Engineering Management
The aim of this project is to introduce students to concepts of Financial Feasibility Modelling and the use of spreadsheets for feasibility exercises.
Assume that you have been appointed as a financial consultant by an investment company to carry out a financial feasibility study for the proposed Sub Division Residential Development Complex Project.
Prepare a report with your recommendations to the Director of the Investment Company to justify the financial viability of this proposed development.
SUB-DIVISION RESIDENTIAL COMPLEX DEVELOPMENT PROJECT
You have been appointed as a financial consultant by an Investment Company to carry out financial analysis for the proposed Sub Division Residential Complex Development Project. Prepare a report with a range of recommendations to the Managing Director to justify the financial viability of this proposed development and include in full detail any assumptions including methods in which they are implemented.
DEVELOPMENT PROPOSAL 1: PROJECT DETAILS
? Residential Development Complex which will have:
500 new lots for housing development of different types 25,000 sq. m leasable area of a regional shopping centre 350 units of aged care accommodation and related facilities.
2000 sq. m Medical facilities
? The site is located at the outer suburb of Point Cook, VIC.
? Due to high demand for land space it is believed that 100% of all land space will be fully utilised.
? It is believed that the outgoing expenses will be 30% of gross revenue.
? The Investment Company will purchase this location (400 hectares) at a cost, inclusive of legal fees, commissions, etc., of $50.0 million on 1st April 2017.
? The company also has decided to demolish the existing industrial building and the demolition work and the new project is to start on 1st July, 2017.
? Construction cost is expected to escalate at 4.0% per annum.
SUMMARY OF AREAS:
Area of Land 400 hectars
Residential Houses/Building 250 hectars
Shopping and other associated facilities 60 hectars
Aged Care accommodation 60 hectars
Medical Centre 5 hectars
Open space & Parks 25 hectars
REVENUE DATA: Based on 1st of January 2017 Prize.
The company is expected to generate income through selling 550 lots of land for housing; 25,000 sq. m leasable area of shopping centre and renting, 2000 sq. m medical centre and leasing of 350 units of aged care accommodation.
Sale of land $ 380,000 per lot
Shopping centre lease cost $1,650/sq m per annum
Medical Centre $1700/ sq. m
Aged care unit lease or rent $800/month
Income is expected to increase 3% per year.
Outgoing expenses will be 30% of gross revenue
COST ESTIMATE: Based on 1st of January 2017 Prize
? Land cost including the existing building which is to be demolished, is $50.0 million paid on 1st April 2017
? Land Improvement cost $30.0 million
? To demolish the existing building and land clearing $4.5 million.
? Building Design cost $4.0 million.
? Aged care Accommodation $130,000 per unit
? Shopping centre $180.0 million ? Medical Centre $20.0 million ? External work $20.0 million.
? Parks and recreation facilities $15.0 million and annual maintenance cost of $0.9 million per year and expected to increase 3% per annum
Construction cost will escalate at 4.0% per annum.
CONSTRUCTION TIME:
? Demolition of existing building 3 months
? Land improvement & Infrastructures 8 months
? Building Design and approval: 6 months
? Shopping Centre Construction 24 months
? Aged Care Facilities 16 months
? Medical Centre 12 months
? External works 6 months
? Parks and recreation facilities 6 months
Demolition and Design is to start on 1st July 2017. Total development period is expected to be 36 months.
DEVELOPMENT PROPOSAL 2: PROJECT DETAILS
? Residential Development Complex which will have:
450 new lots for housing development of different types
18,000 sq. m leasable area of a regional shopping centre 10,000 sq. m leasable area of Community Facilities 420 units of aged care accommodation and related facilities.
? The site is located at the outer suburb of Point Cook VIC.
? Due to high demand for land space it is believed that 100% of all land space will be fully utilised.
? It is believed that the outgoing expenses will be 35% of gross revenue.
? The Investment Company will purchase this location (400 hectars) at a cost, inclusive of legal fees, commissions, etc., of $50.0 million on 1st April 2017.
? The company also has decided to demolish the existing industrial building and the demolition work and the new project is to start on 1st July, 2017
? Construction cost is expected to escalate at 4.0% per annum.
