Investment Appraisal Essay: Report

Calculate Total Cost of Development and Net Income

Calculate total cost of the development

Proposal 1
Particulars	Amount(In million)
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	3.5
Landscaping and external work	0.5
Cost of design and construction	350
Cost of development	0.5
Total	425.3

Proposal 2
Particulars	Amount(In million)
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	4.5
Landscaping and external work	0.5
Cost of design and construction	375
Cost of development	0.5
Total	451.3

Activities	Time duration
Market research	1 month
Data collection	2 month
Planning and design	6 months
Demolition	3 months
Construction	20 months
Landscaping and external work	6 month

Proposal 2
Particulars	Amount
Cash inflow
Sales
Office lettable	27.5
Retail lettable	2.5
Flat	4.56
Total sales	34.56
Amount recoverable
Office lettable	0.25
Retail lettable	0.025
Total recoverable amount	0.275
Total cash inflow	34.84
Cash outflow
Agent commission	0.50985
Overhead costs	10.659
Contingency costs	17.765
Office lettable	8
Retail lettable	0.8
Total outgoings	8.8
Total cash outflow	37.73
Net cash flow	-2.90

Proposal 1
Particulars	Amount
Cash inflow
Sales
Office lettable	41.25
Retail lettable	2.5
Total sales	43.75
Amount recoverable
Office lettable	0.375
Retail lettable	0.025
Total recoverable amount	0.4
Total cash inflow	44.15
Cash outflow
Agent commission	0.811125
Overhead costs	11.439
Contingency costs	19.065
Office lettable	8
Retail lettable	0.8
Total outgoings	8.8
Total cash outflow	40.12
Net cash flow	4.03

 Estimate the net income on completion of project

Proposal 2
Particulars	Amount
Sales
Office lettable	27.5
Retail lettable	2.5
Flat	4.56
Total sales	34.56
Amount recoverable
Office lettable	0.25
Retail lettable	0.025
Total recoverable amount	0.275
Total income	34.84
Expenses
Office lettable	8
Retail lettable	0.8
Total outgoings	8.8
Agent commission	0.640742
Payment
40% of payment	28.84
60% of payment	44.52
Total payment	73.36
Total expenses	82.80074
Net loss	-47.97

Proposal 1
Particulars	Amount
Sales
Office lettable	41.25
Retail lettable	2.5
Total sales	43.75
Amount recoverable
Office lettable	0.375
Retail lettable	0.025
Total recoverable amount	0.4
Total income	44.15
Expenses
Office lettable	12
Retail lettable	0.8
Total outgoings	12.8
Agent commission	0.811125
Payment
40% of payment	28.84
60% of payment	44.52
Total payment	73.36
Total expenses	86.97113
Net loss	-42.82

 Calculate the following:

Total development cost

Proposal1
Particulars	Amount(In million)
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	3.5
Landscaping and external work	0.5
Cost of design and construction	350
Cost of development	0.5
Total	425.3

Proposal 2
Particulars	Amount(In million)
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	4.5
Landscaping and external work	0.5
Cost of design and construction	375
Cost of development	0.5
Total	451.3

Project finance cost

Proposal 1
Particulars	1	2	3
Demolition estimate	0.8	0.8	0.8
Planning and design	3.5	3.5	3.5
Landscaping and external work	0.5	0.5	0.5
Cost of design and construction	350	350	350
Development costs	0.5	0.5	0.5
Leasing and sales costs	4.375	0	0
Interest	42.636	42.636	42.636
Overhead costs	10.659	10.659	10.659
Contingency costs	17.765	17.765	17.765
Total cash outflow	430.735	426.36	426.36

Particulars	1	2	3
Demolition estimate	0.8	0.8	0.8
Planning and design	4.5	4.5	4.5
Landscaping and external work	0.5	0.5	0.5
Cost of design and construction	375	375	375
Development costs	0.5	0.5	0.5
Leasing and sales costs	5.5685	0	0
Interest	45.756	45.756	45.756
Overhead costs	11.439	11.439	11.439
Contingency costs	19.065	19.065	19.065
Total cash outflow	463.1285	457.56	457.56

