Chapter 19 Investment Feasibility Analysis
The Nature of the Feasibility Question • Feasibility analysis attempts to estimate the probability of success of a specific proposed course of action • Formal or informal • Early step in investment or development process • Involves estimating the amount and timing of required cash expenditures and expected cash inflows, and an assessment of the degree of confidence that attaches to the estimates
The Nature of the Feasibility Question • Feasible project must be: • Physically possible • Legally feasible • Financially feasible
The Nature of the Feasibility Question • Feasibility analysis problems: • With a predetermined site, investigate alternative uses • With a predetermined use, investigate alternative sites • With predetermined funds, investigate alternative investment opportunities
The Nature of the Feasibility Question • Limitations should be identified and defined in analysis • Limits of resources • Values, goals, and objectives • Physical characteristics of sites • Society, through ordinances and regulatory oversight
Steps in Feasibility Analysis Process • Assess physical and legal aspects of the site. • Estimate demand for the proposed real estate services. • Analyze competitive space. • Estimate the cost of constructions, alteration, rehabilitation or fix-up, as proposed in the initial concept, and the cost of facility operations. • Estimate the cost of financing various possible combinations of equity and debt financing packages. • Estimate the rate at which vacant units will be rented. • Develop a schedule of cash inflows and outflows. • Evaluate the anticipated cash flows for adequacy, given the investor’s minimum acceptable rate of return and the degree of risk the investor is prepared to accept.
Preliminary Financial Feasibility • Analysis should be viewed as continuous process • To be feasible, project must be attractive both to equity investors and to mortgage lenders • Preliminary financial feasibility deals with the threshold questions concerning a proposed venture (solvency testing)
Format for a FeasibilityReport • Organization should reflect purpose; designed to facilitate use. • Common format: • Title page • Table of contents • List of tables and exhibits • Executive summary • Scope and limitations • Regional and city analysis • Location and site analysis • Market analysis • Financial analysis and cash flow projections • Conclusions and recommendations