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COST BENEFIT

FEASIBILITY STUDY

IMPACT

OVER

THE

ACCOUNTIBILITY

OF A

Introduction
A feasibility study is a preliminary study undertaken to determine and document a
project's viability. The results of this study are used to make a decision whether to
proceed with the project, or table it. If it indeed leads to the project being approved, it
will - before the real work of the proposed project starts - be used to ascertain the
likelihood of the projects success. It is an analysis of possible alternative solutions to
a problem and a recommendation on the best alternative.
Our study mainly focuses on the financial part of the investment, presenting and
analyzing three different alternatives determined by the sources of financing.
Depending on these, the total costs incurred by the company during the two years
intended for the complete construction of the houses vary.
The market characteristics are also important factors in establishing the framework of
the projects implementation. Three attributes of the market are further emphasized in
this feasibility study: the increase in the purchasing power, the movement of people
from one or two rooms to four, five or more and also the competition.
DESCRIPTION of study
The basic idea of our study is to analyse a project for an investment in the
construction of a neighborhood of ten houses, each of them of 550 square meters. The
model for this neighborhood is a similar project developed by a competitor of the
company on the real estate market in Bacau that proved to be highly successful.
Before the actual construction, the company contracted a specialized architectural
company to create the project. The architectural project was designed so that each of
the ten houses has the structure of a duplex, meaning two joined houses build in the
mirror. The 550 square meters intended for each of the living spaces suggests a 275
square meters per house. The houses are designed with a ground floor and a first
floor. The architectural plan presents a detailed picture of each of these floors. The
ground floor will comprise one garage meant for one vehicle, one spacious hallway,
and one living room with a large terrace, one bathroom and one kitchen. On the first
floor, the future owners will have three bedrooms, one bathroom and one dressing
room. All the compartments presented above arc designed for the space of 275 square
meters. The company is the one that will perform the actual construction activity. The
terrain where the actual construction site will be situated is provided by the company.
The balance sheet value of this 6.000 square meters plot of land is of 32.353 Euro. As
the acquisition of the land took place 5 years before the initiation of this project and
the market price for a square meter of land increased significantly, the company
decided to have the plot of land reevaluated. The market price for a square meter of
land inside the city varies between 100 and 150 Euro / square meter. After a thorough
evaluation, it was concluded that the 6.000 square meters of land should be registered

in the financial documents of the company at the value of 675.000 Euro, meaning 1
square meter of land is worth approximately 112.5 Euro.
This investment is financed by the company, which brings the plot of 6,000 square
meters of land and an additional amount of 220.410 Euro, The rest of the funds
necessary for his investment are obtained either through bank loans granted by BRD
Group Societe Generale Bacau or through the advances received from the buyers.
The strategy the company is planning to make use of is that of attracting the clients
even before the beginning of the actual construction. For this purpose, the
construction site will be highlighted through a big advertising banner. Also, a
campaign of advertisements in the local written press and at the local radio stations
will take place, starting three months before the actual start-up of die project.
Taking into consideration the second alternative, the company will finance part of the
project through a bank loan, granted by BRD Group Societe Generale Bacau. The
sums received from the bank are guaranteed first with that plot of 6.000 square
meters of land, then with a part of the finished houses from an architectural point of
view, and lastly, with a part of the completed houses. The annual interest rate charged
by the bank for his loan is of 8.5%. The starting date of the project is estimated to be
the 1st of August 2009. We assume that the company does not perform any other
activity in the period January 1st 2009 and August 1st 2009 for the purpose of using
the data in the financial statements for the year 2008 as relevant This feasibility study
is also built on the assumption that the company will not perform any other activities
during the two years' period of the project.
The only investor involved in this project is Green Project, which is an important
construction company for several reasons - it is competitive, aggressive, professional,
fair, firm and schedule-conscious - the most desirable character traits in any
contractor.
The object of this project regards the investment in and the construction of one
luxurious neighborhood of duplexes inside the county of Bacau within a period of
two years. This project represents an alternative to the deeply rooted tendency of
people to live their everyday life in the classical type of living premises - the
apartments. Moreover, taking into account the recent economic development of the
region, the investment is also intended to fulfill the needs for living spaces of the
flow of population from other regions attracted by the emerging working
opportunities that Bacau provides. Last, but not least, the project is conceived to offer
a solution to families looking for privacy, to those desiring a more quiet environment
and to amateurs of outdoor activities.
SCOPE OF THE INVESTMENT
The scope that the company is pursuing through engaging in this project is of
obtaining a high profit The market analysis and the study of other companies' profits
resulting from similar activities provide evidence that this particular type of
investment is one that brings significant profits.