 Cost escalation

Proposal 2
Particulars	Amount
Office	1.1
Retail	0.1
Flat	0.1824
Total	1.3824

Particulars	Amount
Office	1.65
Retail	0.1
Total	1.75

 Calculate the initial project development yield on completion of the project

 Calculate the initial project development yield on completion of the project

Proposal 1
Particulars	Amount
Rental income
Office	41.25
Retail	2.5
Total rental income	43.75
Ongoing costs
Office	12
Retail	0.8
Total ongoing costs	12.8
Initial development	30.95
Initial development yield	0.3095

Proposal 2
Particulars	Amount
Rental income
Office	27.5
Retail	2.5
Flat	4.56
Total rental income	34.56
Ongoing costs
Office	8
Retail	0.8
Total ongoing costs	8.8
Initial development	25.76
Initial development yield	0.2576

Calculate the purchase price of purchasing facility

Proposal 1
Particulars	Amount
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	3.5
Landscaping and external work	0.5
Cost of design and construction	350
Cost of development	0.5
Total costs	425.3
Yield at5%	21.265
Purchase price	446.565

Proposal 2
Particulars	Amount
Land acquisition costs	70
Demolition Estimate	0.8
Planning and Design cost	4.5
Landscaping and external work	0.5
Cost of design and construction	375
Cost of development	0.5
Total	451.3
Yield at 5%	22.565
Purchase price	473.865

 Calculate developer’s profit or loss

Proposal 1
Particulars			Amount
Rental income
Office			41.25
Retail			2.5
Total rental income			43.75
Developer's cost
Overhead's cost			10.659
Contingency costs			17.765
Total developer's cost			28.424
Profit/loss			15.326
Proposal 2
Particulars	Amount
Rental income
Office	27.5
Retail	2.5
Flat	4.56
Total rent	34.56
Developer's cost
Overhead's cost	11.439
Contingency costs	19.065
Total developer's cost	30.504
Profit/loss	4.056

 Generate an Annual net cash flow for John Wiley Pty Ltd for 10 years

Net Annual cash flow
Particulars	1	2	3	4	5	6	7	8	9	10
Cash flow	426.36	447.678	470.0619	493.565	518.2432	544.1554	571.3632	599.9313	629.9279	661.4243
Particulars	1	2	3	4	5	6	7	8	9	10
Cash flow	457.56	480.438	504.4599	529.6829	556.167	583.9754	613.1742	643.8329	676.0245	709.8257

 Determine NPV using 9% discounting rate with base year 2020

Proposal 1
Year	Cash flow	Pv@9%	Present value
0	446.565
1	426.36	0.917431	391.156
2	447.678	0.84168	376.8016
3	470.0619	0.772183	362.974
4	493.565	0.708425	349.6539
5	518.2432	0.649931	336.8226
6	544.1554	0.596267	324.4621
7	571.3632	0.547034	312.5552
8	599.9313	0.501866	301.0853
9	629.9279	0.460428	290.0363
10	661.4243	0.422411	279.3928
Total			3324.94
NPV			2878.375

Proposal 2
Year	Cash flow	Pv@9%	Present value
0	473.865
1	457.56	0.917431	419.7798
2	480.438	0.84168	404.3751
3	504.4599	0.772183	389.5356
4	529.6829	0.708425	375.2407
5	556.167	0.649931	361.4704
6	583.9754	0.596267	348.2054
7	613.1742	0.547034	335.4273
8	643.8329	0.501866	323.118
9	676.0245	0.460428	311.2605
10	709.8257	0.422411	299.8381
Total			3568.251
NPV			3094.386

Calculate Net present value of sale

Particulars	Amount	Pv@9%	Present value of sale
Initial value of sale	883.92		883.92
cash flow of 10th year	900	0.422411	380.1697
NPV			-503.75

Proposal 1
Year	Average profit
0	446.565
1	426.36
2	447.678
3	470.0619
4	493.565
5	518.2432
6	544.1554
7	571.3632
8	599.9313
9	629.9279
10	661.4243
Total	5362.71
Average	536.271
ARR	120%

Proposal 2
Year	Average profit
0	473.865
1	457.56
2	480.438
3	504.4599
4	529.6829
5	556.167
6	583.9754
7	613.1742
8	643.8329
9	676.0245
10	709.8257
Total	5755.141
Average	575.5141
ARR	121%

Proposal 1
Year	Cash flow
0	-456.565
1	426.36
2	447.678
3	470.0619
4	493.565
5	518.2432
6	544.1554
7	571.3632
8	599.9313
9	629.9279
10	661.4243
IRR	98%

