1.

Introduction to
Financial Analysis
Farida Rachmawati
@2020
Table of content
1.1. Overview
1.2. Principle of Investment
1.3. Need Analysis
1.4. Feasibility Study Concept
1.1. Overview
Topics
• Need analysis
• Investment analysis (land, construction, equipment cost analysis)
• Revenue estimation
• Operational & maintenance cost estimation
• Growth forecasting / trend analysis
• Weighted average cost of capital
• Net cash flow
• Depreciation & Taxation
• Discounted cash flow
• Financial feasibility indicators (NPV, IRR, BCR, Payback period)
• Sensitivity analysis
Lessons 1. Why need investment
2. Need analysis
Introduction to
3. Feasibility study
investment
4. Engineering economics

1. Revenue estimation
Investment analysis
2. Cost (type of cost, life cycle cost
3. Time value of money

Depreciation & Taxation

1. Cash flow components
2. Weighted average cost of capital
Cash Flow Analysis 3. Feasibility indicator:
1. Net Present Value
2. Benefit cost ratio,
3. Internal Rate of Return
Sensitivity Analysis 4. Payback period)
Rationale/aims
• Property economists are continually required to analyse property as an investment and provide
investment information. This involves a close scrutiny of investment options, and selection of the
most appropriate option given the investor's preferences, goals and market conditions.
• This unit provides the basis to enable the property economist to examine the investment’s worth
over time and take account of financing and tax arrangements, risk and return and comparison
against investment objectives.
• The aim of the unit is to develop your understanding of the evaluation of property investment ,
specifically through the use of discounted cashflow analysis.
Objectives of the investment analysis
DECISION MAKING ANALYSIS

• To better understand the feasibility study concept

• To analyze the feasibility aspects of the planned project
• To better understand the types of cost
• To calculate the cash flow based on accurate time value of
money, depreciation and taxation
• To select the most appropriate investment alternatives
1.2. Principle of
Investment
 • What is investment?
Investment • Key terms - The language of investment
Principles • The concept of risk & return
Key Concepts • Investor goals, objectives & strategies
• Nature & characteristics of the major asset
classes
What is Investment?

• Commitment of capital to an item/endeavour (e.g. a business, a

property) in expectation of obtaining an additional income or profit.

• Refers to any activity focused on the creation of more money through

the utilisation of capital.

•  concerns the commitment of capital in anticipation of the receipt

of some future benefit.

• Benefit = future income, e.g. dividends or rent, and/or capital

appreciation, e.g. value of the investment rising above its original
purchase price.
Key Terms
Asset - A possession that has value in exchange.

Real Assets - Physical or identifiable assets such as gold, land

& equipment. They are the opposite of a financial asset.

Financial Assets - An asset that derives value because of a

contractual claim. Stocks, bonds, and bank deposits are all
examples of financial assets. They represent paper claims by
one person against another i.e. pieces of paper evidencing a
claim on some issuer (such as a share).

Institutional Investors- Large investing entities including

banks, superannuation/pension funds & insurance companies.

Retail Investors - Individuals investors.

 Key Terms … cont
Asset Class - Refers to a category of investment media.
There are four major asset classes - shares, property,
cash, and fixed interest. All asset classes have different
risk/return characteristics.

Return - The overall gain or loss on an investment in a

particular period, consisting of income &/or capital
gains.

Risk - The variability of returns or the chance that an

investment’s actual return will be different than
expected
Risk and Return
 • All investments include some (even if only a
very small) level of risk. This theme lies at the
heart of all investment theory!

• The term ‘investment’ implies that the safety

of principal is important (in contrast ‘gambling’
Risk and Return & ‘speculation’ infer that risking principal is
acceptable)

• Expected returns are a product of the time

value of money, expected inflation and future
uncertainty (risk)
 • All investments carry varying degrees of risk.
• Risk is implicitly related to potential return - the
higher the level of risk an investor is prepared to
assume the higher the potential reward offered &
vice versa.
• Investors need to strike a balance between the
desirability of a high return & the necessity of
assuming a certain level of risk.
Risk • Must consciously/explicitly determine
personal/corporate attitude towards risk - this will
be unique to each investor.
• At the individual investor level, factors influencing
attitudes towards risk will include wealth, existing
risk exposure, ability to absorb losses (capital stable)
and life cycle considerations such as age.
Return
• Returns –Which one are you talking about?
• Required return –discounts NI to its PV, which is the price the investor can payin order to earn the
required rate.
• Expected return –that rate earned if the property is purchased for the asking price and the
expected income is received
 • Investment return: Regular or Periodical
Return
(e.g. savings account at bank, bonds, fixed
interest)

Types of
• Capital return: Value Change
Investment (e.g. gold, undeveloped land)
Returns
• Combination of Investment and Capital
Return
(e.g. shares and property)
Risk Return Trade-Off
• Risk Return Trade-Off 30 The Bond is the first office building in
Australia to commit to a 5 star energy rating and is a leading example
of social and environmental sustainability within commercial
objectives.

• The building has 30% lower CO2 emissions than a typical office
building. This has been achieved through the use of natural
ventilation, passive chilled beam cooling and fully operable shading
on the facades.

• The building has a roof top garden with drought resistant plants. This
provides a valuable amenity for occupants and neighbours and
enhances biodiversity.

• The building design features 100m long floor open plates, glass
fronted lifts, open stairs, side cores, balconies and terraces.
 • All investment activities centre around the
financial decision making process relating to the choices
investors face about where to commit funds in order to
generate future returns. (BUY, SELL, HOLD)

Investment: These considerations include:

The Big • Why invest?

