Cash Flow Schedule and Developers Budget - Assignment Example

Feasibility Study Report: Cash Flow Schedule and Developer’s Budget Feasibility Study: Cash Flow Schedule and Developer’s Budget ABC Development Abstract This document provides the background to the outcome of the previous feasibility study conducted for ABC Development project of an imaginary housing development. The paper is mandated to give an overview and a discussion of the wrong feasibility study report conducted before. It indicates the limited nature of how research was conducted in terms of budgeting, planning, forecasting, and cash flow projection. The issues associated with the first have been outlined in addition to the right budget, cash flow projection and schedule of work. The reasons for the wrong estimates of the previous budget and schedule have also been explained to help in coming up with a conclusion on the topic under discussion. Development Program (The New Schedule) The housing project was scheduled to begin on January 1, 2013 and to be completed in the first few days of the month of December 2013. However, the construction process was delayed by 1 week. The planning process also realized delays of about 3 weeks. In total, delays in the schedule were 4 weeks (approximately 1 month). The planning permission was to commence on March 1, 2013 while construction was to begin a month later (April 1). It means that the first complete housing units were to be rescheduled to the end of October. The sales process should have started on November 1, 2013. The sales would remain at the same rate indicated earlier in the feasibility study since the shifts in house sales have not affected the current revised rate. It remains at 2 housing units sold per month. However, completing the sales would be realized three in February 2014. Finance There are changes on the interest rate charged by the financial institution responsible for the funding of the housing project. With the increase in the rates of interest, loan facility would have to be viable until the end of February 2014. The simple interest would have to be scaled to 1.3% or simply 1% because of the 0.8% rise in the simple interest rates. The interest on the loan facility remains at the original schedule of a quarterly model in arrears. The developer’s cash will be used to pay it out. Roll-ups will not be allowed on the payments. The commitment fee of £5000 will not be affected by scaling up the interest or the changes in planning and construction schedules. It will still be paid once the loan has been processed. The disposal fee of £500 per housing sold will also remain unchanged. The funding of construction costs in a revolving basis will not be affected by the changes. It will remain at £525,000. The remaining land cost (£80,000) and the construction expenditure plus the other expenses incurred in developments and interest on loans will still be carried by the organization (ABC Development) using their cash flow. Cash flow deficits will be catered for by the overdraft facility from the bank. The bank’s decision to raise its interest rates on overdraft facility to 1.5% per month resulted to the monthly rate reaching 19.6%. Cash Flow The changes in construction schedule, sales, and completion of units, advertising, and interest rates have affected the new cash flow. The revised repayment and payment schedule for the imaginary housing project is shown in Table 1 below. Cash flow schedules for the financier and ABC Development are shown in Table 2. Graphical representation of the two tables is found in Figure 1 and Figure 2 Figure 1: Developer’s Cash Flow Developer’s Budget The developer’s budget has taken into consideration, the changes and adjustments from the bank in relation to the time and rate of the loan facility. The table below shows the revised budget: Table 1: Developer’s Budget Income Detached Villas 10 units @ £150,000 £1,500,000 Land purchase Purchase price £320,000 £320,000 Construction costs Villas 10 units @ £58,000 £609,000 Roads and infrastructure £126,000 £735,000 Development expenditure Architects fees £20,000 Agents fees 10 units @ £1,750 £17,500 Advertising £13,000 Legal fees 10 units @ £2,500 £25,000 Local Authority fees £7,500 £83,000 Finance costs Commitment fee £5,000 Redemption fee 10 units @ £500 £5,000 Land finance From cash flow -£229,200 Construction finance From cash flow £10,517 -£208,683 £194,317 Gross margin £1,305,683 Developers finance From cash flow £14,337 £14,337 Net margin £1,291,345 Margin on turnover 86% Margin on developers outlay 481% The new budget indicates that the project will be profitable. The surplus