CONSTRUCTION

ECONOMICS III

FEASIBILITY STUDY
 Relationship of property market and
investment, comparison between
property and other types of investment
Property development process
Preparation and evaluation of feasibility
studies
Ownership of property, restriction and
encumbrances and controls on land use
Introduction to valuation of property
and characteristics of property that
affect capital and rental values
 INTRODUCTION

important major decisions tool

prime criterion applied in decision making is financial

(or return on investment)

frequently influenced by:

political,
environmental and
sociological.

Whatever the prime or secondary criteria, a FS is

required to aid judgement as to investment and related
decision.
 DEFINITION AND OBJECTIVES
Feasible - means practicable or possible

Feasibility study - a study of what is practicable or possible

a study of the current and expected availability of human, physical and financial
resources with a view to the means of their future optimum deployment as measured
against specified criteria and taken an the context of prevailing and predicted commercial
or socio-commercial requirement

From engineering point of view, FS is carried out in order to show:

1) that given projects or courses of action are possible

2) that alternatives might be available
3) from the selection of alternatives, what is their order of merit
4) which of the highest ranking items are worth pursuing
5) how best to execute them
6) what will be the likely outcomes?

Within the above framework- quantitative guide to decision making.

FS is an exercise aimed at:

) analysing a problem area and searching for possible courses of action,
) Amassing the data relating thereto,
) Synthesising a system model, and
) Applying to it the relevant data
To forecast economical and technical information
 COST- BENEFIT-ANALYSIS
CBA is a technique used to evaluate the economics of costs incurred with the benefits achieved.
It is mainly used in the public sector in connection with investment decisions where some account need to be
taken of those considerations which are not purely financial (Ashworth, p44).

Cost-benefit analysis (CBA) is a public policy decision tool.

In specific instances: to assess whether or not the social benefits of a proposed policy or project outweigh its
social costs.
More generally: to facilitate the allocation of resources to their most valuable uses.
An optimal allocation of resources can sometimes be achieved through markets: price signals direct resources to
their most valued uses.
Rationale for policy intervention:
market failure (inefficiency)
wealth redistribution

A private/commercial development;
lead to product or service output which can be sold at an estimated market price over a number of years
statistics of net income can be used to guide the investment choices

A social investment,
Provides obvious benefits to the community
But it is not easy to quantify such benefits and produce a set of income returns which can be compared to the
cost estimates.
Most of the public investments are large scale. Scale of investment to be taken by public sector
organisation is far larger than to be undertaken by the private sector
New construction are mostly more complex
Major difficulty with a large public investment project lies in the inability to establish the benefits/returns
from the investment
Therefore,
Purpose of CBA: to assess the case for intervention and guide that intervention.
CBA is importantly distinct from financial analysis.
Financial analysis is a business tool that focuses on financial outlays and receipts associated
with an investment.
CBA is concerned with social costs and social benefits; these can often differ widely from simple
financial outlays and receipts.
Example: environmental impacts
Similarities and Differences between FS
and CBA
 CATEGORY OF FS
Many forms
General classification of FS based on:
a) national or economic sector studies
b) in-house studies of individual projects or problem areas
c) studies of individual projects or problem areas carried by external agencies.

TYPES OF FS
1) Location/site DO approval, basic amenities, etc
2) Economic based labour trend, income and population, etc
3) Market study demand and supply, price
4) Financial return on investment, etc
5) Design design factors, design themes, etc

PROCESS
6) Problem definition
7) Data collection
8) Analyses
9) Synthesis
10)Decision and project initiation
 FORMAT OF REPORT PRESENTATION

1. CONTENTS PAGE

2. INTRODUCTION

Brief background of project

Scope of report
The site
The building

Basis of estimate
Brief method of calculating the cost
Cost included
Cost excluded, common items excluded:
Land cost and premium
Interest
Loose furniture and fittings
Assumption made

3. SCHEDULE OF AREAS

4. VIABILITY REPORT/CALCULATION
Construction cost:
Building cost
Infrastructure
Preliminaries
Contingencies, etc
Pre development cost
Profit/return of investment

5. CONCLUSION

 COSTS INVOLVED
1. Total construction cost:
a. Building cost
b. External works
i. Site preparation
ii. Earthwork
iii. Storm water drainage
iv. Sewerage reticulation
v. STP
vi. Water reticulation
vii. Road works
viii. TNB substations
ix. External M&E services
x. Landscaping
c. Preliminaries
d. Contingencies & Design reserve
e. Other development costs:
. CIBD
. Prof. fees
. Plan & Submission fees
. Capital contribution
. Survey
. Soil investigation
. Developers overhead
. Sales& marketing & legal
2. Total Selling Price (Income from sales)
3. Gross Return =
Total Construction Cost Total Selling Price x 100%
Total Selling Price
 INVESTMENT APPRAISAL
Common methods used:
i. Payback method
ii. Return on investment (ROI)
iii. Discounted cash flow return (DCFR)
iv. Net present value (NPV)

Payback Method
Crudest but one of the most widely used.
Defined as the period it takes for an investment to generate sufficient
incremental cash to recover its initial capital outlay in full.
Adopt cut-off point, beyond which the project will be rejected if the investment
has not been paid off.

Advantages
Simple to apply - quick and simple to apply.
Take into consideration the cash receipts

Disadvantages
Fail to measure long term profitability
Difficult to make comparisons between projects with different life expectancies
using this criterion.
Application
 Return on Investment (ROI)
Measure the rate of return/net income in the specified year as
compare to the total investment cost. It is the ratio of profit to capital
Need clear definitions on the definition of profit and capital.
Profit can be taken as either gross of tax or net of tax.
Most businesses are interested in their post-tax position; net profit is a more
useful yardstick.
However net profit can be either what is made in the first year or the average
of what is made over the entire lifetime of the project.
Similarly, capital can be taken as either the initial outlay or in the form of
average over time.

Example

Capital cost RM 15,000,000.00

Income RM 18,500,000.00
Profit RM 3,500,000.00

ROI = Profit x 100%
Capital cost
= 3,500,000.00 x 100%
15,000,000.00
= 23% (Income before tax)
 Discounted Cash Flow Return (DCFR)
DCF is a method of investment appraisal which is founded upon the time
preference for money.
For example, an investor will attach a higher value to an investment offering an
immediate return than he will to one offering an identical return but deferred for a period
of time.

RM 1 now is worth more than RM 1 tomorrow.

The essential of discounted cash flow:

1. Preparation of a cash flow table,
money flow out
money flow into
2.Calculating the ultimate disposal of the investment
3. Discounting cash flow

Cash flow table

In presenting a DCF analysis it is usual to construct a cash flow table using the following
headings:
1) Period (year, quarter or monthly)
2) Details (brief description of cash flow)
3) Cash outflow
4) Cash inflow
5) Net cash flow
6) PV of 1 @ x%
Discounted Cash Flow Return
EXERCISE