ECONOMIC FEASIBILITY: WHAT IS IT AND HOW IS IT DONE? - DUDAS - 2024

The economic feasibility is the analysis of the costs and revenues of a project in an effort to determine whether or not it logical and possible to complete it. It is a type of cost-benefit analysis of the examined project, which evaluates whether it is possible to implement it.

This term means the evaluation and analysis of the potential of a project to support the decision-making process, through the objective and rational identification of its strengths, weaknesses, opportunities and associated risks. In addition, the resources that will be needed to implement the project and an assessment of its chances of success.

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The economic feasibility analysis is the most used method to determine the efficiency of a new project. Also known as cost analysis, it helps identify the expected return against a project investment.

Cost and time are the essential factors involved in this field of study. The development cost and the operating cost are evaluated. The approximate time frame to receive the returns against the investment is also calculated, taking into account the future value of the project.

What is economic feasibility?

Embarking on a new business venture, producing a new product line, or expanding into a new market is dangerous, under any economic conditions.

The economic feasibility assessment offers an alternative to longer and more expensive feasibility studies. It is essential for a project that is sustainable and the first step in planning, as it answers the key question: Is this investment worth it for the company?

Through economic feasibility, the economic climate is examined, a business plan is articulated, and the costs and revenues of planned operations are estimated. This helps companies plan operations, identify opportunities and difficulties, and attract investors.

During the economic feasibility study process, certain recommended practices are followed to obtain the desired result. Likewise, certain assumptions are made on the basis of which a sound investment plan can be provided.

How is an economic feasibility analysis done?

The economic feasibility analysis is not necessarily difficult or expensive, but it must be comprehensive, taking into account all potential challenges and problems.

Performing an economic feasibility analysis is an important step in evaluating the costs, benefits, risks, and benefits of a new business.

The study or analysis of the economic feasibility is constituted by carrying out the following analyzes in particular:

-Market analysis

This first analysis is a set of activities that aim to create rational premises to make decisions. They refer to market service in all dimensions, based on market research.

Use data obtained through market research. This analysis is defined as a momentary record of the market behavior structure at a specific time and place.

Identify and describe the target market

Identify and describe the target market for the intended business or business. It should describe how the intended customer base would benefit from the product or service.

If the planned activity is to serve an enterprise customer base, the industry in which the target customers are located and who the key players are must be identified.

For a consumer base, the demographics and buying behavior of the intended customers should be described.

Assess competition in the target market

Identify the main competing companies, their products and services. Also their respective market shares for the planned activity. Doing so will force you to consider how to distinguish your products or services from those of your competitors.

The general plan should be described. This includes requirements for production, facilities, sales, and marketing strategy.

-Economic analysis

It forms the fundamental part of the economic feasibility analysis. It is a method of study of economic processes, which consists of considering the relationships between the various elements of these processes.

Economic analysis enables diagnoses, facilitates decision-making, and facilitates the rationalization of economic processes, both at the macro and microeconomic levels.

The objective of the analysis is to examine the structure of the assembly, in order to know the mechanism of connections between the components.

The actions related to the activity of the company are object of economic analysis. In the changing conditions of the environment and technological development, making decisions regarding the management of the company requires fast and reliable information.

Therefore, economic analysis has become particularly important. Economic analysis covers all economic phenomena that occur within the company and also in its environment.

Project income

Income from business activity should be projected, based on an assumed portion of the target market.

Income projections can be provided for a period of one year or more. Some analysts suggest providing income projections for a period of three years.

As a new entrant to the market, conservative projections should be maintained, estimating only a small market share, usually between 5% and 10%.

Using the estimated market share and selling price, calculate the total revenue, breaking it down by month, quarter and year.

Calculate costs

Calculate the costs of the commercial activity, considering the fixed and variable costs. Fixed costs are those that remain constant within the time period for which revenue is being projected.

Examples include the rental of factory facilities, interest on capital items, and administrative expenses. Fixed costs must be considered as a single lump sum, since they are the same regardless of the level of sales or services provided.

Variable costs are those that change in response to sales levels. Materials, labor costs, marketing and distribution costs are variable costs. These should be expressed in terms of cost per unit.

Cost benefit analysis

Evaluate the costs and benefits of the planned activity or company, using projected income and costs as a guide. If the benefits, understood as earnings, exceed the costs of the planned activity, the new company can be considered as a viable commitment for the organization.

-Technical-economic analysis

This analysis is optional within the economic feasibility. It is a set of techniques designed to forecast the future prices of securities, currencies or raw materials, based on the analysis of price formation in the past.

The purpose of technical analysis is to determine the times of buying and selling of a certain security, currency or raw material, which are beneficial from the investor's point of view.

Forecasts are supported by numerous technical indicators and statistical analysis tools, such as moving average and standard deviation.

References

1. Business Dictionary (2019). Economic feasibility. Taken from: businessdictionary.com.
2. Shane Hall (2019). How to Make an Economic Feasibility Analysis. Taken from: bizfluent.com.
3. CEOpedia (2019). Economic feasibility. Taken from: ceopedia.org.
4. Strategic Networks Group (2019). Economic Feasibility Assessment. Taken from: sngroup.com.
5. Wikipedia (2019). Feasibility. Taken from: es.wikipedia.org.