Scribd
Upload
150 views

NPV Irr Case

The document discusses various financial feasibility indicators for real estate projects. It provides examples of calculating net present value (NPV), internal rate of return (IRR), payback period, and weighted average cost of capital (WACC) for a sample residential project in Bengaluru. It outlines the construction costs, sales volumes, and sale prices projected over 10 years to determine the financial viability based on these metrics.

Uploaded by

alim shaikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
150 views

NPV Irr Case

The document discusses various financial feasibility indicators for real estate projects. It provides examples of calculating net present value (NPV), internal rate of return (IRR), payback period, and weighted average cost of capital (WACC) for a sample residential project in Bengaluru. It outlines the construction costs, sales volumes, and sale prices projected over 10 years to determine the financial viability based on these metrics.

Uploaded by

alim shaikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 22

Cash Flow Management Strategy

Shekhar Nagargoje
RICS School of Built Environment, Amity University, Mumbai
Financial Feasibility Indicators

► For investors to engage in a new investment project, the project


has to be financially viable. Invested capital must show the
potential to generate an economic return to investors at least equal
to that available from other similarly risky investments, i.e. the
return on investment needs to be equal or higher.

► Financial feasibility analysis is an analytical tool used to evaluate


the economical viability of an investment. It consists of evaluating
the financial condition and operating performance of the
investment and forecasting its future condition and performance.
= 1 Crore (1+7%)^10
= 1(1+0.07)^10
= 1.96 Crores Fixed Deposit

= 1 Crore (1+12.5%)^10 = 1 Crore (1+10%)^10


= 1(1+0.125)^10 = 1(1+0.10)^10
= 3.24 Crores Stock Market = 2.6 Crores Residential (Pune)
Rs.500 in 2020
Average Inflation Rate 7%

PV of 500 in 2030 = 500 / (1+0.07)^10


= Rs. 254
Financial Feasibility Study

► A feasibility study is a tool for investigating the viability of the


prospective project.

► As Matson (2000) sees it, the feasibility study refines the initial
business idea, while the business plan uses information from the
feasibility study to further prepare the project to evolve into an
operating business.
Criteria for Financial Feasibility

1. Net present value methods;

2. Rate of return methods;

3. Ratio methods;

4. Payback methods;

5. Accounting methods.
Net Present Value

► Net Present Value (NPV) is the difference between the present


value of all cash inflows and cash outflows associated with an
investment project.

N
NCFt
NPV =  t
t =0 (1 + r )
NCF=Net Cash Flows
(Cash inflows – Cash Outflows)
r = Expected rate of Return
For Real Estate Project in Micro-market, assuming 50% Loan (Debt)
and 50% Personal Investment (Equity) we get:

Wd= Weightage of Debt = 70%

We= Weightage of Equity = 30%

Kd = Cost of Debt = 11.20% (SBI Project finance interest rate, Dec 2020)

Ke = Cost of Equity = 25% (Assuming Current market risks and other alternative
investment options)

∴ WACC = 15.34%
► Personal Down payment = 5 Lakhs
► Bank Loan = 45 Lakhs
► Bank Loan interest rate = 9%

► After 3 Years The property Value = 77 Lakhs


► Total Value rise = 77-50 = 27 Lakhs
► Loan Principle amt = 45 Lakhs
► Interest Amount = 12.15 Lakhs
► Therefore amt to be paid to Bank Total= 57.15 Lakhs
► Personal Gains from investment = 77- 57.15 - 5 = 14.85 Lakhs
► ROI = 14.85/5 = 297%
Benefit-Cost Ratio

► The benefit-cost method is often used for public projects. The method compares
project benefits to the cost of the project, and for the project to be viable, the
benefits have to be greater than the cost. By definition, project benefits are the
favorable consequences of the project to the public, and project cost is the
monetary disbursement required of the government (Sullivan et al., 2006).
Internal Rate of Return

► Internal Rate of Return (IRR) is a concept based on the return on


invested capital in terms of a project investment, or as Park (2002)
defines it: “IRR is the interest rate charged on the unrecovered
project balance of the investment such that, when the project
terminates, the unrecovered project balance will be zero”.
The Relationship between NPV and IRR
The Payback Period

► This measures the length of time required for the net cash
flows generated during production to cover the cash
outflows during exploration and development.
► This occurs where the cumulative cash flow is zero.
► The option with the shortest payback is most preferred.
The Payback Period Formula
Decision Criterion
Bengaluru
Case Study: Cash-Flow Analysis
The Project Site
Proposed Layout

Total Built-up Area (Approx.)


100,000 Square Meter
Market Trends

Source: MagicBricks.com
Future Project Cash Flows

Construction Sales Volume


No. Year Construction in Sq.M Sale Price (₹/Sq.M)
Cost(₹/Sq.M) in Sq.M

2019 20000 28000 5000


1 59000
2020 25000 29000 10000
2 60770

3 2021 15000 30000 15000 62593


2022 18000 31000 12000
4 64471

5 2023 22000 32000 8000 66405


6 2024 11000 68397
7 2025 10000 70449
8 2026 7000 72563
9 2027 12500 74739

10 2028 9500 76982


Using the above cash flows determine: Payback, NPV and IRR.
Thank You

You might also like