Michigan State University Extension
Tourism Educational Materials - 33119709
06/06/02
Feasibility Analysis In Tourism
By Gary R. Warnell
Tourism Information Series No. 5
Cooperative Extension Service
Michigan State University
Extension Bulletin E-1992
September 1986
90 cents
Introduction
Committing resources, whether time, personnel or money,
is always risky. If you are responsible for making
resource commitment decisions in today's dynamic economy,
you realize the importance of any information that can
help reduce uncertainty.
The feasibility analysis is a tool which can shed light
on the question: will the expected returns from a
proposed venture be sufficient to justify the initial
investment? This might mean, is there enough demand for
additional campsites to warrant their construction? Will
building a new ski lift attract enough new skiers to
recover its costs? Will a new swimming pool generate
enough additional revenue to pay for the construction,
operations and maintenance?
The feasibility analysis helps eliminate part of the
uncertainty in such questions, but it by no means
guarantees success. Many factors influence the outcome of
a proposed venture. Some are predictable, but many are
not. For instance, an unexpected change in the weather,
the economy, consumer preference or your competition's
techniques can have a severe affect on the best thought
out plans. The best you can hope for is a thorough
analysis of the conditions that exist now, what has
happened in the past, and make provisions for change in
the future. This is where the feasibility analysis is
useful.
The purpose of this bulletin is to enable you to
understand better the feasibility analysis process, its
components and what you should be concerned with if you
decide to have the analysis performed by an outside
organization.
Why Perform An Analysis?
The feasibility analysis has had the reputation of being
an extremely difficult and expensive task. The size,
scope and cost of an analysis varies, however, depending
on the total amount of resources to be invested. The
greater the investment the greater the risk. The greater
the risk, the greater the need for a more thorough and
accurate analysis. The more thorough and accurate the
analysis, the greater its cost. Thus, cost may be one of
the main reasons why the percentage of investment
failures in small businesses is greater than that in
large businesses. Small businesses often view the
analysis as a waste of time and money and neglect it in
the planning process. However, a feasibility analysis can
pay for itself by early identification of poor risks
which otherwise might cost the investor much more than
the analysis alone.
Generally, the feasibility analysis is done for one or
more of the following reasons:
(1) To evaluate the status of an existing product or
service
(2) To evaluate the potential for expanding an existing
product or service
(3) To evaluate the potential for a new product or
service
(4) To obtain financial backing for a project. This is
required to determine whether the project can be
justified in economic terms by conventional
debt-financing sources (such as lending institutions) and
preferred by equity sources (those individuals or
companies who would be willing to invest in your idea:
stockholders, partners, etc.).
A feasibility analysis should always be undertaken if the
outcomes of the alternatives being considered are
unknown, or if the entire proposed venture is unfamiliar.
If this is not the case, concentrate your efforts in
developing the product to meet your customers needs.
Remember, severe constraints such as time, personnel or
money may prohibit or restrain the quality of the
analysis. Therefore, make sure you identify the
importance of this process and justify its need at the
outset to prevent unrealistic expectations.
Criteria
After determining the reason for the analysis, the next
step is to establish criteria that constitute
feasibility.
Feasibility is demonstrated when it is determined that:
(1) there is a reasonable likelihood of satisfying your
predetermined goals through
(2) the implementation of a specific program of activity
that is
(3) within the framework of available resources.
Should the investment pay for itself by the end of the
year? - in two years? If a certain return on investment
is expected, how much?- fifteen percent? -twenty percent?
Is an increase in overnight stays expected?- how much and
by when? Criteria such as these must be determined to
avoid losing perspective of the original purpose.
Components Of The Analysis
The feasibility analysis has two interrelated parts. The
first is the MARKETING PLAN. This determines the market
feasibility of the project. The second is the FINANCIAL
PLAN that determines the financial feasibility of the
project. Although these two plans contain different
information, they are interrelated because the financial
feasibility of the project is dependent to a great extent
upon the market feasibility. Without the necessary data
to predict demand, there is no way to estimate expected
revenue. Without a revenue projection, it is impossible
for lenders to assess the potential success of the
investment.
