12/31/20

LECTURE TOPIC
FEASIBILITY STUDY: FINANCIAL
SBEQ 4452 ASSESMENTS
DEVELOPMENT ECONOMICS o  Purpose
o  Types

Sr Fara Diva Mustapa, PQS,MRISM,MRICS o  Application

Department of Quantity Surveying, Faculty of
Built Environment & Surveying

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TYPES OF FEASIBILITY STUDY

Site/location

Economics

Let's Rec ap Marketing

Financial

Design

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4) FINANCIAL
Studies relating to cost and return, profit on cost,
development return, investment assessment,
etc. Will cover this more specifically in
developer’s budget.
①  Serve as numeric models – revise your cost model
understanding
②  Firms/practitioners prefers financial models with
the aim to determine profitability
③  Most of the models based on forecasted cash-flow

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Project financial evaluation may be carried out by using 1) Payback period

the following various simple methods:

①  Payback method ▪  Time taken to gain financial retu rn equal

②  Return on investment (ROI) to the original investment and expresse d
in either months or years.
③  Discounted cash flow return (DCFR)
④  Net present value (NPV)

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1) Payback period (cont’d)

1) Payback period (cont’d) §  Disadvantages of payback method;
•  Does not consider the time value for money. Eg.
Project with a high, early income (cash-inflow)
•  Advantages of payback method; would be ranked equally with a project that has a
late income if their payback periods were the
•  Simple & easy to use
same.
•  Uses readily available accounting data to

Cash flow
determine cash-flows
•  Reduces the project’s exposure to risk and
uncertainty by selecting the project with shortest
D
payback period
C
•  Appropriate to evaluate high technology projects
with rapid technology change

Time

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1) Payback period (cont’d)

1) Payback period (cont’d) Project Calculation

The Payback period of each project is as follows:

The "cut-off" point is when the income return equals the expenditure spent.
Expenditure = Income (that is Payback period)

Cash flows Year Project A 200,000 ₌ (50,000 + 75,000)+ 75,000

A B C ₌ 2 years + ………..

Expenditures 0 200,000 250,000 325,000 Period ₌ 2 years + 75,000

Income 1 50,000 75,000 75,000 100,000
Income 2 75,000 75,000 90,000
Income 3 100,000 100,000 110,000 ₌ 2 years + (0.75 x 12 months)
₌ 2 years + 9 months
Income 4 50,000 100,000 90,000
Income 5 40,000 50,000 120,000 B 250,000 ₌ 75,000 + 75,000 + 100,000
250,000 ₌ 250,000
Period ₌ 3 years

C 325,000 (75,000 + 90,000 + 110,000) + 50,000

₌ 3 years + ………..

Period ₌ 3 years + 50,000

90,000

₌ 3 years + (0.55 x 12 months)

₌ 3 years + 6.6 months

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1) Payback period (cont’d) 2) Return on Investment (ROI)

Cashflows Year Project

A B C
Payback Period 2 yrs + 9 months 3 years 3 yrs + 6.6 months
Expenditures 0 200,000 250,000 325,000
Total income 5 325,000 400,000 485,000
Net income 115,000 150,000 160,000
% income 57.5 60 49

▪  S i m i l a r a d va n ta g e a s o f p a yb a ck p e ri o d , b u t
co n s i d e rs th e ca s h -f l o w o ve r th e w h o l e
p r o j e ct.
Eg. Annual profit = RM 200,000 = RM50,000 per year
4
Return on investment = RM50,000 x 100 = 14%
*RM350,000 1

* Cost of investment

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2) Return on Investment (ROI)(cont’d) 2) Return on Investment (ROI)(cont’d)

•  D i s a d va n ta g e s – a ve ra g e s o u t th e p r o f i t o ve r th e
s u cce s s i ve ye a rs . A n i n ve s tm e n t w i th h i g h i n i ti a l
p r o f i ts w o u l d b e ra n ke d e q u a l l y w i th a p r o j e ct w i th
h i g h p r o f i ts l a te r i f h e a ve ra g e p r o f i t w a s th e
sa me. Capital cost RM 15,000,000.00
Income RM 18,500,000.00
Profit RM 3,500,000.00

