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Financial Feasibility Analysis Report

Before embarking on any investment plan, it is advisable to determine whether the idea is feasible or not. In feasibility analysis, it becomes prudent to consider various aspects before reaching to a conclusive decision (Regina, 2010).  Carrying out a feasibility analysis is a critical step in the decision making process. This financial feasibility report presents a viable project analysis of two proposed construction projects. Group dynamics in terms of the inputs in achieving the objective of the reports is also discussed.

Feasibility analysis for long time has been one of the effective analytical tools used to evaluate investments from various perspectives, such as social, legal, technical, market, financial and even organizational (Robinson, 2009). Projects need to generate profits for the project owner and therefore, scrutiny of different projects is critical to guarantee profitability. The proposed projects that required a financial feasibility analysis is between investing in commercial houses or residential houses. The two projects have their own advantages and pitfalls, hence must be taken through a feasibility analysis to determine which ones will have more returns in terms of profits.

Market Analysis of the Two Proposed Projects

In feasibility study, location where the project is undertaken matters a lot (Bennett, 2003). Location can help to estimate the value of the property and the returns expected from that project. The location of the proposed projects is the 447 Queen Street, IN Brisbane. The proposed projects will require an estimate of 2500 square meter.  For this project, the location is considered prime because it is an already developed area. The surrounding areas have essential social amenities such as hospitals, good tarmac roads, water supply, power supply, schools, health facility, shopping malls and social places that make it prime. Furthermore, the location is a walking distance from Eagle Street Pier and Queen Street mall making it an ideal location for residential apartments or commercial offices.

In this feasibility study, it is prudent to weigh the two options based on the availability and readiness of market (Mesly, 2017). Brisbane residential market analysis provides an insight on the viability of establishing or resorting to residential market or commercial offices. In Australia, currently, there has been a steady increase in population over the past few years. Increase in population puts pressure on the existing housing which in turn increases the demand pushing prices higher. Brisbane city currently is ranked at position 25 as the most livable city in the world. This implies that more people are geared to come and settle in the city. This obviously, will push the prices and the demand of houses higher. Similarly, Brisbane is one of the top 20 cities in the world that has continued to attract real estate developments. This scenario is a demonstration of the fact that the city is an investment hub and the demand of houses is going to hike. Investors therefore, are taking advantage of these market expectations to develop the sector.

Proposed Project Site

The average area for the proposed project is 2500 square meter. The building footprint permitted by the authorities in Brisbane is 43 meter by 43 meter, which can accommodate either of these projects. The permitted maximum number of floors the houses can accommodate is five. This means that, the units that can accommodate the five spaces will be limited.  Furthermore, accessibility of the proposed site is through public or private means. It is therefore convenient for both private and public users. There are taxis, and train bus that the residents and other people can use to move from the city and other towns around. The expected life spam of the project is 30 years. In those 30 years, the project to be decided upon should have accrued profits.

On the other hand, commercial market is also worth looking at to make a suitable decision on whether to consider the option. The growth/demand for commercial property has been growing, regardless of the vacancy rates having recorded some decline over the past six years. Rental growth has however started to rise in the past few years butt at a slower rate. The commercial market seems to be at its lows as the projections of new constructions of commercial offices in the coming ten years seems low.

Building residential area will cover an area of 2500 square meters. The construction is also estimated to take two and half years to complete. This means that, the returns will accrue after elapse of the two and half years. The construction footprint will cover 2050 square meters. The net rentable area of one floor will cover 1507.4 square meters. The gross floor area is estimated at 9250 square meters. Every apartment units dimension will cover 150 square meters per unit, with estimated floor height of 3.8 meters. The building will have a   parking of estimated 12.9 square meters per unit.  On contrary, the commercial offices will have five floors of offices with 25 office units, 2 shops and parking space for 126 cars.