The MARKETING PLAN is developed to determine the level of
demand for the proposed venture. It helps reduce the
element of risk by specifically identifying such things
as:
* the product or service provided
* the characteristics of the target market
* the costs associated with the marketing plan
* the competition
* the resources of the community or business
* the general market in present and future terms,
and
* factors that could alter the market, for example,
developments or elimination of existing facilities
such as shopping malls, office complexes,
attractions, convention or conference centers.
More specific information about the marketing plan can be
found in Extension bulletin E-1959.
The FINANCIAL PLAN is developed to determine financing
sources - the rate, terms and conditions necessary to
acquire funds - and how the loans, interest and other
associated financing costs will be repaid. This component
of the overall analysis helps reduce the element of risk
by identifying such things as:
* the costs of land, buildings and supplies
* organization, financing and preopening expenses
* working capital required
* capacity utilization
* proposed fees, and rates
* salary, wages, taxes and insurance (including
liability insurance)
* other sources of revenue (such as rentals,
souvenir sales and storage fees)
* an estimate of equity capital financing (money you
have on hand) and/or debt financing (money you
need to borrow) required, and a time schedule for
capital outlay.
Interpretation of the financial data is probably the most
important part of this study. There are many methods used
to analyze the data. Some of the most common are:
* breakeven analysis - determines the volume of
business necessary before any profit may be
assumed by the owner
* liquidity ratios - relates current assets to
current liabilities
* return on investment (ROI) -is determined by
relating net income to assets.
Another important component of this study is an analysis
of the management factors that will become a day-to-day
matter if the project is undertaken. Some general areas
that should be addressed are:
* the personnel needed to manage or operate the new
project
* the qualifications of new personnel should they be
needed
* the qualifications of the existing management to
successfully undertake the new project should it
be determined feasible
* the new project's effect on the roles and
workloads of existing personnel.
Who Should Perform The Analysis?
Only you can answer this question. If you have the time,
personnel and knowledge, you can save money by doing the
analysis yourself. A good basic discussion of the steps
involved can be found in Extension bulletin E-705 A Guide
for a Feasibility Study. Topics addressed in that
publication include:
* Analyzing the site
* Developing a consumer profile
* Selecting the best alternatives
* Evaluating personal characteristics and objectives
* Estimating resource and investment requirements
* Estimating income
* Analyzing profitability
* Tips for conducting the study.
There are many other sources of assistance and
information to help you through the process (see "Sources
for Additional Help" at the end of this bulletin).
However, realize that there are many factors involved in
a thorough analysis you may not be completely aware of or
familiar with. For example, if you are not familiar with
how to analyze financial data, critical errors could be
made leading to false conclusions as to the feasibility
of the project! And, as mentioned earlier, you must take
into consideration the amount of your investment in
relation to your overall net worth. Can you financially
afford to make a mistake if your analysis is wrong and
the project fails?
Advantages And Disadvantages
When trying to decide whether to hire someone to do the
study or to undertake it yourself, consider the
following:
If you do the analysis, the advantages are that you:
1) have contacts to call on within the community
2) are more sensitive to your needs and that of your
community
3) have a vested interest in the analysis
4) know the most about how your operation runs
5) will make the most use of the analysis
6) can save money.
The disadvantages are that you may not:
1) have the necessary training in the feasibility
analysis process
2) be able to provide the needed objectivity necessary
to avoid influencing the results (thus causing the
analysis to become self-serving)
3) have the time to prepare the analysis
4) have the necessary help to gather the information
5) be able to see it through. In other words, it may
become a hot and cold effort.
