PROJECT INVESTMENT ANALYSIS ASSIGNMENT -

The aim of this project is to introduce participants 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 Office 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.

CITY HIGHRISE DEVELOPMENT COMPLEX -

You have been appointed as a financial consultant by an Investment Company to carry out financial analysis for the proposed City Highrise Complex (Refer the given data and information). Prepare a report with your recommendations to the Managing Director of the company to justify the financial viability of this proposed development.

Development Proposal: Project Details

• Office complex development which will have: 75,000 m2 of lettable area and 5,000 m2 of lettable retail area
• The site is located in the CBD of Melbourne
• Due to high demand it is believed that 100% of the office and retail areas will be fully let.
• The Investment Company will purchase this location at a cost, inclusive of legal fees, commissions, etc., of $70.0 million on 1st July 2018.
• The company also has decided to demolish the existing building and the demolition work and the new project is to start on 1st October, 2018.
• Total development period is expected to be 36 months.

DEVELOPMENT COST

Land and acquisition costs are $70 Million based upon purchase 1 July 2018, settlement 30 September 2018. Deposit payable 10%. Balance on settlement.

Demolition estimate $800,000. Planning and Design cost is estimated to be $3.5 million. Landscaping and external work cost $500,000. All costs are based on 1st of July 2018 value.

Project commencement - 1/10/2018

Planning and design period - 6 months

Demolition - 3 months

Construction duration - 20 months

Landscaping & External - 6 months

Cost of design and construction incl. all margins $350 Million (Split $50m + $300 million)

Rise & Fall only during construction

(a) 40% of money spent in first 12 months, with inflation rate of 3%.

(b) Balance of money spent in second 12 months, with 6% inflation in that year.

Allow costs during the development period at $500,000 per annum.

Assume that gross revenue will attract leasing and sales costs of 10% in the first year of operation.

Assume that all cash expenditure bears interest at the rate of 12% per annum.

Allow for the developers' overhead costs of 3% of all cash expended, and a contingency of 5%.

PROJECT REVENUE -

Total office lettable area amounts to 75,000m² which will be let at an average of $550/m². Calculate the 'on completion' rental assuming 4% annual escalation.

Total retail lettable area amounts to 5,000 m² which will be let at an average of $500/m².

OUTGOINGS -

Assume outgoings to be equal to $160/m2 today and subject to 4% annual escalation, with $5/m² recoverable from tenants both office and retail.

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 -

Part A -

1. Calculate total cost of the Development at 1st July 2018 value.

2. Preparing a development plan (including the sale of the apartments) by assuming that demolition; land development and design and construction will start on 1st October 2018.

3. Prepare a cash flow schedule starting on 1st July 2018.

4. Estimate the net income on completion of project, 1st July 2021.

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 (2021) at a price that will be 5% yield to John Wiley Pty Ltd. on the first year of ownership 2021. 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 2021).

5. Assuming John Wiley Pty Ltd. sell the Facility for $900 million at the end of 10th year of ownership (year 2031), calculate the Net Present Value of sale. (Base year 2021). Discount rate is 9%.

6. Calculate the Profit & IRR John Wiley Pty Ltd. will make at 2021 value.

Part C -

Assess the impact of changing the debt: equity ratio to 80: 20 and 50: 50.

Part D -

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 E -

List all assumptions at the front of your report.