Key takeaways
- A good feasibility study tests its assumptions until it is clear where the project breaks, rather than simply making the base case pass.
- A financial model is a decision-making tool, so it must be traceable and must withstand a change of users.
- IRR should always be read together with NPV, MOIC and Peak Funding.
Chapter 4 Feasibility Study and investment decision
Feasibility is the first gate of an investment and the base document for discussions with banks and investors. The handbook sets out a framework of five dimensions: market, technical, financial, legal & regulatory and risk. It is carried out in stages, from screening, preliminary and detailed study to review and post-investment review, so that actual results can be compared with the assumptions.
The market study must answer whether there are real buyers at the asking price. It does so through demand, supply including the pipeline, absorption rate and price benchmarking against 5–10 comparable projects. The technical study should state the accuracy level of the construction budget, which narrows from about ±25% at the initial stage to roughly ±5% once a detailed BOQ and tender results are available.
Absorption Rate = monthly sales ÷ number of units available for sale × 100%
Testing has three layers. Sensitivity analysis changes one variable at a time to find which has the greatest effect on IRR, which is usually the selling price, followed by construction cost and sales speed. Scenario analysis changes several variables at once into base, bull and bear cases. Stress tests simulate extreme events such as an economic crisis, a pandemic or foreign buyers ceasing to buy.
There are five Go/No-Go criteria: the base case passes the hurdle rate; the bear case is not below the cost of capital; Peak Funding is within the capacity to raise funds; most stress tests are passed; and the project is consistent with the company's strategy.
Chapter 5 Building an investment-grade financial model
A model that banks, investors and auditors will accept must clearly separate its functions into assumptions, revenue, cost, CAPEX, financing, tax and output. It should be designed according to the FAST principles (Flexible, Appropriate, Structured, Transparent) and the handbook's SMART rules (Single Input Point, Modularity, Auditability, Robustness and Testability). Each input must sit in one place only, no figures may be hard-coded in formulas, and cells should be colour-coded by data type.
The core is a three-statement model linking the P&L, balance sheet and cash flow, with balancing checks, for example that assets equal liabilities plus equity and that closing cash agrees with the cash flow statement. For development-for-sale projects, land and WIP should be presented as inventory under TAS 2, not as PP&E.
Equity Cash Flow = Project Free Cash Flow − interest − principal + new loan drawdowns
The model must separate project-level (unlevered) from equity-level (levered) figures. The debt schedule should be designed to match cash flow using debt sculpting, for example interest-only during construction, then principal repaid in line with transfers. For a JV, build a waterfall covering return of capital, preferred return, catch-up and promote. Before it is used for decisions, it should pass a three-layer review by the builder, a team colleague and an independent reviewer, with version control.
Chapter 6 Valuation and investment metrics
This chapter brings together the language a CFO uses with the board, investors and banks. NPV uses a discount rate that reflects the risk of the cash flows: WACC with unlevered cash flow, and cost of equity with levered cash flow. IRR is the rate that makes NPV equal to zero, but it has limitations: it relies on a reinvestment assumption, does not reflect the size of the money involved, and can have multiple answers when cash flows change direction several times. It must therefore be read together with NPV and MOIC.
RLV = project value − development cost − developer's required profit − operating expenses − financing cost
Residual Land Value is a tool for setting a ceiling on the land price. If the landowner asks for more than the RLV, the developer should consider withdrawing. Profit on Cost and profit margin must not be confused: a 25% margin is equal to a profit on cost of about 33%.
Hurdle Rate = Cost of Capital + Risk Premium
For income-producing assets, the handbook compares cap rate, comparable sales and DCF. It also explains that payback and cash-on-cash suit initial screening but should not be used alone to make decisions. The hurdle rate should differ according to project risk; for example, an income-producing asset has a lower rate than a new project with high uncertainty. It should be reviewed every 1–2 years in line with the cost of funds and market conditions.