Proposal 2
Year	Cash flow
0	-473.865
1	457.56
2	480.438
3	504.4599
4	529.6829
5	556.167
6	583.9754
7	613.1742
8	643.8329
9	676.0245
10	709.8257
IRR	101%

Compare option 1 and 2 and suggest the best suitable option

The financial performance of both the projects such as investment option 1 and 2 has evaluated by using investment appraisal tools and techniques. Net present value method has used to test the feasibility of different options. Net present value method tests the economic performance of an enterprise by determining the profit generated from the different investments in the future within a short span of time (Covrig, McConaughy and Travers, 2016). The most suitable method used by an individual in measuring the future profitability of different investments opportunities. Two of the investment options are tested on different parameters such as net present value method, average rate of return and internal rate of return. Average rate of return is used to measure the efficiency of the investment opportunity that tests the efficiency of the firm by determining the profitability of the business concern. Internal rate of return is the similar concept just like break even concept in which this rate will test the performance of an entity (Tsai, 2016). An investment opportunity that surpasses this rate will generates higher sales and the revenue for an individual. The results of the different economic appraisal techniques, IRR, NPV and ARR are higher in proposal 2 as compared to the other investment option no. 1. Higher test results of the macro-economic tools are higher in option 2 that positively influences an individual (Roy, Rudra and Prasad, 2017). It can be suggested from the evaluation of all the investment options is proposal 2 that generates higher sales and the revenue for the business enterprise.

Generate Annual Net Cash Flow for 10 Years and Determine NPV

Analyze the impact of changing the Debt To Equity Ratio to 80:20 and 50:50

Debt and equity are two important components in an entity that helps in backing up financial support of the business entity. A capital structure has created by including booth debt and equity that makes the best suitable capital structure in improving the financial performance of an entity that helps in getting the desired market objectives within a short span of time (Gotze, Northcott and Schuster, 2016). Frequent changes in the debt to equity ratio will create negative changes for the business that increases the burden of costs due higher debt. 80: 20 ratio states that 80% debt in an entity with 20% equity that is not the suitable option of the investment. This option increases interest costs as even in profit or loss situations, an entity need to pay the interest costs to all the debentures holders, less portion of equity is not enough to compensate the total amount of debt held by the enterprise owner. Higher amount of debt decreases the strength of the business in meeting all the costs incurred by the business concern (Parker and Swanson, 2016). On the another hand, 50:50 debt to equity ratio, is neutral decision in which there is stable position of the business in front of booth internal as well as external stakeholders of the business concern that will not generate enough revenue for the business.

List all risks that influences the development proposal

Risks is treated as one of the important aspects that needs to be consider by an entity before selecting the most suitable project that enhances the overall productivity of the business concern (Fletcher, 2016). Risks are to be identified by the firm at initial stage to chive the desired market aim and targets within a short span of time. While selecting the suitable investments proposals whose efficiency is to be tested by using macroeconomic tools such as NPV and IRR method that tests the feasibility of the project (Nuswandari, 2016). A particular is selected by the firm that generates higher and positive output in lesser time. Three parameters is consider by the firm is time, quality and costs that increases the productivity of the business concern in the future (Hira, 2016). Completing all the tasks in a lesser time will helps an entity in taking sustainable competitive advantage over all the competitors of the business concern. There are various risks incurred by City High-rise complex while analyzing two of the development projects are mention below:

• Permission of the local an authority of Melbourne as the rules framed by the authority will may increase the rates of land (Robke and et. al., 2016). Without the approval of the authority the firm is not able to purchase the land as these acts as legal evidence in case of any default committed by both the parties in a particular legal contract.
• Higher price of land is due to changes takes places in the legal fees and commission. Legal fees involves legal agreements is required before purchasing a land as legal contract will bind both the parties to contract. City high-rise faces the problem of increasing the cost of land due to the external market changes takes places in the legal rules of the Melbourne court due to real estate authority (Evans and Porter, 2010).
• Owner of the land charges higher commission from the business as their aim is to generate higher profit by selling the land on the cost plus profit pricing. Contract rate may get increases as this contract is inclusive of all the legal fees as well as commission charged by the owner from the city High-rise complex.