Hiring someone to do the analysis has the following
advantages:
1) they will have past feasibility analysis experience
(if they don't have an extensive track record, references
that you can call on or examples of previous work are
mandatory),
2) as "outside" reviewers, they may provide greater
credibility and objectivity (this is very important when
trying to obtain loans)
3) sophisticated equipment and access to other
information resources may be at their disposal,
4) the task will be completed at a specified time
5) the finished project will be very professional.
The disadvantages are:
1) they may not have a vested interest in the community
causing a lack of sensitivity to local community
interests
2) they may not understand or be sensitive to the
interests of community leaders whose support you may need
3) the cost will be higher than an in-house effort.
It maybe possible for you to combine your experience with
that of the professional analyst. This might entail you
or your personnel gathering relevant data, as determined
by the analyst, from internal records or from contact
within your community. The analyst would then interpret
the data for you and generate the feasibility report. The
advantages are that you lower your costs, are assured of
the direction and progress of the analysis, and have
tighter control. The disadvantage is that the results
will be only as good as the quality and accuracy of the
information supplied.
If you hire someone to do the analysis, make sure the
following contract points are specifically covered before
you commit any money:
* Purpose of the project to be undertaken - this
should be stated precisely and clearly so there are no
misunderstandings.
* Objectives - a definition of the end product, its
execution needs, costs and timeframe estimates.
* Assumptions - a statement of the assumptions that
will be used in order for the project to be undertaken.
For example, to increase attendance by ten percent within
one year, or that only a certain amount of money will be
available to implement the proposed plan.
* Methodology - a step-by-step guide of the approach
to be taken.
* Support - a statement on the support required from
the client and other areas where necessary. Names of
individuals from whom support is required help tie down
responsibilities and lessen uncertainty. It is important
that you are a part of the data-gathering process and
also a participant in ongoing communications and interim
reviews with the analyst. This will help uncover
potential problem areas.
* Constraints/Boundaries - should be identified under
which the project will be developed. For example,
completion date, your budget or the amount of time you
can devote to the research.
* Alternatives - those that are being considered as
well as those ruled out should be included in the
analysis and evaluated as the analysis progresses. Even
those that are ruled out should be mentioned briefly in
the analysis, including a short discussion of why they
were eliminated.
* Automatic stops - criteria that automatically
eliminate some alternatives - should be determined at
the outset. For example, if the use of underground
utilities is essential for the aesthetic appearance of a
proposed facility, then the alternative of using above
ground utilities is automatically ruled out. These types
of criteria prevent wasting time and money on
unacceptable alternatives.
* Signatures - for approval.
Keep the cost of the analysis in line with the total
project. It should not be a ton of paper with page after
page of confusing data or tables. It should be concise
and client-oriented. Remember, you are paying for the
study. It needs to be complete enough to satisfy
potential lenders, but just as important is your ability
to understand the analysis so that you can implement it.
If you can't understand it, you can't use it!
Conclusion
Whether or not you try to perform a feasibility analysis
of a proposed venture, or hire someone to do it for you,
the important point is that you understand and support
the process. The analysis will aid greatly in the
creation of some new endeavor or the expansion of some
existing project by providing you, the owner, with both a
clear plan for internal use, and a valuable tool for
obtaining outside funds. It can also pinpoint projects
that would likely fail given a certain set of
circumstances. Although not a cure for the financial
pangs of risk, it can help ease the anxiety. With proper
planning and research, you can feel more confident about
investing your resources with a sound feasibility
analysis at your side.
Selected References
"A Guide for a Feasibility Study." James E. Neal and John
K. Trocke. Cooperative Extension Service Bulletin E-705,
Michigan State University, East Lansing, Michigan. 1982.
How To Prepare a Feasibility Study. Robert E. Stevens and
Philip K. Sherwood. Prentice-Hall, Inc., Engelwood
Cliffs, New Jersey. 1982.
Marketing: A Managerial Approach. William H. Cunningham
and Isabella C. M. Cunningham. South-Western Publishing
Company, Cincinnati, Ohio. 1981.