ROI Profit
₌ x 100%
Capital cost
₌ 3,500,000.00 x 100%
15,000,000.00
₌ 23% (before tax)

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3) DISCOUNTED CASH-FLOW (cont’d)

3) DISCOUNTED CASH-FLOW (cont’d)
o  The essence of DCFR preparation includes:

o  Takes into consideration the time value of money today, will not
have the same worth or buying power in the following year.
o  There is 2 basic DCF, net present value (NPV) and internal rate of
return (IRR).
o  NPV is the reverse of compound interest due to inflation and
interest rate. Utilises the table of discounting factors to indicate
the return.
•  Preparing of cash flow table showing month by month or year by year:
Ø  The money which is possibly to flow out from an organisation
Ø  The money which is possibly to flow into the organisation from
the
investment made.
•  Calculating the ultimate disposal of the investment
•  Discounting the cash flow table at a selected interest rate, to enable all
money coming in or going out to be calculated on a similar time basis,
which is the present value.

o  This process enables investors to make actual comparisons in terms of the

present value between the expected money to be obtained from an
investment and the money expected to be paid out in purchasing or
erecting and maintaining the investment, be it for property or other forms of
assets.

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3) DISCOUNTED CASH-FLOW (cont’d) 3) DISCOUNTED CASH-FLOW (Cont’d)

Cash flow Table

In presenting the DCFR analysis, it is common to construct a cash flow table

by using the following headings:

Period (yearly or monthly)

Summary / Detailed of cash flow
Cash outflow
Cash inflow
Net cash flow
Present cash flow
Discounted value n = Period which takes values from 0 to the Nth period till the cash flows ending period
CFn = Cash flow in the Nth period
Formula for the Present Value of 1 i = Discounting rate

1
(1 + i)ⁿ

Where :
i ₌ Interest rate
n ₌ number of years

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3) DISCOUNTED CASH-FLOW (Cont’d) 3) DISCOUNTED CASH-FLOW (Cont’d)

Advantages;
o  Introduces time value for money
o  Expresses all future cash-flows in today’s value – enables direct
comparison
o  Allows for inflation and escalation
o  Gives more accurate profit and loss forecast than non DCF
calculations

Disadvantages; Internal Rate of Return is also called DCF yield or DCF return on
o  Accuracy is limited by the accuracy of the predicted future investment. The IRR is the value of the discount factor when the NPV is
cash-flows and interest rates zero.
o  Biased towards short run project IRR analysis is a measure of the ROI, therefore, select the project with
o  Excludes non financial data e.g. market potential highest IRR.

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Example of cash flow table

Year Details Cash Net Cash Present Discounte

Outflo Cash inflow flow Value of 1 d Value @
w @ 10% 10% Net
(RM) PV
(RM) (RM)
(RM)
0 Total 15,000,000 ─ (15,000,000) 1.00 (15,000,000)
constructio
n cost
1 Sales profit ─ 10,000,000 10,000,000 0.91 9,100,000
2 Sales profit ─ 8,000,000 8,000,000 0.83 6,640,000
- 18,000,000
(15,000,000) 15,000,000
how to prepare/produce investment appraisal
aka feasibility study? Profit 3,000,000 Net PV 740,000

(─) Negative value

Assumption that income is received after the project is completed

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Cash Flow AS S ETS AM OUNT QUARTER

AS S ETS UNIT QTY COS T AM OUNT DEVELOP 1 S ig n in g o f S &P Ag reemen t 10% 1 1 ,5 0 0 ,0 0 0

