Project Feasibility Analysis
  • For me it all started with a term paper
   –Ice Plant article by Richardson and Mapp, 
    Southern Journal of Agricultural Economics 
    (SJAE) 1976 – used risk for feasibility 
    analysis
   –The article demonstrated the methodology 
    for risk based feasibility studies, and it was 
    first to report
     • Probability of Economic Success
     • Probabilistic Cash Flows to meet cash needs
  • Financial/Economic analyses have been 
   used hundreds of times for a wide 
   variety of firm based problems
    Project Feasibility Analysis
   • In business most feasibility studies use 
     Excel spreadsheet models
     – This trend by business started in mid-90s 
     – Excel is the language of business analysis
   • Feasibility studies generally ignore risk – 
     many do a “What if …” study for the Best 
     Case and Worst Case scenarios
   • Some analysts think they considered risk 
     by including a 10 year “average” price
   • Excel deterministic feasibility models are 
     easily converted to stochastic feasibility 
     models
     – Just make the forecasted variables stochastic 
      using the residuals from the forecast models
    Project Feasibility Analysis
   • Risks to consider for a feasibility 
     analysis are:
     – Price of raw inputs, as fuel and labor  
     – Price of the product or output
     – Production risk
     – Black Swan events
     – Competition and market share over the life 
      of investment (business)
     – Cost of the plant and product development
     – Cost of production for the finished product
   • Project feasibility is where we put it all 
     together in an analysis of Time, Money, 
     and Economic Viability
       Project Feasibility Analysis
       • Project Feasibility: consider the Time, Money 
         (Cost), and Economic Viability of the finished 
         business
       • Simulate the Time to complete or build the 
         plant
       • Simulate the Cost of developing the plant 
         incorporating risk into the plant’s development 
         costs                              PP((T)T)
                            PPrroojejecct t 
       •                     MMaannaaggeemmeenntt
         Simulate the Economic Viability of the 
         completed plant (business)                   TTiimmee
                                            PP((CC))
                             Bid
                             AAnnaallysisysis
                                                    CCoosstt  ((mmoonneey)y)
                                            P( )
                                            P( )
                              PPrroojejectct
                              FFeeaasibsibiilitylity
                                                    RRaattee  ooff  RReettuurrnn
          Project Feasibility Analysis
         •   Proposed business with a new product
         •   Tasks and duration/costs
         Tasks         Description               Time (mo.) Costs ($1,000)
             1         Plant Modification3-5                    300-325
             2         Product Development                 1-3            200-300
             3         Distribution System 2-3                  50-100
             4         Marketing Program              3-4       100-150
         •   Finance 100% of project costs @ 9%
         •   Marginal cost of production/unit Uniform(10,15), a scenario 
             variable
         •   Fixed Costs/year  $200,000
         •   Inflation      Uniform(0.04, 0.05) percent per year
         •   Demand Projections
         Years         Price/Unit           Quantity Sold/Year
         1-3           U(13.5,14)           U(500K, 600K)
         4-5           U(13,13.5)           U(400K, 500K)
         6-10          U(12.5,13)           U(300K, 400K)