Picture • What investment opportunities exist in the marketplace?
• What goals and objectives underlie investment
activities?
• What fundamental principles guide the investment
process?
• What strategies do investors employ?
The
Investment
Process
 Key issues to be considered by all investors
include:

1. Investment purpose
2. Return preference and risk tolerance
Investment 3. Investment quantum
Objectives 4. Investment horizon
5. Liquidity preferences
6. Tax considerations
7. Legal and regulatory requirements
8. Other investor specific considerations
Asset Classes
Investments can be categorised into specific asset classes according to a range of
factors such as:
• the type of investment (shares, property or bonds)
• whether they provide potential income or capital growth, and
• the risk/return profile of the investment.

Generally, asset classes fall into 2 main categories:

• defensive assets, or
• growth assets.

A diversified investment portfolio should include asset allocations across several

asset classes, and should include both defensive and growth assets.
 Asset Classes … cont
Defensive assets
• Defensive assets generally offer lower risk and lower returns over the longer term. A
portfolio weighted towards defensive assets may suit short term investors or those wanting
to reduce the risk of market volatility.
• Defensive assets include cash and fixed interest investments.

Growth assets
• Growth assets provide the potential for longer term capital gains, but have a higher level of
risk over defensive assets, especially over the shorter term.
• A portfolio weighted towards growth assets may suit investors seeking capital gains over the
longer term and who are willing to accept an increased risk of volatility over the short to
medium term.
• Growth assets include investments such as Australian shares, international shares and
property.
1.3. Need Analysis
Need analysis
• a formal, systematic process of identifying and evaluating
training that should be done, or specific needs of an individual
or group of employees, customers, suppliers, etc.

• Needs are often referred to as 'gaps', or the difference between

what is currently done and what should be performed.
How to determine needs?

PREDICTION

Customer survey (focus group,

Historical Data
questionnaire, social listening

Statistical analysis
Example 1
• Kebutuhan perumahan
• Untuk kurun waktu 2020–2024 backlog ditargetkan sebesar 5 juta unit dengan jumlah anggaran
sebesar Rp730 triliun melalui 20%–30% APBN/D dan sisanya dari swasta atau masyarakat. Zero
backlog rumah bagi MBR dicapai antara 2025 dan 2030 dengan jumlah anggaran sebesar Rp1.220
triliun melalui 20%–30% APBN/D dan sisanya melalui swasta/masyarakat.
Example 2
Fact of needs
• Saat ini lebih dari 55 persen orang Indonesia tinggal di kota-kota dengan laju urbanisasi saat ini sebesar 2,3%,
diperkirakan pada tahun 2030 mendatang, lebih dari 73% orang Indonesia akan tinggal di kawasan
transportasi.

Constraint:
• Tingginya harga tanah di pusat kota atau dekat dengan pusat lapangan kerja merupakan kendala bagi program
penyediaan perumahan. Biaya pengadaan tanah juga mengambil porsi besar dari investasi para pengembang
perumahan.
 Example 3: Traffic Growth
3,500,000

3,000,000

1,400,000
2,500,000
1,200,000

1,000,000 2,000,000

800,000
1,500,000
600,000
1,000,000
400,000

200,000 500,000

-
2017 2018 2019 -
0 5 10 15 20 25 30
International Box International TEUs Domestik Box Domestik TEUs Arus petikemas impor Arus petikemas ekspor Arus petikemas total
Kapasitas tersedia impor Kapasitas tersedia ekspor Kapasitas tersedia total
Buffer

Assumption: growth per year = 2%

Example 4:
• Customer needs:
• Convenience
• Design
• Facility
1.4. Feasibility Study Concept
Siklus Hidup Proyek

Defining / Planning /
Penentuan Perencanaan

Delivering / Executing /
Pengiriman Eksekusi

Clifford F. Gray & Erik W. Larson

DEFINITIONS & AIMS
• FS analyses the proposed project, product or service with
respect to the performance objectives expected by the
organization
• A Feasibility Study is the process of defining exactly what a
project is and what strategic issues need to be considered
to assess its feasibility, or likelihood of succeeding
A decision making process to decide
“GO or NO GO” the proposed project
(Overton, 2007)
Feasibility aspects

1. Technical
2. Economic and Financial
3. Law
4. Social
5. Market
6. Environment
Feasibility Study Intensity
• Feasibility Study Point of View
• The private sector: enhancing financial aspects to return the
investment and to obtain high profit
• The public sector: enhancing the public benefit
• The financial institution: to save their loan
Market Analysis
1. Supply:
- Market capture
- Potential and future supply
2. Demand
- Segmented/potential buyer
- Kind of products
3. Supporting regulations
4. Segmented market
5. Competitor
6. Marketing strategy
Technical aspect
Technical
Aspect

Production
Location Layout Method
Area
 Technical Aspect

Pre-construction In-progress construction Operational

1. Project location
2. Koef Dasar
Bangunan 1. Evaluation of
1. Material source
3. Koef Luas bangunan supporting
2. Const method
4. Accessability equipment/tools
3. Site condition
5. Material source 2. Installation capacity
4. Equipment
6. RTH 3. Production process
7. Parking area
8. Const method
9. Site condition

Influences to financial aspect

Technical aspect – location analysis
1. The availability of raw material
2. Targeted market
3. Water and electricity sources
4. Labor supply
5. Transportation facilities
6. Law and regulations applied
7. Weather and site conditions
8. Cultures
9. Organizational assets
Financial Aspect
Financial
aspect

Investment IRR NPV

Payback Benefit Cost Profitability

ROI / ROE
Period Ratio Indeks
Financial Aspect
• Investment analysis criteria:
• Net Present Value
• Payback Period
• Internal Rate of Return
• Benefit Cost Ratio

Feasible or not??
Environmental aspect
Market Technical Financial

Environment

Kerangka
ANDAL RKL / RPL
Acuan