 't' at discount rate at the same time, i.e. (t – initial capital outlay). Accounting Rate of Return (ARR): This capital investment appraisal technique compares the profit that can be earned by the concerned project to the amount of initial investment capital that would be required for the project. Projects that can earn a higher rate of return are preferred over ones with low rate of return.

Adjusted Present Value (APV): APV capital investment appraisal technique overcomes the shortcomings of NPV technique. It evaluates a project on the basis of risks associated with the investment APPRAISAL OF CAPITAL INVESTMENT

Profitability Index (PI): PI evaluates a project based on calculation of value per unit of investment. Also known as value investment ratio and profit investment ratio, this capital investment appraisal technique is a ratio of amount of money invested to profit or pay off of the project. Payback Period: This method appraises capital investment on the basis of time that would be taken to get back the initial investment, called the payback period. APPRAISAL OF CAPITAL INVESTMENT