Feasibility Study & Economic Analysis: Methods, Models & Real-World Tradeoffs

TAKEAWAYS:

• Feasibility studies assess four key dimensions (technical, operational, economic, schedule) to decide if a project should proceed, using structured checklists and expert judgment.
• Economic feasibility compares development costs (one-time + recurring) against benefits (tangible like revenue savings, intangible like improved customer satisfaction) over the system’s lifetime.
• The Net Present Value (NPV) method discounts future cash flows to today’s dollars, while Return on Investment (ROI) and Payback Period provide simpler but less precise comparisons.
• Schedule feasibility evaluates whether the project can be completed within the required timeframe without compromising quality or resources.
• Radical methods (e.g., prototyping, JAD sessions) gather requirements faster but may introduce ambiguity; traditional methods (interviews, document analysis) are slower but more structured.
• Nepali companies like eSewa (economic feasibility via transaction cost savings) and NTC (technical feasibility of fiber-optic network upgrades) use these analyses to justify IT investments.

What is Feasibility Study?

A feasibility study is a detailed analysis performed before developing an information system to determine whether the project is practical, viable, and worth pursuing. It answers:

• Can we build it? (Technical feasibility)
• Should we build it? (Operational, economic, schedule feasibility)

Why is it important?

• Avoids wasted resources: Prevents spending $90,000 on a system that may not work or be used.
• Prioritizes projects: Helps organizations choose between competing IT initiatives.
• Reduces risks: Identifies potential roadblocks early (e.g., lack of skilled staff, budget overruns).
• Aligns with business goals: Ensures the system solves real problems (e.g., Khalti’s digital payment system reduced cash handling costs by 40%).

Four Categories of Feasibility

Feasibility is evaluated across four dimensions, each with specific questions and metrics.

1. Technical Feasibility

Definition: Can the system be built with existing technology, tools, and expertise? Key Questions:

• Does the organization have the hardware/software (e.g., servers, databases)?
• Are there skilled developers (e.g., Python, SQL, cloud architects)?
• Can the system integrate with legacy systems (e.g., Nepal Rastra Bank’s core banking software)?

How to Measure:

• Expert opinion: Consult IT teams or vendors.
• Prototype testing: Build a small-scale version (e.g., Pathao’s early ride-hailing prototype).
• Technology readiness assessment: Check if required tools (e.g., AWS, Docker) are available.

Example: NTC’s Fiber-Optic Network Upgrade

• Challenge: Expanding broadband to rural areas required new fiber-optic cables and routers.
• Feasibility Check:
  • Technical: Could NTC’s existing crew install the cables? → Yes, but needed training.
  • Cost: $5M for equipment vs. $2M saved annually in maintenance.
  • Time: 18 months to deploy (aligned with government deadlines).

2. Operational Feasibility

Definition: Will users accept and use the system? Does it align with business processes? Key Questions:

• Will employees adopt the new system (e.g., eSewa’s online payment portal)?
• Does it improve workflows (e.g., Daraz’s automated inventory system)?
• Are there legal/compliance issues (e.g., NEPSE’s trading system must follow SEBON rules)?

How to Measure:

• User surveys: Ask potential users (e.g., Ncell’s customer service reps).
• Pilot testing: Roll out to a small group first (e.g., Khalti’s beta test in Kathmandu).
• Change management plan: Assess training needs.

Example: Bank Loan Processing System (Himalayan Bank)

• Problem: Manual loan approvals took 10 days.
• New System: Automated workflow with AI risk assessment.
• Operational Feasibility:
  • User Acceptance: Loan officers resisted initially (feared job loss).
  • Solution: Training + clear communication → 90% adoption rate.

3. Economic Feasibility

Definition: Is the system cost-effective? Do benefits outweigh costs? This is the most critical for board exams—focus on cost-benefit analysis (CBA).

