This essentially involves the following steps:
(1) Analysis of technical feasibility
(2) Measurement of cost
(3) Measurement of benefits
(4) Comparison of the benefit costs
Technical feasibility is a broad level exercise, to start with, to determine what kind of technology would be needed for the different earlier screened project-ideas. The questions could be for example: Is there enough water to construct a dam and a power station? What is the rainfall in the catchments area? What kind of terrain is it? Therefore, what kind of dam could be constructed? Is it technically possible to construct a dam and a power station in that region? What seepage is expected in irrigation-canals? If it is a road building project then one may investigate: What is the topography of the region? Are there foods in that region (washing out or blocking the road periodically)? etc. Therefore, is it technically feasible to construct such a road? Such analysis should be done with the help of engineers or scientists in the field who have the competence and up-to-date knowledge to assess the technology available. If a project is found to involve such technical requirements which may not be indigenously available or may be available at only a very high premium from foreign countries, it can be avoided keeping in view the objectives and priorities of the nation, region or organization. Speaking of Government projects or national or regional level projects, one may be justified in experimenting with new technology or very high priced imported technology but justification may not be there for projects of the profit oriented private industry. The private industry may avoid experimental or obsolescent projects. New process or machinery although apparently quite well tested under laboratory or pilot plant conditions, may not produce the desired results under commercial mass production conditions. Commercial criteria and governmental or public systems criteria may often be quite different.
Capital and Operating Costs:
After having done a preliminary technical feasibility survey, one may proceed with the measurement of costs, benefits and their comparison for different projects.
To a private organization, conclude capital as well as operating expenses. The costs may be that of land, housing machinery, raw material, fuel, power labor, water, transportation etc. these different aspects of cost need to be investigated not only for one but several alternate locations, including cost on delivery of imported items. It should be remembered that the costs include not only equipment and other fixed costs, input materials and labor, but also transportation and other aspects. Therefore, a plant or site location problems is inevitably connected with a cost feasibility or financial feasibility analysis.
While investigating the proposed plant sites, the estimates of the total production costs in several alternative output sizes should be calculated. Sometimes, there may be a conflict between the plant size needed for meeting the economic demand and the size needed to obtain the optimum cost of production. In such cases a size which would be some what larger than the existing market can justify and somewhat smaller than that required for lower cost production is recommended. This financial feasibility phase of investigation involves a considerable amount of field work but the extent of such an analysis should not exceed 1 to 2% of the total possible project cost.
While costing commercial projects, an allowance may be made for unforeseen cost at the rate of 10 to 20% of the total project cost.
The working capital requirements may also be estimated on the basis of the volume of production expected and the estimated production cost, the length of time cycle from the moment the raw material enters the plant till the customer pays for the goods, the payments for the supplies and labor which must be made during this span of time, etc.