Compare Option 1 and 2 and Suggest the Best Suitable Option

Identify three key risk areas

There are various risks covered in the evaluation of all the development proposals is mention below:

• Higher costs is one of the biggest issue faced by the City High-rise complex as higher costs incurred by the firm may get indifferent while selecting an appropriate investment plan (Ehrhardt and Brigham, 2016).
• Higher inflation rate is another problem that increases the sales price of the land which is beneficial for the owner of a land and not beneficial for the enterprise owner of City High-rise complex as they need to spent more amounts in selecting the best suitable opportunity (Epstein and Buhovac, 2014). In development proposal, the inflation rate is higher as there are two rates that affect the amount spent in the project are 3% and 6%.
• Higher costs spent in a development proposal as according to the total area of the land purchased by the firm.

Carry out sensitivity and risk analysis on the above mention three areas

After evaluating the risky factors covered in the two different investment opportunities of the business concern. Risk analysis will be performed by the firm that helps in safeguarding the position of an entity as compared to its competitors located in the external business environment (Chong, 2014). Different risk parameters used by an entity by market research through which an entity can generate enough information regarding the financial performance of an enterprise. Through market research, an entity will get enough information about different changes takes places in the external business environment.

List all assumptions at the front of report

There are various assumptions used in the current assignment are mention below:

• Fluctuating capital structure by changing the composition of a particular capital structure such as debt and equity.
• Stable inflation rate
• Inherent risks occurred in each and every investment option out of the two investment option such as proposal 1 and 2. 

Current assignment is all about evaluating the performance of an entity by considering the financial aspects of an entity in selecting the best suitable investment opportunity out of the two proposals (Davies and Drexler, 2010). City High-rise complex is an investment company whose daily business activity is to make investments in different opportunities that generates higher sales and the revenue in the future in strengthening the performance of the business concern. Two proposal has evaluated in the current assignment is related to the office development and another proposal is regarding apartment complex development (Dalt and Coughlin, 2016). Different tools and technique is used to evaluate the monetary performance of an enterprise by using economic appraisal techniques. NPV and Internal rate of return helps in selecting the best suitable option of the two investment proposals that generates higher revenue for the business enterprise. The current report also emphasises on the capital structure option of considering 80:20 and 50:50 combination of both debt and equity in creating a balance in the business in meeting all the objectives within a given span of time. This assignment focuses on both expenditures and sales and the revenue generated by the firm within a short span of time to improve the current performance of the business in the future.

It can be suggested after evaluating the financial performance of an entity that in the current assignment targets two different aspects in analyzing two different investment projects. It helps in comparing different forms of financing by changing the overall structure of the capital structure with two diverse options such as 80:20 and 50:50 proportion of both debt and equity held in a business. By evaluating the two of the projects, proposal 2 has selected as the best suitable project whose efficiency can get increases by using forecasting tool to predict all the external market changes takes places in an entity. Linear regression tool is used to predict the future return from the investments that helps an entity in ensuring its survival as an investment company for longer time period in front of all its competitors exists in the similar industry for more time period. Another aspect of the current aspects is about the changes in the debt and equity ratio which can be improved by using adequate capital structure theory. Modi-gliani miller approach of the capital structure theory has used to increase the overall earnings of the business by decreasing the overall cost incurred in a business entity.

Analyze the Impact of Changing the Debt to Equity Ratio

An entity uses primary as well as secondary research methodology that helps an individual in assessing a different investment options such as proposal 1 and 2 that helps in getting a desired market objectives (Kaplanand Atkinson, 2015). Market research conducted by an enterprise owner to search about different facts and figures about a particular research that targets diverse investments opportunities. A Primary research methodology used by an entity through questionnaires by taking consent and views of all the stakeholders about a certain project that generates higher sales and the revenue within a short span of time.

To The managing Director Subject-Analyzing financial performance This is to inform to the top management of the City High-rise complex company about the financial performance of the firm by analyzing different investments opportunities. Introduction Two investment proposals 1 and 2 are evaluated by using NPV, ARR and IRR in testing the feasibility of two of the projects. One proposal is related to office and retail lettable area and another proposal is related to office, retail and flats lettable area. Methodology Macro-economic tools are used by an entity owner in measuring the overall performance of two of the projects in facilitating the owner in selecting the most suitable option. Results Proposals two has higher values in NPV, ARR and IRR as compared to another proposal 1 to influence the user in considering the suitable project. Recommendations It is recommended to the management to adopt MODI-GLIANI miller approach of capital structure to stabilise the earnings of an entity by balancing the two components of debt and equity.

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