Key takeaways
- Sensitivity changes one variable at a time. A scenario changes several variables together. A stress test asks whether the project survives a severe event.
- For the same percentage change, selling price affects returns more than cost does, because the revenue base is larger than the construction base.
- A delay destroys IRR even though total profit barely changes. Always look at Peak Funding alongside it.
Three tools, three questions
| Tools | Method | Question answered |
|---|---|---|
| One-Way Sensitivity | Change one variable at a time | Which variable matters most? |
| Two-Way Sensitivity | A two-variable table, e.g. price × cost | Where is the danger zone? |
| Tornado Chart | Rank the impact of every variable in a single chart | What should management time go to first? |
| Scenario (Base/Bull/Bear) | Change several variables together in a coherent way | What is the overall result? |
| Stress Test | Assume a severe event with a low probability of occurring | Does the project survive, and is there enough cash? |
Sensitivity from a real model
This table is recalculated from the cash flows in the SARARN SUK model, a hypothetical case study. The model's Base Case has a Project IRR of 15.9%, an Equity IRR of 25.4% and a net profit of THB 224.7 million. Only the stated variable is adjusted; all other assumptions are held constant.
Calculation assumptions: variable expenses of 12.3% of revenue move with revenue; corporate income tax of 20% moves with profit; construction cost is hard cost plus landscape and FF&E, totalling THB 630 million; payment timing and distribution of returns are the same as in the Base Case.
| Case | Project IRR | Equity IRR | Net profit (THB m) | MOIC |
|---|---|---|---|---|
| Selling price +10% | 24.2% | 35.2% | 331 | 2.07x |
| Selling price +5% | 20.1% | 30.4% | 278 | 1.90x |
| Base Case | 15.9% | 25.4% | 225 | 1.72x |
| Selling price −5% | 11.7% | 20.1% | 172 | 1.55x |
| Selling price −10% | 7.4% | 14.4% | 118 | 1.38x |
| Selling price −15% | 3.0% | 8.3% | 65 | 1.21x |
| Construction cost +5% | 13.7% | 22.9% | 200 | 1.64x |
| Construction cost +10% | 11.5% | 20.4% | 174 | 1.56x |
| Construction cost +15% | 9.4% | 17.7% | 149 | 1.48x |
| Construction cost +25% | 5.3% | 12.2% | 99 | 1.32x |
| Price −5% and cost +5% | 9.5% | 17.4% | 146 | 1.47x |
| Price −10% and cost +10% | 3.1% | 8.6% | 68 | 1.22x |
Break-even points of the assumptions
| Criteria | Selling price can fall by | Construction cost can rise by |
|---|---|---|
| Project IRR falls to the WACC of 10% | 7.0% | 13.6% |
| Equity IRR falls to the required return of 20% | 5.1% | 10.7% |
A price reduction of only 5.1%, or a construction cost overrun of 10.7%, is enough to bring shareholders' return down to the minimum threshold. This is information that decision-makers need to see.
Sales speed and delays
Revenue and variable expenses are shifted in time as specified, while CAPEX stays unchanged. Total profit barely changes, but IRR and Peak Funding change significantly.
| Case (share of receipts in Year 2/Year 3/Year 4) | Project IRR | Peak Funding (THB m) |
|---|---|---|
| Base Case 15/35/50 | 15.9% | 421 |
| Slower sales 10/25/65 | 13.4% | 497 |
| Much slower sales 5/20/75 | 12.0% | 621 |
| All receipts delayed by 1 year | 8.3% | 745 |
In the 1-year delay case, Equity IRR falls from 25.4% to 17.4%. This figure does not yet include the interest from carrying debt for longer, so it is a minimum impact. Peak Funding rises from THB 421 million to THB 745 million, which exceeds the equity and facilities available if they have not been prepared in advance.
Scenarios: a Bear/Base/Bull example
This set of figures is an illustrative example from a sample project, used only to show how to lay out the analysis.
| Variable | Bear | Base | Bull |
|---|---|---|---|
| Average selling price (THB/sq m) | 128,000 | 135,000 | 142,000 |
| Construction cost (THB/sq m) | 44,000 | 40,000 | 38,000 |
| Monthly absorption | 2.0% | 3.0% | 4.0% |
| Average interest rate | 7.5% | 6.5% | 5.8% |
| Contract cancellation rate | 12% | 8% | 5% |
| Total revenue (THB m) | 2,480 | 2,800 | 3,120 |
| Total cost (THB m) | 2,310 | 2,100 | 1,990 |
| Gross profit (THB m) | 170 | 700 | 1,130 |
| Profit on Cost | 7.4% | 33.3% | 56.8% |
| Project IRR | 9.8% | 22.5% | 34.5% |
| Equity IRR | 11.2% | 31.0% | 52.0% |
| Peak Funding (THB m) | 1,520 | 1,100 | 850 |
Weighting Bear at 20%, Base at 60% and Bull at 20%, Expected IRR = 20% × 9.8% + 60% × 22.5% + 20% × 34.5% = 22.4%. Weighting does not make the Bear Case go away. If the Bear Case actually occurs, funding of THB 1,520 million must be available.
What a stress test should cover
| Situation | Example assumptions | Reference event |
|---|---|---|
| Economic Crisis | GDP −5%, selling price −20%, cost +15% | 1997, 2008 |
| Pandemic | Sales halt for 12 months; tourism halts for 18 months | 2020–2022 |
| Oversupply | Absorption −40% | Competitors launch several projects at the same time |
| Interest Rate Spike | MLR +3% | 1997 |
| Construction Crisis | Cost +25%, delay of 18 months | Supply Chain 2021–2022 |
| Foreign Buyer Stop | Foreign buyer transactions halt for 12 months | Capital Control |
| Natural Disaster | Tsunami, flood, earthquake | 2004 |
A stress test result must answer three questions
- Does Peak Funding in that situation exceed the available sources of funds?
- Does the loan remain within its Covenant limits? If not, when would the event of default begin?
- How much additional equity must the shareholders inject, and do they actually have the money?
Risk mitigation approaches
- Diversify buyer nationalities; do not rely on a single market
- Use a fixed-price contract with a financially strong contractor
- Prepare an equity buffer and contingency of around 5–8% of total cost
- Maintain relationships with more than one bank
- Set a Presale threshold before construction starts and before drawing the main loan tranches
- Prepare a price adjustment plan in advance, together with its effect on the collateral facility