Key Terms

Worked Example: eSewa’s Online Payment System

Assumptions:

• Development Costs: $150,000 (one-time).
• Recurring Costs: $50,000/year (servers, security).
• Benefits:
  • Year 1: $200,000 (reduced cash handling + transaction fees).
  • Years 2–5: $300,000/year (scalable with more users).

Calculations:

1. NPV (r = 10%):

   Year 0: -$150,000 (initial cost)
   Year 1: ($200,000 – $50,000) / 1.10 = $136,364
   Year 2: ($300,000 – $50,000) / 1.10² = $225,356
   ...
   NPV ≈ $780,000 (positive → **feasible**).
   

2. Payback Period:
   • Cumulative benefits exceed costs by Year 2 → 2 years.
3. ROI:
   • Total benefits (5 years) = $1,300,000.
   • ROI = ($1,300,000 – $150,000 – $250,000) / $150,000 = 566%.

Decision: Proceed—high ROI and short payback period.

4. Schedule Feasibility

Definition: Can the system be delivered on time without compromising quality? Key Questions:

• Are deadlines realistic (e.g., Nepal’s census system needed in 6 months)?
• Are there resource constraints (e.g., limited developers)?
• Can milestones be realistically achieved?

How to Measure:

• Gantt charts: Visualize timelines (see below).
• Critical Path Method (CPM): Identify longest tasks.
• Risk assessment: Plan for delays (e.g., NTC’s fiber rollout faced monsoon rains).

Example: NEPSE’s Trading System Upgrade

• Goal: Launch by Chaitra 1 (new fiscal year).
• Challenges:
  • Legacy system integration: 3 months.
  • Regulatory approvals: 2 months.
  • User training: 1 month.
• Solution: Parallel testing → met deadline.

Methods for Gathering Feasibility Data

Comparison: Traditional vs. Radical Methods

In the Real World

1. eSewa’s Economic Feasibility

   • Idea Used: Cost-Benefit Analysis (CBA).
   • How: Compared $1.2M development cost vs. $5M annual savings (reduced cash transactions + government subsidies). NPV over 5 years: +$18M → approved.

2. NTC’s Fiber-Optic Expansion

   • Idea Used: Technical + Schedule Feasibility.
   • How: Assessed whether 10,000 km of fiber could be laid in 24 months with existing crews (yes, but needed 15% more labor). Used Gantt charts to track progress.

3. Daraz’s Inventory Management System

   • Idea Used: Operational Feasibility.
   • How: Tested with 5 warehouses before full rollout. Found 30% faster picking but training needed → adjusted plan.

4. NEPSE’s Trading Platform

   • Idea Used: All Four Feasibilities.
   • Technical: Could the system handle 10,000 transactions/sec? → Yes (scaled with cloud).
   • Operational: Brokers resisted new UI → redesigned.
   • Economic: Saved $2M/year in manual processing.
   • Schedule: Launched on time despite delays.

Feasibility Study Process (Step-by-Step)

flowchart TD
    A["Start: Define Project Scope"] --> B["Identify Stakeholders"]
    B --> C["Gather Data<br/>(Documents, Interviews, etc.)"]
    C --> D["Analyze Feasibility<br/>(Technical, Operational, Economic, Schedule)"]
    D --> E["Assess Risks<br/>(Delays, Budget Overruns)"]
    E --> F["Prepare Report<br/>(Recommend: Proceed/Modify/Abort)"]
    F --> G["Present to Management<br/>(Get Approval)"]
    G -->|"If Approved"| H["Proceed to SDLC"]
    G -->|"If Rejected"| I["End Project"]

Economic Analysis Techniques

1. Cost-Benefit Analysis (CBA)

Steps:

1. List all costs (development, maintenance, training).
2. List all benefits (tangible + intangible).
3. Calculate NPV, ROI, Payback Period.

Example:

Decision Rule:

• NPV > 0 → Feasible.
• NPV < 0 → Not feasible.