project is over £1.3 million which represents 86% of the total turnover. The total turnover is £1,500,000. The projected return is also very impressive with a total of 481% of the overall financial commitment of the developer. Figure 2: Financial Institution’s Cash Flow Factors that have contributed to the Profits Realized in the New Developer’s Budget 1. Well planned contingency buffers The revised estimates considered the challenges in plans that are set up for a project. Therefore, management reserves were introduced to cover the schedule and budget contingency buffers. The end of key phases of the project should be followed by catering for the unseen issues that may paralyze the project cycle. The application of critical sequence analysis, a model that classifies the uncertainties in risk and estimates into rational contingencies, has also been applied in the paper (White, 2001; Pg. 87). Renegotiating the terms and conditions of the loan was one of the contingency control measures that helped in shaping the overall outcome of the project. 2. Reducing the asking price Reducing the asking price for the housing units helped in enhancing the marketing strategy. Since the real sales were not in line with the projections due to reluctance on the side of the buyers, the developer had to device new ways of attracting the attention of the customers. 3. Conducting project retrospectives The profits realized in the revised estimate of the schedule and cost can also be attributed to the retrospectives (post-project reviews or post-mortems) that were highlighted earlier in the first feasibility study. Retrospectives utilize the progress of the previous projects or project phases to learn from the lessons of failed or successful projects (Kerth, 2001; Pg. 162). 4. Increasing the promotion and advertising expenditure Sales have to be made after the completion of a housing unit. The more the people receive news about a product on sale, the higher the demand or interest in the product. The reducing rates in sales of the completed housing units prompted the developer to increase its advertising expenses to cover the target market. 5. Revising the loan duration Extending the period of repayment also helped in ensuring that the developer benefited from the revised loan terms. Interest rates increased. However, compounding the rate placed ABC Development in the right place to benefit from longer and lower installments as compared to the previous feasibility study. Potential changes that can be introduced in feasibility studies to avoid wrong estimates Technical issues often dominate the development process of a project and its potential to be considered viable or impossible. Feasibility study helps in identifying the problems or challenges that may affect the smooth running of the proposed project. Feasibility studies not only deal with the technical viability of the project but also the financial aspect (Gypton, 2002; Pg. 57). Good feasibility studies have to ensure that the social, economic, commercial and technical issues are assessed before the proposed project is started. An intensive business plan with a proper assessment of risk-reward outline of the development should be part of the study. Amos (2001; Pg. 75) and Laird (2001; Pg. 51) affirm that feasibility studies are vital elements in the early stages of a development project. They are also iterative and multi-phased (West, 3006; Pg. 108). Organizations or development firms need to ensure that it conducts initial assessment of the resource project’s development potential. The aim of doing this is to assess the project’s major economic and technical characteristics. Subsequent assessments need to follow to confirm the hypothesis and reduce the unforeseen problems linked to the resource development (Vancas, 2003; Pg. 46). Development firms should be aware of the level of feasibility study they are conducting. That is, they should indicate the study by using prefaces such as ‘detailed’, ‘definitive’, ‘bankable’, ‘final’, ‘pre’, ‘indicative’, ‘preliminary’, ‘order of scale’, or other words or phrases show the level of detail incorporated in the study. These are the basis of preparing an all-encompassing business plan. It is also worth noting that the technical side of feasibility studies is less important-the listed parameters form the major portion of the project’s viability (Kuestermeyer, 2002; Pg. 83). Changes in feasibility studies to improve their proper estimation can be reached at by making sure that the project degree of freedom, constraints, and drivers are identified. State that every project should balance its quality