Feasibility Model for Residential Development Acquisition Assignment Sample

Subject Name : Accounting & Finance

Introduction

´ The main objective of this assignment is to analyse the feasibility, viability, and acceptability of the upcoming tender of residential development site.

´ The aim of the project is to develop 42 residential apartments from the residential development site and then make activities for sale within due period.

´ The company’s objective is to start the project within 6 months and then

complete the construction within 18 months of beginning.

´ The company is required to find whether it will be profitable for the entity to take the tender i.e., if the upcoming tender will add more value to the overall profitability of the company or not.

´ If the company is of the opinion that the project will result in financial losses, then the project should not be accepted however if the project will generate more profits for the company, then the same should be accepted.

´ The company shall take the decision as to whether to make investment in the project basis the discounted cashflow method.

´ The discounted cashflow method tells whether a proposed project is profitable or not taking into considerations all cashflows during the lifetime of the project and discounting them using a reasonable cost of capital.

´ If the net present value is positive, it means the project is profitable and it will increase the shareholder wealth too

´ If the net present value is negative, it means the project is not profitable and it will decrease the shareholder wealth in the long-run.

Sales	## Apartments	Price Per Apartment	Total Sales
Residential Sales	42	17,50,000	7,35,00,000
Selling Costs
Agents Fees	2.25%	16,53,750
Legal Fees	1.00%	7,35,000
Assumptions	Cost	Unit
Construction Costs	-$7,50,000	per property
Construction Period	18	months
Professional fees	8.00%
Professional Fees per month	-$140,000
Land Holding Costs	-$15,000	per month
Landscaping costs	-$500,000
Acquisition Costs	6.50%
Discount Rate	6.70%	0.538%	per month

Project assumptions

Project scenarios:

´ In scenario 1, the company believes that the company will be able to sale the residential apartment as soon as they are completed, and no extra period will be required to make the sale of the residential apartments.

´ In scenario 2a, the company believes that the company will be able to sale the residential apartment on bi-monthly basis i.e., each apartment will be sold after 2 months and thus sale of the residential apartments shall not take place immediately.

´ In scenario 2b, the company believes that the company will be able to make the sale of 50% residential apartment on monthly basis i.e., each apartment will be sold on each month & remaining 50% residential apartment on bi- monthly basis i.e., each apartment will be sold after 2 months.

´ In scenario 3, the company believes that the company will be able to make the sale of 50% residential apartment on monthly basis i.e., each apartment will be sold on each month & remaining 50% residential apartment on bi- monthly basis i.e., each apartment will be sold after 2 months however the residual land value shall not exceed

$11.5 million.

Report - Sensitivity Analysis:

DCF Analysis	Particulars	NPV	IRR	Residual Land value
Scenario 1	Sale of apartment as per case study	2,84,59,466.25	48%	2,67,22,500.00
Scenario 2a	Sale of apartment in every 2 months	1,88,44,099.84	19%	1,76,94,000.00
Scenario 2b	50% sales of apartment in each month & remaining 50% sale of apartment in every 2 months	2,31,08,587.28	27%	2,16,98,200.00
Scenario 3	Residual land value given alongwith 50% sales of apartment in each month & remaining 50% sale of apartment in every 2 months	1,10,46,908.71	14%	1,15,00,000.00

Analysis - Sensitivity Analysis:

´ In all the scenarios, the profitability of the project remains positive and thus the entity is advised to submit the tender for the upcoming project as it will increase the overall profitability of the company in the long run. The company shall submit the tender in the price band of ~$11.5 million to

~$26.72 million. If the company submits the tender in the given price band, then the entity will be able to fulfil the expected return of the stakeholders as well as increase the overall revenue for the firm.

´ From the above calculation, scenario 1 is the most profitable scenario as it provides the highest return among the other scenarios as in this scenario, the company believes that the company will be able to sale the residential apartment as soon as they are completed.

´ Company earns the lowest rate of internal return in the scenario 3 as in this scenario, the company believes that the company will be able to make the sale of 50% residential apartment on monthly basis i.e., each apartment will be sold on each month & remaining 50% residential apartment on bi- monthly basis i.e., each apartment will be sold after 2 months however the residual land value shall not exceed $11.5 million.

References

´ Arshad, A. (2012). Net present value is better than internal rate of return. .

Interdisciplinary journal of contemporary research in business.

´ Holopainen, M. M. (2010). Comparison of various sources of uncertainty in stand-level net present value estimates. . Forest Policy and Economics, 5(12), 377-386.

´ Knoke, T. G. (2020). Use and misuse of the net present value in environmental studies. . Ecological Economics .

´ Pasqual, J. P. (2013). Equivalence of different profitability criteria with the net present value. . International Journal of Production Economics.

´ Peymankar, M. D. (2021). Maximizing the expected net present value in a project with uncertain cash flows. . European Journal of Operational Research.