Investment Feasibility Analysis

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Chapter 19

• Investment Feasibility Analysis

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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

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The Nature of the Feasibility Question

• Feasible project must be
• Physically possible
• Legally feasible
• Financially feasible

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Figure 19.1
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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

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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

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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 investors minimum acceptable rate of
  return and the degree of risk the investor is
  prepared to accept.

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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)

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Figure 19.2
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Figure 19.3
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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