objectives, schedule, cost, staffing, and functionality (Shillabear, 2001; Pg. 69). Organizations and development firms need to grasp the real processes involved in effective feasibility studies. Changes can be implemented in the design process that several development organizations have using. For example, ABC Developments can include three core phases in the process, namely the scoping or conceptual phase, the prefeasibility or preliminary phase, and the definitive or final phase (Appleyard, 2001; Pg. 219 and Noort and Adams, 2006; Pg. 135). Noort and Adams (2006) express the three phases of feasibility study as: A scoping (concept) study should be used to define the potential of a project, eliminate those options that are unlikely to become optimal, and determine if there is sufficient opportunity to justify the investment required for further studies. Prefeasibility studies should be used to select the preferred operating options from the shortlisted options defined by the scoping study and to provide a case for whether or not to commit to the large expenditure and effort involved in a subsequent definitive feasibility study. Definitive (full) feasibility studies should be used to refine the optimal operating scenario defined by the prefeasibility study. They are often used to assist with outside financing requirements. The definitive feasibility study provides the basis for the decision on whether in fact further study is required, whether the project is worth pursuing or whether to advance the project to design and construction. Development firms can identify alternative configurations regarding the project and decide whether or not to continue with the project development. In case the decision to continue with the project has been reached, the optimal configuration has to be defined. In case a decision has been reached and the procurement, design and construction processes have been initiated, there is limited opportunity to solve any shortfalls that might have been caused by poor feasibility study (Lawrance, 1997; Pg. 152). Correct estimation of the schedule may not be an easy task. The limited literature related to the exact attainment of the construction schedule may also be a draw-back to the identification of how changes can be implemented to improve future feasibility studies. However, avenues such as the public companies’ reports on ‘the revised schedule’ indicate that delays in projects are not strange events. References APPLEYARD, G. R. (2001). An overview and outline, in Mineral Resource and Ore Reserve Estimation – The AusIMM Guide to Good Practice (ed: A C Edwards), p 3 (The Australasian Institute of Mining and Metallurgy: Melbourne). GYPTON, C. (2002). How have we done? Feasibility performance since 1980, Engineering and Mining Journal, 1 January. KUESTERMEYER, A. (2002). Minimum requirements for feasibility studies, Pincock Perspectives 34(September) (Pincock, Allen & Holt: Lakewood, Colorado). LAIRD, A. M. (2001). How to develop a project, in Mineral Resource and Ore Reserve Estimation – The AusIMM Guide to Good Practice (ed: A C Edwards), p 21 (The Australasian Institute of Mining and Metallurgy: Melbourne). LAWRANCE, A. (1997). Pre- and post-development audits, in Proceedings MINDEV ’97 Conference, pp 145-152 (The Australasian Institute of Mining and Metallurgy: Melbourne). NOORT, D. J. & ADAMS, C. (2006). Effective mining project management systems, in Proceedings International Mine Management Conference, pp 87-96 (The Australasian Institute of Mining and Metallurgy: Melbourne). SHILLABEAR, J., H. (2001). Lessons learned preparing mining feasibility studies, in Mineral Resource and Ore Reserve Estimation – The AusIMM Guide to Good Practice (ed: A C Edwards), p 435 (TheAustralasian Institute of Mining and Metallurgy: Melbourne). VANCAS, M. F. (2003). Feasibility studies: Just how good are they? In Proceedings Hydrometallurgy 2003 – Fifth International Conference in Honor of Professor Ian Ritchie – Volume 2: Electrometallurgy and Environmental Hydrometallurgy (eds: C A Young, A M Alfantazi, C G Anderson, D B Dreisinger, B Harris and A James), pp 1407-1413 (The Minerals, Metals & Materials Society: London). WEST, R. (2006). Preliminary, prefeasibility and feasibility studies, in Australian Mineral Economics (eds: P Maxwell and P Guj), pp 113-128 (The Australasian Institute of Mining and Metallurgy:Melbourne). WHITE, M., E. (2001). Feasibility studies – scope and accuracy, in Mineral Resource and Ore Reserve Estimation – The AusIMM Guide to Good Practice (ed: A C Edwards), p 421 (The Australasian Institute of Mining and Metallurgy: Melbourne). Read More