What it means
A feasibility study sits between an idea and a business case. The idea says what someone would like to build, and the study asks whether it can be built, whether anyone will pay for it, and what it would actually cost including the parts nobody thought about.
Most studies cover five angles: technical feasibility, market feasibility, financial feasibility, legal and regulatory feasibility, and operational feasibility. Skipping any one of them is how projects end up technically brilliant, fully funded and impossible to staff or licence.
The financial section is where numbers appear. It typically models capital cost, running costs, expected revenue or savings, and then summarises the result using payback period, net present value and internal rate of return so that competing proposals can be compared on the same basis.
Good studies are honest about uncertainty. Rather than presenting one confident forecast, they show a base case, a pessimistic case and an optimistic case, and identify which single assumption the decision hinges on so that management knows what to watch.
The cost of a study is small next to the cost of a bad decision, often 1% to 5% of the project's capital cost. That ratio is the whole argument for doing one, and it is why lenders and grant bodies routinely insist on seeing a study before releasing funds.
In practice
Real-world examples
Example 1
A hospital trust commissions a study before converting a disused wing into a day surgery unit. The technical work confirms the building can take the ventilation plant, but the operational section finds no realistic way to recruit the anaesthetic staff, and the project is shelved.
Example 2
A drinks company studies whether to open a distribution depot in a new region. The commercial section shows enough demand, and the study recommends a smaller leased site first rather than the freehold warehouse originally proposed.
Example 3
A software firm evaluates replacing its billing system. The study finds the new platform is cheaper to run but that migrating fourteen years of contract history would take nine months of engineering time, changing the payback from two years to nearly four.
Think of it
A feasibility study is like checking the weather forecast and planning your route before packing for a long road trip, ensuring you have enough fuel and the right vehicle before you leave the driveway.
Formula
Calculation
Simple payback period = capital cost / annual net cash benefit
Net present value = present value of future cash flows - capital cost
Ridgeway Bakery is considering a second production line costing $1,200,000 that should generate $300,000 of additional net cash each year for six years.
Simple payback: $1,200,000 / $300,000 = 4.0 years
At a 10% cost of capital, the present value factor for an equal amount received annually for six years is 4.35526
Present value of the cash flows: $300,000 x 4.35526 = $1,306,578
Net present value: $1,306,578 - $1,200,000 = $106,578
The project clears the hurdle, but not by much. If the annual benefit came in 10% lower at $270,000, the present value would be $270,000 x 4.35526 = $1,175,920, giving a negative net present value of $1,175,920 - $1,200,000 = -$24,080. The study's real conclusion is therefore that the decision rests almost entirely on whether the $300,000 benefit is achievable.Case study
Seen in the real world
This is a fictional, illustrative example. Kestrel Ceramics wanted to add a $2,800,000 automated glazing line at its main plant, and the operations director's one-page proposal showed savings of $620,000 a year and a payback of 4.5 years.
The commissioned feasibility study cost $85,000, about 3% of the capital cost, and it changed the picture in two ways. Technically the line worked, but it needed a three-phase electrical upgrade costing a further $310,000 and a nine-week production shutdown, and commercially the labour savings assumed a headcount reduction the site's agreement did not permit for eighteen months.
Restated, the capital cost became $3,110,000 and first-year savings became $180,000 rather than $620,000, pushing genuine payback beyond seven years. Kestrel's board approved a phased version instead, automating one of the three glazing bays for $900,000 and reviewing after a year. The study did not kill the idea; it stopped the company buying the wrong version of it.
Watch out
Common mistakes
- Commissioning the study after the decision has effectively been made. A study written to justify a favoured option will find reasons to support it, which wastes the money spent on it.
- Covering only the financial section. Projects fail at least as often on regulatory approvals, staffing and integration as they do on the numbers.
- Presenting a single forecast with no sensitivity analysis. Decision makers need to know which assumption breaks the case, not just what happens if everything goes to plan.
Questions
People also ask
How is a feasibility study different from a business case?
The study asks whether the project is viable at all and considers alternatives, while the business case argues for a chosen option and asks for the funding to deliver it.
Who should carry out the study?
Someone independent of the project's sponsor, whether an internal team or an external adviser, so the conclusions are not shaped by whoever wants the project approved.
What does a negative conclusion cost?
Only the price of the study, which is normally a small fraction of the capital avoided, and that avoided loss is the clearest return the exercise can produce.