II EXP ENDITURE
M
2 Earth wo rk 10% 2 1 ,5 0 0 ,0 0 0
1 2 3 1 Lan d 1 ,0 0 0 ,0 0 0
3 S tru ctu ral Wo rk 15% 3 2 ,2 5 0 ,0 0 0
I REVENUE Co n v ersio n 2 5 0 ,0 0 0
4 ………………… 15% 4 2 ,2 5 0 ,0 0 0
S S Terrace Hse Un its 100 1 5 0 ,0 0 0 1 5 ,0 0 0 ,0 0 0 P lan n in g 1 5 0 ,0 0 0
5 ……………….. 10% 5 1 ,5 0 0 ,0 0 0
II EXP ENDITURE 1 ,4 0 0 ,0 0 0
6 …………………. 15% 6 2 ,2 5 0 ,0 0 0
1 Lan d Ac 10 1 0 0 ,0 0 0 1 ,0 0 0 ,0 0 0 2 In frastru ctu re
7 …………………. 10% 7 1 ,5 0 0 ,0 0 0
Co n v ersio n 2 5 0 ,0 0 0 Earth wo rk 3 0 0 ,0 0 0
8 ………………….. 10% 8 1 ,5 0 0 ,0 0 0
P lan n in g 1 5 0 ,0 0 0 Utilities 5 0 0 ,0 0 0
9 Vacan t P o ssessio n 5% 9 7 5 0 ,0 0 0
To tal lan d Co st 1 ,4 0 0 ,0 0 0 3 Bu ild in g 8 ,0 0 0 ,0 0 0
To tal 100% 3 6 M o n th s 1 2 ,0 0 0 ,0 0 0
2 In frastru ctu re 8 ,8 0 0 ,0 0 0

Earth wo rk Ac 10 3 0 ,0 0 0 3 0 0 ,0 0 0 4 Co n su ltan cy 8 0 0 ,0 0 0

Utilities Ac 10 5 0 ,0 0 0 5 0 0 ,0 0 0 5 M an ag emen t 7 2 0 ,0 0 0

3 Bu ild in g Un its 100 8 0 ,0 0 0 8 ,0 0 0 ,0 0 0 F in an cin g 1 5 0 ,0 0 0

To tal Co n stru ctio n Co st 8 ,8 0 0 ,0 0 0 1 2 ,8 7 0 ,0 0 0

4 Co n su ltan cy % 10 8 0 0 ,0 0 0 ACCUMULATIVE
5 M an ag emen t M th 30 2 0 ,0 0 0 7 2 0 ,0 0 0 CURVE OVER
DEVELOPMENT
F in an cin g S ay 1 5 0 ,0 0 0 PERIOD

To tal Dev elo p men t Co st 1 2 ,8 7 0 ,0 0 0

III Gro ss Dev elo p men t P ro fit 2 ,1 3 0 ,0 0 0

Highes t Gap between Accumulative
1 Financing Required Revenue and Cos t Curve
AS S ETS UNIT QTY P RICE TOTAL DEVELOP M ENT P ERIOD 2 Cos t of Fund Financial Charges on Cas h Deficit
Resid en tial Q1 Q2 Q3 Q4 Q1 0

REVENUE

S S Terrace Hse Un its 100 1 5 0 ,0 0 0 1 5 ,0 0 0 ,0 0 0 1 ,5 0 0 ,0 0 0 1 ,5 0 0 ,0 0 0 2 ,2 5 0 ,0 0 0 … … … …

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CRITERIA OF A FEASIBLE PROJECT

Economic Appraisal
A project is said to be feasible / viable if the
expected return meets the criteria specified. If there
are no changes to other factors, the client will be
stratified as long as the project is carried out, and the
expected return, expenditure and time meet the
economic condition and equipment.

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What is GDV?

• Gross development value, or GDV as it is commonly known in property

circles, needs to be fully understood if you want to be able to calculate
a near accurate figure of what your property or development project
may be valued at once all your proposed works have been completed.

• GDV is an essential tool for any real estate investor or property

developer as it forms a key component of the development appraisal
process.

• Without an accurate gross development value your pre-acquisition /

pre-development financial projections will be flawed and your risks
potentially increased.
Gross Development Value (GDV) |
Property Developers Guide to Financial Appraisals

