From MoxyWiki

Conceptual or Preliminary Feasibility Analysis is a type of analysis where a wide range of strategic options with underlying possible tactical alternatives are evaluated at a high level, in a cost effective manner in order to identify those worthy of more detailed evaluation. The result of a Preliminary Feasibility Analysis is a recommendation to be presented to decision makers in response to a particular decision situation.

The diagram indicates shows how alternatives underlying strategic options are eliminated from the opportunity set over time and how commitment to a particular course of action is achieved.

The Preliminary Feasibility Analysis (Economic Feasibility or Conceptual Analysis) role is to make sense of the large number of possible alternatives and evaluate them in a cost effective manner to identify the few, dominant, concepts worthy of further analysis. At this stage the focus is on performing a broad but shallow review of the opportunity set to establish viability within wide tolerance. (+- 40%)

A few, eligible concepts are subject to a further Feasibility Study where the assumptions about the performance of an alternative is subjected to greater rigour and the reliability of the assessment of the viability is narrowed (+-15%). Such a study would typically involve quotations for capital and operating cost parameters and detailed analysis of the testing and engineering.

“Simply put, the feasibility study is a formal technical report that is used by the company to determine whether the proposed project is capable of being developed at a sufficient return to justify the capital and managerial resources that must be committed to the project.”^[1]

A Feasibility Study can be considered ‘bankable’ when it is of sufficient quality to present to a finance institution for the purposes of raising project funding.

Methodology

Decision-makers confronted with the task of deciding where to invest, at what scale, and at what rate, are informed by quantitative analysis of the affordability and effectiveness of the strategic options open to them. ^[2]

Bold, simplifying assumptions are made at the first stage of the Decision and Risk Analysis cycle. These are then relaxed iteratively as structural complexities and uncertainties are introduced for consideration. Three requirements which must be met if the analysis is to be deemed by decision-makers to be justifiable and theoretically sound are:

1. assumptions made at any stage of the cycle can be interrogated;
2. the models on which simulations are based are considered ‘fit-for-purpose’ and,
3. data employed in the simulations can be traced back to source

Affordability may be represented by the amount of capital which is to be put at risk. Before final decisions are made, additional metrics related to (for example) expected future earnings are assessed carefully.

Examples of Preliminary Feasibility Analysis

• ExxonMobil explores a range of biofuel technologies before deciding to invest $US600 million in research into Algal Biofuel.^[3]
• Magellan performs a PFA on building a methanol plant around Darwin using local natural gas supplies.^[4]

References

1. ↑ Essential elements and risks in bankable feasibility studies for mining transactions
2. ↑ Companies such as GE and DuPont employ this approach.
3. ↑ Mouawad, Jad (2009-07-15). "Pond scum replaces moonshine in Exxon's mind". Australian Financial Review. http://www.afr.com/home/viewer.aspx?EDP://20090715000031344417. Retrieved on 2009-07-16. 
4. ↑ "Magellan proposes methanol plant for Darwin". Australian Financial Review. 2009-07-14. http://www.afr.com/home/viewer.aspx?ATL://1247529821924. Retrieved on 2009-07-16.