2. Break-Even Analysis

Definition: The point where total costs = total benefits. Formula: $$\text{Break-Even Point (Years)}=\frac{\text{Initial Investment}}{\text{Annual Net Benefit}}$$ Example:

• Initial Cost: $90,000.
• Annual Benefit: $30,000 (after costs).
• Break-Even: $\frac{90,000}{30,000}=3$ years.

Common Pitfalls in Feasibility Studies

1. Ignoring Intangible Benefits
   • Example: A hospital management system reduces errors (intangible) but saves lives (priceless).
2. Overestimating Benefits
   • Example: Claiming $1M/year savings without data (common in Nepali government projects).
3. Underestimating Costs
   • Example: Forgetting training costs for Ncell’s new CRM system.
4. Bias in Data Collection
   • Example: Only interviewing IT staff (not end-users) for eSewa’s new feature.
5. Political Pressure
   • Example: Approving a project because a minister’s son is involved (seen in Nepal’s e-Governance projects).

Feasibility Study Report Template

A formal report includes:

1. Executive Summary: Key findings (1 page).
2. Project Overview: Goals, scope.
3. Feasibility Analysis:
   • Technical (tools, expertise).
   • Operational (user acceptance).
   • Economic (NPV, ROI).
   • Schedule (Gantt chart).
4. Risks and Mitigation: Table of risks + solutions.
5. Recommendations: Proceed, modify, or abort.
6. Appendices: Raw data, surveys, prototypes.

Example Snippet (Economic Section):

Net Present Value (NPV): The system yields an NPV of $120,000 at a 10% discount rate over 5 years, indicating strong economic viability. The payback period is 2.5 years, well below the 3-year threshold set by management.

Sensitivity Analysis: If benefits drop by 15%, NPV remains positive ($85,000), confirming robustness.

Exam Tip

How to Score Full Marks in TU/PU Exams:

1. Define Clearly:

   • Start every answer with a one-sentence definition (e.g., "Feasibility study is a pre-development analysis to assess whether a project is viable across technical, operational, economic, and schedule dimensions.").

2. Use Formulas:

   • For economic feasibility, always show calculations (NPV, ROI, payback period). Use the past exam question as a template:

     NPV = Σ [Benefits – Costs] / (1 + r)^n
     Year 1: ($70,000 – $40,000) / 1.10 = $27,273
     Year 2: ($80,000 – $40,000) / 1.10² = $33,058
     ...
     

3. Compare Methods:

   • If asked about document analysis vs. observation, use a table (as above) and give one real-world example for each (e.g., "NTC used document analysis to review old billing records, but observation revealed inefficiencies in call-center workflows.").

4. Link to Real-World:

   • Every answer must tie to Nepali companies (e.g., "Like eSewa’s economic feasibility study, this project must justify costs via NPV to stakeholders.").

5. Visuals = Extra Marks:

   • Draw a Gantt chart for schedule feasibility or a cost-benefit table for economic analysis. Use Mermaid diagrams for processes (e.g., feasibility study steps).

6. Avoid Common Mistakes:

   • ❌ "Feasibility is just about money." → Wrong (it’s four dimensions).
   • ❌ "NPV is always the best method." → Partial (mention payback period for simplicity).

7. Exam Question Patterns:

   • Define + Explain: "Define feasibility. Explain economic feasibility." → Give definition + NPV/ROI formulas + example.
   • Compare: "Observation vs. document analysis." → Table + pros/cons + real-world use.
   • Worked Example: "Calculate NPV for given costs/benefits." → Show year-by-year table.

sequenceDiagram
    participant User
    participant Analyst
    participant Stakeholder
    User->>Analyst: Request feasibility study for new system
    Analyst->>Stakeholder: Gather requirements (interviews, docs)
    Analyst->>Analyst: Analyze technical/operational/economic/schedule feasibility
    Analyst->>Stakeholder: Present NPV, ROI, risks
    Stakeholder-->>Analyst: Approve/Reject project