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Feasibility Study vs. Pro Forma

This information was included in my response to the council member (under entry titled "Conversation with Council Member").

Technical feasibility: This assessment is based on an outline design of project requirements, to determine whether the company has the technical expertise to handle completion of the project. At this level, the concern is whether the proposal is both technically and legally feasible.

This section should include:

  • A brief description of the business to assess more possible factors which could affect the study

  • The part of the business being examined

  • The human and economic factor

  • The possible solutions to the problem

The technical feasibility assessment is focused on gaining an understanding of the present resources of the organization and their applicability to the expected needs of the proposed project.

Legal Feasibility: Determines whether the proposed project conflicts with legal requirements, and if the proposed project is acceptable in accordance to the laws of the land.

Operational feasibility: This is the measure of how well a proposed project solves the problems, and takes advantage of the opportunities identified during scope definition and how it satisfies the requirements identified in the requirements analysis phase of project development.

It also focuses on the degree to which the proposed development projects fits in with the existing business environment and objectives with regard to development schedule, delivery date, corporate culture and existing processes.

To ensure success, desired operational outcomes must be imparted during design and development. These include such design-dependent parameters as reliability, maintainability, supportability, usability, producibility, disposability, sustainability, affordability and others. These parameters are required to be considered at the early stages of design if desired operational behaviors are to be realized. A project design and development requires appropriate and timely application of engineering and management efforts to meet these parameters. A project may serve its intended purpose most effectively when its technical and operating characteristics are engineered into the design. Because of this, operational feasibility is a critical aspect of projects engineering that needs to be an integral part of the early design phases.

Schedule Feasibility: A project will fail if it takes too long to be completed before it is useful. Typically this means estimating how long the project will take to develop, and if it can be completed in a given time period using some methods like payback period. Schedule feasibility is a measure of how reasonable the project timetable is. Given our 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.

In addition to these pieces of the feasibility study there are other feasibility factors, including market, real estate, resource and financial feasibility.

Market feasibility studies typically involve testing geographic locations for a real estate development project, and usually involve parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for given parcels. Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility takes into account the importance of the business in the selected area.

Resource Feasibility: This involves questions such as how much time is available to build the new project, when it can be built, whether it interferes with normal business operations, type and amount of resources required, dependencies, and developmental procedures with company revenue prospectus.

Financial feasibility: In case of a new project, 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 and promoter's share of total cost

  • Existing investment by the promoter in any other business

  • Projected cash flow and profitability

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 to the following factors:

  • Mild slowing of sales.

  • Acute reduction/slowing of sales.

  • Small increase in cost.

  • Large increase in cost.

  • Adverse economic conditions.

Market Research Studies: This is one of the most important sections of the feasibility study as it examines the marketability of the product or services and convinces partners that there is a potential market for the product or services. If a significant market for the product or services cannot be established, then there is no project.

Typically, market studies will assess the potential sales of the product, absorption and market capture rates and the project's timing.

The feasibility study outputs the feasibility study report, a report detailing the evaluation criteria, the study findings, and the recommendations. TXDOT has other project feasibility studies online – these studies are several chapters in length (resembling our master plan). Here is one example:

Pro Forma Model: The term pro forma is generally considered a formality, provided as a courtesy and/or satisfies some minimum requirement.The pro forma models calculate the projected figures and the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements. In some instances, pro forma figures are vastly different than those generated with generally accepted accounting principles (GAAP).

In a business sense, financial statements prepared with the pro forma method are made ready ahead of a planned transaction such as an acquisition, merger, change in capital structure or a new capital investment. These models forecast the anticipated result of the transaction, with emphasis placed most specifically on estimated net revenues, cash flows and taxes. Pro forma statements, therefore, in summary, indicate the projected status of a company in the future based on current financial statements.

Note: Pro forma results in the United States boomed in the late 1990s surrounding dot-com companies that used the method to make losses appear like profits or, at minimum, to reveal much greater losses than obviously indicated through U.S. GAAP accounting methods. The U.S. Securities and Exchange Commission (SEC) responded by firmly requiring publicly traded companies in the country to report and make public U.S. GAAP-based financial results. The SEC also made it clear that utilizing pro forma results to lie about or grossly misconstrue GAAP-based results would be deemed fraud and punishable by law if investors were misled.

As you can see there is a clear difference between a “Pro Forma” and “Feasibility Study.” These terms should not be used interchangeably because they do not mean the same thing. Here is an example of a pro forma report:

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