SUMMARY OF AREAS:
Area of Land 400 hectars
Residential Houses/Building 180 hectars
Shopping and other associated facilities 80 hectars
6000 sq. m leasable area of Community Facilities 40 hectars
Aged Care accommodation 60 hectars
Open space & Parks 40 hectars
REVENUE DATA: Based on 1st of January 2017 Prize.
The company is expected to generate income through selling 450 lots of land for housing; 18,000 sq. m leasable area of shopping centre, 10,000 sq. m leasable area of community facilities and renting and leasing of 420 units of aged care accommodation.
Sale of land $ 380,000 per lot
Shopping centre lease cost $1,650/sq m per annum
Community Facilities rental $800/sq. m per annum Aged care unit lease or rent $800/month
Income is expected to increase 3% per year.
Outgoing expenses will be 35% of gross revenue
COST ESTIMATE: Based on 1st of January 2017 Prize
? Land cost including the existing building which is to be demolished, is $50.0 million paid on 1st April 2017.
? Land Improvement cost $30.0 million
? To demolish the existing building and land clearing $4.50 million.
? Building Design cost $4.0 million.
? 6000 sq. m leasable area of Community Facilities $65.0 million
? Aged care Accommodation $110,000 per unit ? Shopping centre $140.0 million ? External work $20.0 million.
? Parks and recreation facilities 9.0 million and annual maintenance cost of 0.9 million per year and expected to increase 3% per annum
Construction cost will escalate at 4.0% per annum.
CONSTRUCTION TIME:
? Demolition of existing building: 3 months
? Land improvement & Infrastructures 8 months
? Building Design and approval: 6 months
? Shopping Centre Construction 22 months
? Community Facilities 18 months
? Aged Care Facilities 18 months
? External works 6 months
? Parks and recreation facilities 6 months
Demolition and Design is to start on 1st July 2017. Total development period is expected to be 36 months.
FINANCING METHOD:
Option A
The Investment Company will have to borrow the capital, and it is to be assumed that the rate of interest will be 12% per annum compounded on a monthly basis.
Option B
Debt: Equity Ratio of 80: 20
Option C
Debt: Equity Ratio of 50: 50
THE ANALYSIS (Option 1 and Option 2)
Part -A-.
1. Calculate total cost of the Sub Division Development at 1st April 2017 value.
2. Preparing a development plan (including the sale of the land) by assuming that demolition; land development and design and construction will start on 1st July 2017.
3. Prepare a cash flow schedule starting on 1st April 2017.
4. Estimate the net income on completion of project, 1st April 2020
5. Calculate.
- Total development cost - Project finance cost - Cost escalation.
6. Calculate the initial project development yield on completion of the project.
Part -B-
Assuming the entire facility will be sold to John Wiley Pty Ltd. on completion (2020) at a price that will be 6.5% yield to John Wiley Pty Ltd. on the first year of ownership 2020. Calculate for John Wiley Pty Ltd.
1. The Price at which John Wiley Pty Ltd. will purchase the entire facility.
2. The original developer’s profit/loss.
3. Generate an Annual Net Cash Flow for John Wiley Pty Ltd. for 10 years.
4. Net Present Value of the John Wiley Pty Ltd.’s cash flow using 9% discount rate (Base year 2020).
5. Assuming John Wiley Pty Ltd. sell the Facility for $900 million at the end of 10th year of ownership (year 2030), calculate the Net Present Value of sale. (Base year 2020). Discount rate is 9%
6. Calculate the Profit & IRR John Wiley Pty Ltd. will make at 2020 value.
Part -C-
Compare Option 1 and Option 2 and recommend the best option for this investment.
PART “D”
Assess the impact of changing the debt: equity ratio to 80: 20 and 50: 50.
Part -E-
1. List all possible risks which may have an influence on this development proposal
2. Identify three (3) key risk areas that need further evaluation from the above list.
3. Carry out sensitivity/risk analysis on the above three key areas which may have greater concern on the project development.
Part “F”
List all assumptions at the front of your report.