Managerial Accounting
Class Notes and Lecture Outline
Feasibility Studies 
What are Feasibility Studies?
  • In-depth analysis of the financial feasibility of a property development
  • 2 basic types
    1. Find the best location for a new property
    2. Given a location, what is the best use
  • Provides a GO / NO GO decision
  • Does NOT guarantee financial success
  • Attempts to reduce the risk of the investment
Feasibility Study Format
  1. Introduction
    • covers reasons why the study was carried out (which property, location, when, by whom)
    • executive summary highlighting the findings, conclusions, and recommendations
  2. General Market Characteristics
    • some factors to consider for inclusion are:
      • site location details
      • population demographics and growth trends
      • business diversification and growth trends (building permit activity)
      • employment trends
      • general economic trends
    • descriptive and statistical data should be used
    • information in this section should relate to the demand for the product/service the business will supply
  3. Site Evaluation
    • include detailed maps highlighting important activity centers and transportation routes
    • include physical information about the site
    • cost of the site, preparation costs, and property taxes
    • zoning restrictions, parking requirements, height restrictions
    • present and future traffic flow patterns
    • availability of utility service
  4. Supply & Demand Information
    • 3 scenarios on the demand side
      1. present demand exceeds supply
      2. demand from a new market that is not presently being serviced
      3. the present supply is inferior in quality to the needs of the present market
    • show demand in the area for the last 5 years
    • describe the competition  (major competitors, moderate competitors, minor competitors)
    • detail the likely sources of demand
    • some typical sources of data include:
      • chamber of commerce
      • convention and visitor bureaus
      • associations and trade groups including their publications
      • airport authorities
      • government agencies
  5. Supply & Demand Analysis
    • calculate the most recent 12 month demand for the major competitors
    • calculate the composite growth rate of demand 
    • calculate demand for the next 5 years
    • calculate future supply
    • compare projected demand with anticipated supply
  6. Space Recommendations
    • information that can be used by an architect to prepare more detailed plans
  7. Financial Analysis
    • Capital Investment Required and Tentative Financing Plan
      • these estimates are based on information received from architects, contractors, government agencies, etc.
      • includes an equity investment schedule
    • Pro Forma Income Statement
      • projected income statements for the first 5 years of operation
      • often includes 3 scenarios...
        • best guess
        • worst case
        • best case
    • Projected Cash Flow
      • convert the net income to annual cash flows for the first 5 years of operation
    • Evaluation of Projections
      • determine the return on equity investment
      • also calculate NPV and IRR of the project

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this page is maintained by Reed Fisher
last updated January 15, 2011