Ten questions to ask before approving a feasibility study

Feasibility studies are commissioned to inform a capital commitment, but they are frequently read only for the headline IRR. The analytical weight sits in a small number of assumptions that, if wrong, move the result more than anything else in the model. These questions are designed for the person approving the study, not the person writing it.

1. 01

   What utilization rate is assumed, and what evidence supports it?

   Utilization is the single most common source of optimism. A plant modelled at 85% capacity from year two, when comparable facilities take four years to reach it, will show returns that cannot be earned. Ask what the ramp-up curve is based on and whether any operating facility has achieved it.

2. 02

   Where does the demand assumption come from?

   There is a large difference between demand estimated from observed transactions and demand inferred from population multiplied by an assumed consumption rate. The second method is easy to construct and hard to defend. Ask for the source and the sample.

3. 03

   Has working capital been modelled, or only capital expenditure?

   Projects fail on liquidity more often than on returns. Inventory, receivables and the gap between paying suppliers and being paid are real cash requirements. A model that shows CAPEX and operating costs but no working capital cycle is understating the funding requirement.

4. 04

   What does the sensitivity analysis actually test?

   Flexing every variable by ±10% produces a tidy table and very little insight. Useful sensitivity identifies the two or three variables that dominate the outcome and tests them across a credible range, including combinations that could occur together.

5. 05

   Are the financing assumptions available in the current market?

   Models are frequently built on a tenor, a grace period and a rate that no lender is currently offering for this asset class in this jurisdiction. If the financing structure is aspirational, the equity return is aspirational too.

6. 06

   What is the basis of the cost estimate, and when was it priced?

   A CAPEX figure carried from an earlier study, or benchmarked from another country without adjustment for logistics, duties and site conditions, is a placeholder. Ask for the date, the source and the contingency.

7. 07

   Which permits, approvals or land matters are unresolved?

   Approval timelines are part of the financial case because delay consumes interest during construction and pushes revenue back. An unresolved land title is not a footnote.

8. 08

   Who operates this, and do they exist?

   Many studies assume an operating capability that the sponsor does not have and has no plan to acquire. Either the operator is identified, or the cost and time to build the capability belongs in the model.

9. 09

   What would have to be true for this to fail?

   Inverting the question is more revealing than reviewing the base case. If the answer is a modest shortfall in price or volume, the margin of safety is thin regardless of the headline IRR.

10. 10

    What decision does this study support, and what is the alternative?

    A study that evaluates one option in isolation cannot show whether it is the best use of the capital. The comparison — including the option of doing nothing — is part of the analysis.

• Approve the assumptions, not the IRR.
• Utilization, demand and financing carry most of the risk.
• Working capital belongs in the funding requirement.
• A study without a comparison is not yet a decision document.