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Feasibility and Economic Justification Analysis

Evaluate the feasibility of and economic justification (if any) for building a new liquid chemicals distribution facility near New York City.

In speaking over the telephone with the sales/marketing managers for the Industrial Chemicals and Specialty Chemicals divisions, they point out that the Northeast is the most densely populated region of the country and that two of Canbide's competitors already have distribution facilities near New York. Without the facility, they jointly estimate that market share in the region will decline by about 5% per year for the next five years, then stabilize there. With a new facility, they jointly estimate that regional market shares will increase by 10-15% per year for the next three years, then 5-8% for the next two years. The increase in market share is equivalent to a 15% increase in the annualized sales volume.

You stop by the central records storage and request copies of the two previous studies that looked at building a new liquid chemicals distribution facility in the Northeast. Both of these studies assumed that, in order to minimize product transportation costs, liquid chemicals would be delivered to the new facility by an ocean-going barge. (On a cost per pound-mile basis, trucking costs are more expensive than rail travel. Rail is more expensive than barge, which is slightly more expensive than sea-going ship.) Both analyses found that the cost of construction plus the cost of operation plus the cost of transportation (from the barge to the facility and from the facility to the customer) out weighed the potential growth in sales.

You decide that the former analyses are sound, but you need to come up with a recommendation. You examine a detailed map of the Northeast and find that one city in eastern PA is located at the juncture of three interstate highways that lead to major population centers. You then look at a sectional map showing rail lines and discover that two major railroads also serve that city. You decide to propose an "in-land" location that will receive liquid chemical products by rail and make shipments by tank truck, but including ship or barge shipments may not be completely excluded.

What kind of data will you need to fully perform your analysis? Remember that adding a new distribution facility will reduce the volume through other facilities. Transportation costs will clearly be affected; instead of shipping products by truck from Charleston, SC (the nearest existing facility), products will be shipped from eastern PA to the Northeast. A new facility will also affect inventory levels (and valuations). Which products will you propose to distribute through the new facility? How will you estimate the construction costs of the new facility? How will you estimate the cost of real estate for the new facility? How will you estimate the operating costs of the new facilities?

Solution Preview

// Feasibility analysis brings out the chances of the project being successful. Before writing a feasibility report, we have to first understand what exactly we mean by a 'feasibility report' or what are the various factors which should be studied etc. To begin the report, we have to start with a short introduction of the topic.//

Introduction:

A feasibility analysis seeks to determine whether the project is prima facie worthwhile and what aspects of the project are critical to its viability. It results in a reasonably adequate formulation of the project in terms of location, production technology, production capacity, material inputs, etc. and contains a fairly specific estimate of the project cost, means of financing, sales revenues, production costs, financial profitability and social benefits (Agarwal, N.P., & Mishra, B.K., 2007). It helps in assessing the practicality of starting a new value-added business or restructuring or expanding an existing business. It gives important information needed to make the critical assessment of whether to go ahead with a business venture.

// After giving a brief description of the process, we will discuss the kind of data used for performing such an analysis. A feasibility analysis requires various kinds of data. Here, we would start with market analysis and financial analysis.//

The kind of data required to perform the analysis:

A feasibility analysis is a multi-dimensional analysis and is a vital exercise that can be carried out on the following grounds:
Market analysis: The first step in the feasibility analysis is to estimate the potential size of the market and the market share that is likely to be captured by the product proposed to be manufactured. This is necessary because the viability of the project depends critically on whether or not the estimated sales satisfy the demand for the product or services. To ascertain this, an intelligent and in-depth study of variety of information is required. The data mainly relates to the following:

- Pattern of consumption growth
- Supply position
- Composition of the market
- Nature of competition in the market
- Income and price elasticity of demand
- Consumer behavior
- Availability of substitutes
- Distribution channels
- Marketing policies
- Administrative, legal and technical constrains
These various types of information may be gathered from primary and/or secondary sources. ...

Solution Summary

This solution is comprised of a response of over 1500 words which thoroughly discusses how to construct a feasibility analysis properly so the decision of building a new chemical distribution facility can be made. This response is designed to act as an outline of how this analysis could potentially be structured and contains valuable subject material related to this topic. One reference is also included.

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