"Marketing Research and Small Business: Pitfalls and
Potential." Paul D. Boughton. Journal of Small Business
Management, July, 1982. pp. 36-42.
"Marketing Research: Some Basics for Small Business."
James G. Barnes, G.A. Pynn and A.C. Noonan. Journal of
Small Business Management, July, 1982. pp. 62-66.
Private and Commercial Recreation. Arlin F. Epperson.
John Wiley & Sons, Inc., New York, New York. 1977.
Resort Development and Management. Chuck Y. Gee.
Educational Institute of the American Hotel and Motel
Association, East Lansing, Michigan. 1981.
The Feasibility Process for Parks and Recreation. Craig
Kelsey and Howard Gray. Utah State University, Logan,
Utah. 1985.
"The Feasibility of Recreational Land Development."
Joseph A. Lusteck and Jack K. Mann. The Appraisal Journal
January, 1978. PP. 7-19.
"The Feasibility Study as a Tool for Venture Analysis. "
Robert T. Justis and Barbara Kreigsmann. Journal of Small
Business Management, January, 1979. pp. 35-42.
"Tourism and Your Community." Robert W. McIntosh.
Cooperative Extension Service, Michigan State University,
East Lansing, Michigan. 1974.
Tourism-Past, Present, and Future (2nd. ed.). A. J.
Burkart and S. Medlik. William Heinemann Ltd., London.
1981.
Tourism Planning. Clare A. Gunn. Crane Russak & Company,
Inc., New York, New York. 1979.
Tourism: Principles, Practices, Philosophies (4th ed.).
Robert W. McIntosh and Charles R. Goeldner. Grid
Publishing, Inc., Columbus, Ohio. 1984.
Tourism USA, Vol. I-IV United States Department of
Commerce, United State Travel Service, Washington, D.C.
1978.
Tourist Business (4th ed.). Donald E. Lundberg, CBI
Publishing Co., Boston, Mass. 1980.
Sources For Additional Help
* Local Chambers of Commerce
* Michigan State Chamber of Commerce, Lansing, Michigan
* Michigan State University Cooperative Extension
Service, East Lansing, Michigan
* Travel Bureau, Michigan Department of Commerce,
Lansing, Michigan
* Economic Development Office, Michigan Department of
Commerce, Lansing, Michigan
* Other state and local agencies important to various
stages of the project, such as:
Health Departments
Road Commissions
Drain Commissions
Planning and Zoning Commissions
Tourism Information Series
The Tourism Information Series is for those interested in
tourism development. To obtain the series, contact your
county Extension office. Look in the white pages under
County Government.
1. E-1937, Tourism and Its Significance in Local
Development
2. E-2004, Tourism Planning
3. E-1958, Developing A Tourism Organization
4. E-1959, Tourism Marketing
5. E-1992, Feasibility Analysis in Tourism
6. E-1939, Developing A Promotional Strategy
7. E-1957, Creating A Promotional Theme
8. E-1940, Information and Traveler Decision Making
9. E-1938, Managing Tourism Information Systems
10. E-2005, Selecting Promotional Media
11. E-1999, Pricing Tourism Products and Services
12. E-1960, Direct Marketing of Agricultural Products to
Tourists
Series editor: Maureen H. McDonough, Associate
Professor, Department of Park and Recreation Resources.
Produced in Cooperation with the Michigan Travel, Tourism
and Recreation Resource Center Michigan State University
MSU is an Affirmative Action/Equal Opportunity
Institution. Cooperative Extension Service programs are
open to all without regard to race, color, national
origin, sex, or handicap.
Issued in furtherance of Cooperative Extension work in
agriculture and home economics, acts of May 8, and June
30, 1914, in cooperation with the U.S. Department of
Agriculture, W.J. Moline, Director, Cooperative Extension
Service, Michigan State University, E. Lansing, MI 48824.
This information is for educational purposes only.
Reference to commercial products or trade names does not
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to commercial products or trade names does not imply
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mentioned. This information becomes public property upon
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