por The economic feasibility It is the analysis of the costs and revenues of a project in an effort to determine whether or not it is logical and possible to complete it. It is a type of cost-benefit analysis of the examined project, which assesses 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. Also, the resources that will be needed to implement the project and an assessment of its chances of success.
The economic feasibility analysis is the most widely used method to determine the efficiency of a new project. Also known as cost analysis, it helps to identify the expected profit against the investment of a project.
Cost and time are the essential factors involved in this field of study. The cost of development and the cost of operation 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.
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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.
Economic feasibility assessment offers an alternative to longer and more expensive feasibility studies. It is essential for a project to be sustainable and the first step in planning, since 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 income of planned operations are estimated. This helps companies plan operations, identify opportunities and pitfalls, 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 thorough, taking into account all potential challenges and problems.
Conducting an economic feasibility analysis is an important step in assessing the costs, benefits, risks, and benefits of a new venture.
The study or analysis of economic feasibility is constituted by carrying out the following analyses, in particular:
-Market analysis
This first analysis is a set of activities that aim to create rational premises for decision making. They refer to the 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 behavioral structure of the market at a specific time and place.
Identify and describe the target market
The target market for the intended business or business activity must be identified and described. 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 purchasing behavior of the intended customers should be described.
Assess the competition in the target market
Identify the main competing companies, their products and services. Also their respective market shares for the planned activity. Doing this will force you to consider how to distinguish your products or services from those of competitors.
The general plan should be described. This includes production requirements, facilities, sales, and marketing strategy.
-Economic analysis
It forms the fundamental part of the economic feasibility analysis. It is a method of studying economic processes, which consists of considering the relationships between the various elements of these processes.
Economic analysis allows diagnoses to be made, facilitates decision-making and facilitates the rationalization of economic processes, both on a macro and microeconomic scale.
The objective of the analysis is to examine the structure of the set, in order to know the mechanism of connections between the components.
The actions related to the company’s activity are subject to 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. The economic analysis covers all the economic phenomena that occur within the company and also in its environment.
project income
Revenue 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 revenue projections for a three-year period.
As a new entrant to the market, conservative projections should be maintained, estimating only a small market share, typically between 5% and 10%.
Using the estimated market share and sales 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 rent for 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. Material costs, labor costs, marketing and distribution costs are variable costs. These must be expressed in terms of cost per unit.
Cost benefit analysis
Evaluate the costs and benefits of the planned activity or enterprise, using projected revenues and costs as a guide. If the benefits, understood as profits, 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 economic feasibility. It is a set of techniques designed to forecast 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 moments of buying and selling a certain security, currency or commodity, which are beneficial from the investor’s point of view.
The forecasts are supported by numerous technical indicators and statistical analysis tools, such as the moving average and standard deviation.
References
Business Dictionary (2019). Economic feasibility. Taken from: businessdictionary.com.
Shane Hall (2019). How to Make an Economic Feasibility Analysis. Taken from: bizfluent.com.
CEOpedia (2019). Economic feasibility. Taken from: ceopedia.org.
Strategic Networks Group (2019). Economic Feasibility Assessment. Taken from: sngroup.com.
Wikipedia (2019). Feasibility. Taken from: es.wikipedia.org.