Assessing the financial returns of two or three proposed investment plans is key in any feasibility studies. The balance sheets, cash flows, and income and expenditure statements are essential tools to use in identifying the most valuable project between residential and commercial project. Cash flow statement provides insights on how the proposed investment will accrue income and provides the estimated expense or costs of operating. The cash inflow should be more than cash outflows to guarantee returns.  Cash flow costs of the two project looks at the cost of funding the two project and the operating costs that the two will incur for the expected life of the project which is 30 years. The proposed commercial option is estimated to cost $30,950,000 compared to the residential which will require an initial investment of $33,950,000. Long term and operational cash flows for the commercial offices in 30 years is estimated to be $66,310,750 compared to the residential which will cost $ 60,155,410 as indicated in the figure1below

Figure 1: Estimated cash flow-costs of the two proposed projects

The projected cash flows for the commercial offices in a period of 30 years is compared to the cash flow-revenues of residential houses. Commercial offices will generate income from rent, car parks fees, and advertisements. While on the other hand, the main source of residential houses come from rent paid by the tenants. The total return after deducting taxes from the commercial offices will be $134,300,550 compared to $36,090,230 from the residential houses as shown in figure 2 below

Figure 2: Estimated cash flow-Revenues of the two proposed projects

Based on the cash flows- costs versus the revenue that the two proposal projects will generate over the period of 30 years, the most viable project to carry out is the commercial offices. The expected revenue is more than the costs incurred and the difference between these two is very huge.  Even though, along the way, situations may change due to economic factors such as inflation, fluctuation of interest rates and aspects of demand and supply, such issues are not likely to affect the cash flow in bigger margins. The population is increasing and the demand for commercial spaces is also going to increase hence the demand is likely to keep on growing.

Since the two projects can be implemented, life cycle costs analysis technique (LCCA) is helpful in deciding on the most suitable and appropriate decision on the viable project (Kierulff, 2008). The findings using LCCA on residential houses is positive at $4,500,521 similar to Commercial offices which stands at $68,750,000. This therefore, pits the commercial offices as the most viable since it has a very high life cycle cost with higher returns compared to residential houses.

 Using sensitivity analysis in these two scenarios is also helpful in determining whether the selected proposal will meet the projected returns or not. Sensitivity analysis evaluates different values of independent variable and how it can impact or affect the dependent variable under given set of assumptions. Even though commercial offices may be viable investment, there are a number of factors that might compromise the success of this venture. Some of these factors as earlier stated include, inflammation rate and vacancy rates. Other factors outside the development aspects include political factors, cultural aspects, affordability rates, change in prices utilities, and societal factors. For instance, cultural factors such as size of the offices, racial issues, lifestyles of the people in the surrounding area among others may affect the performance of the business.  Increase in rates and rent charged may also affect the number of clients and this may affect the returns. Economic situations keep on changing as time passes by and during times of economic recession, natal calamities and even political instabilities may have a negative implication on the business returns.

Group dynamics

It is always said that two are better than one. Working in groups even though has its own challenges, it has lots of positivity. Bringing resources together and brainstorming on issues through team work contributes to success.  The team had a common goal when beginning the assignment. Defining the objectives and the vision was important in bringing each one to one purpose. As a team, we resolved to identify key issues that we needed covered. Afterwards, we divided various sections of the requirements among each one of us based on our strengths. We realized that team members had different talents; as some preferred numerical while others preferred more theoretical components. The team leader who was selected by members played important role in directing the group’s activities. He was responsible for convening group meetings and leading the discussions.  This organization allowed the group to plan and to undertake its tasks with ease. However, they were some challenges working with the group but were managed appropriately. One of the challenges was absenteeism by some members in our discussion members. Some members did not manage their time well while others failed to meet deadline. The team leader was able to find amicable ways that ensured that the task was completed to the expected standards.

Working in the group helped me to put into practice research skills as well as exercise my communication and listening skills.  During this group discussion, each of team members presented their point of view and their assignments to the rest of the team members for criticism. Research was also paramount for each team members, something that expanded my research skills. Research allowed the team members to use different platforms such as internet and library. Information on feasibility analysis was forthcoming, and in the processes each one of us was able to acquire in depth understanding on the importance and value of feasibility analysis. Through the research, we supplemented and broadened the scope of study going beyond what we had been taught in class. It was wonderful, learning new concepts in financial feasibility analysis.

Conclusion

Financial feasibility analysis for investments should always be the starting point for every investor. Projects on face value might appear promising, but along the way, in the long term they may not accrue to the anticipated returns. It is therefore always important to analyze the proposed project in terms of their cash flow over a certain life span putting into consideration other sensitive issues that may occur such as fluctuations in the market, inflation, and political factors. Financial feasibility of the two projects; residential and commercial offices have indicated the viability of investing in commercial offices as opposed to residential houses. Decision to embark on commercial offices was a result of lengthy financial feasibility analysis.