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What is gross development value?
To many property developers, GDV is one of the most important
performance metrics that they will monitor as it helps to highlight
the capital and rental value of their property or development
project when all redevelopment works have been completed.
In other words, it will show if a profit has been, or will be, made out
of the project, and at what level.
Put simply, GDV is the estimated value that a property or new
development would fetch on the open market if it were to be
sold in the current economic climate.
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So, how is GDV calculated?
Generally, if a near accurate valuation is to be created for a development
project or property investment, then current sales prices and recent
transactions in the area for similar properties would be carefully analysed -
this would provide a comparable estimate of what properties in the same
area are selling for and therefore what you could expect your property to
fetch.
Developing to let and rental values
If a developer wants to let a property or development, they will have to look at
recent lettings in the same area to find comparable rental values.
This information can usually be obtained from local lettings agents or
specialist firms of surveyors. This will help to establish how much the
developer can expect to take in rent on a per month, per annum etc. basis.
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Land = GDV – (Construction + Fees + Profit)

Key performance metric
GDV should never be underestimated.
It is the foundation to any property development project appraisal and is the one
performance metric that impacts on all other major aspects, such as
o the acquisition cost
o of the building or land,
o the cost of the construction and enabling works;
o developers profit and,
o more importantly, the likelihood of a successful financial outcome.
Residual method
The method of development appraisal that incorporates the GDV calculation is the
residualmethod of valuation and you can approach this in a couple of different ways.
The most common and most basic formula to estimate the general value is as
follows:
Where:
Land = Purchase price of land/property/site acquisition
GDV = Gross development value
Construction = Building and construction costs
Fees = Fees and transaction costs
Profit = Developers profit required
An alternative form of residual assessment can be used by reconfiguring the above
formula to calculate the developer's profit:
Profit = GDV – (Construction + Fees + Land)
The second form of this formula is a more traditional way of assessing the financial viability
of a property development project as it helps to highlight the developers profit.

Land = GDV – (Construction + Fees + Profit)

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Market, Property and Planning Information

Land Area 6.25 Hectares Development Analysis
Permissible Density 100 Persons/Hectares
Household Planning Standard 5 Persons No of units to be developed per hectare = Permissible density divided by
Plot ratio 1 : 2.1 Household planning standard
Green area allocation 10%
Property Report in the area (Selling prices expected in 3 years’ time 100 divided by 5= 25 units per hectare
- 20 X 75 feet
Land plot = 6.25
• House A ( (End lot Unit) 10 unit @ RM 500,000
• House A (Intermediate Unit) RM 450,000 Total no of units for the whole development? = units
• House A (Intermediate Unit with Improvement) 10 unit@ RM 480,000

• House A (Corner Unit) 10 unit @ RM 600,000 Construction cost =

Estimated Construction Cost
• House A (End Unit) RM 265,000.00
• House A (Intermediate Unit) RM 220,000.00 10 units end = 10 x RM 265,000 =
• House A ( Intermediate Unit with Improvement) RM 240,000.00 10 units corner =10 x RM 320,000 =
• House A (Corner Unit) RM 320,000.00
5 units intermediate with improvement = 5 x 240,000=RM
Consultant Fees 10% of Construction Cost units intermediate = x 220,000 = RM
Management cost RM 500,000 Total cost =RM XXXXXXX
Cost of Finance (Rule of Thumb) 2% of Construction Cost
Risk Factor 5% of Construction Cost
Developer’s Profit 25% of Gross Development Value

Present Value of RM1.00 @ 8.5 % for 3 years 0.7829081

Hectare to Square foot conversion 1=107639.104

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GDVs calculation

10 units end = 10 x RM 500,000 =

10 units corner =10 x RM 600,000 =
5 units intermediate with improvement = 5 x RM 480,000=RM
units intermediate = x RM450,000 = RM
Total cost =RM XXXXXXX

Land Value’s calculation

Land value = GDV Less (Construction cost + Fees + Management/admin +

cost of finance + risk + profit)
Land value= RMXXXXXXX – (RM XXXXXXX + RM 500,000.00 + (2% of
construction costs) + 5% of construction costs) + 25% of GDV)
RM XXXXXX (value of the land at today’s price)

Present value in 3 years time = RM XXXXXXXX X 0.7829081

= RM XXXXXXXX(rounded)

***To study – definition of permissible development density, plot ratio, green/! Neutral area,
bonus plot ratio, floor space requirements such as circulation area, M&E etc

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SELFCHECK
What is financial feasibility studies?

What is the type?

What is the formula?
What is the advantages &
disadvantages?

How to calculate the GDV and Land’s

value of a project?

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