During the past years the purchasing power of the population increased and combined
with the adhesion of Romania to the European Union, it is forecasted to increase even
more in the following years. This comes to prove that the population can afford
investing more for privacy and intimacy, for comfort, so for their own house. As
previously presented, the tendency of the inhabitants in the last years was of moving
from one, two or three rooms' homes to five or more rooms. This shift in the
mentality of Romania's residents and in their purchasing power has encouraged a
large number of companies to invest in real estate activities. These are some of the
reasons why GREEN PROJECT believes that the real estate market in Bacau is not
saturated and the construction of a luxurious duplex neighborhood is one of the most
profitable investments at the moment in the respective area.
Regarding the marketing activities, the company intends to make use of a total budget
of 25.000 Euro spread among the two years of the projects' development. For the first
year, the only marketing related activity of the company will be the installation of
two banners in Bacau, one at the construction site and another in a central location in front of the biggest hotel in Bacau, Hotel Moldova. This approach adopted by the
company is only meant to stir the interest of the potential clients. These banners'
acquisition, installation and authorization receipt is approximated to 1.000 Euro,
money that the company intends to dispense of in the first quarter of the first year of
activity.
The other approach to the marketing activity is related to the third scenario analyzed
in this paper. This scenario is based on the assumption that part of the financing of the
project will be done by using the advances received by the company from its clients.
In this case, the marketing activities have to precede the moment of start-up of the
construction. For this purpose, the company intends to use the 24.000 Euro for the
radio and written press advertisements starting with three months before the
commencement of the project, to attract potential customers. The reason the company
chose to proceed with a three months marketing campaign and not a four months one
is that this campaign is intended to be a more aggressive one, meant to bring a large
number of clients.
The initial fixed investment costs are divided into seven categories. The contribution
of the company to the financing of this project is mainly represented by the 675.000
Euro terrain, with a surface of 6,000 square meters. This plot of land includes 2.000
square meters of constructions, 1.850 square meters of free space and an additional
150 square meters occupied by an energy processing station. This plot of land was
registered in the balance sheet of December 31st, 2008, at the value of 32.353 Euro,
but the company decided to reevaluate it. The reevaluation process was performed
according to the existing Romanian legislation and to the market value for 1 square
meter of land in the area. Taking these factors into consideration, the value of 1
square meter of land found on the area of interest was settled at 112,5 Euro, meaning
the value of the land became 675.000 Euro. The gain the company obtained from this
reevaluation is estimated at 642.647 Euro.

Additional fixed costs incurred by the company refer to the site preparation for the
construction of the neighborhood. The first step that the company has to take is to
demolish the existing constructions and to clear the site. This activity involves
contracting an external company, specialized in the tearing down of buildings. The
amount of 10.000 Euro also includes the cost of the transportation of the residual
materials, away from the location, activity performed by the employees of the
company.
After the construction site is cleared and ready for the commencement of the actual
construction, the company has to be in the possession of certain documents, like
agreements, notice approvals and permit licenses. The main document that the
company has to obtain is construction authorization license. All these mandatory
documents are obtained against a fee of 9.500 Euro. The entire amount is paid when
the company places the agreements', notice approvals' and permit licenses' requests
with the competent local authorities.
Cost
categori
es

Raw
mat
erial
s

Labor

Utilities

Transportation

Total

Infrastructure

17.913

6.212

970

714

25.809

Superstructure

13.262

4.125

669

382

18.438

Architecture

19.419

2.986

22

485

22.912

Finishing
operations

110.061

38.791

2.086

7.937

158.911

Total/cost
category

160.655

52.114

3.747

9.554

226.070

Table 1 - Production cost per unit


Considering the sources of financing, the company faces several alternatives. The
three most probable scenarios are further presented. Two of the scenarios take into
consideration the alternative of contracting bank loans, while one of them presents
the financing of the project through advances received from the clients. In the two
cases related to bank loans, the value of the interest paid is computed according to the
credit value and to the annual interest rate of 8.5%. As one quarter comprises three
months, the interest is the sum of the monthly due interests, calculated on the basis of
the monthly interest rate of 0.708(3)%.

SCENARIO NO. 1

SOURCES OF FINANCING
The company is initially contracting a credit of 675.000 Euro from BRD Group
Societe Generale, using as guarantee a first rank mortgage on the plot of land of
6.000 square meters. The credit is taken for a period of two years. Considering the
good relations with the bank and the profile of the company, the bank agreed to grant
this credit to GREEN PROJECT with some special requirements. The company is
allowed to repay the loan to the bank as it sells the resulting buildings, only having to
pay the monthly corresponding interests. The value of the interest is estimated at
4.781 Euro per month, adding to a total amount of 14.344 Euro per quarter.
Taking into account the direct costs, the loans taken from the bank and the
corresponding interests related to these loans, the company was able to estimate the
operating and financial costs of the period.
VALUATION OF THE INVESTMENT PROJECT
The financial valuation starts with the computation of certain financial ratios,
representative for the liquidity, operating performances, solvency and efficiency of
the company.
The liquidity ratios place the company in the yellow area for the years 2008 and
2009, while for 2010, the current and the quick ratios cannot be computed, as the
liabilities in 2010 are null. This means that during the course of the project under
discussion, the company pays out the entire amount of its payables. This means that
the company can easily meet its short-run obligations. The profitability ratios
measure the level of earnings in comparison to a base such as assets, sales or capital.
These ratios place the company in the yellow and even in the green area, according to
some pre-established benchmarks. The operating, gross and net profit ratios
computed for the year 2010 are evaluated in the banking system with 1, the highest
mark.
The solvency ratios, and especially the interest coverage, evaluate the company at the
moment it initiates the project as having the highest solvency. Although during 2009
the interest covered decreased significantly, in 2010 the level reached by this ratio
positions the company in the green area. The solvability ratio for 2010 cannot be
computed as at the end of the projects development, it is estimated that GREEN
PROJECT would have already paid all its debts, having thus null liabilities.
SCENARIO NO. 2
SOURCES OF FINANCING
The hypothesis behind the second scenario is that the company will contract at the
beginning of the project a loan of 675.000 Euro, which it will have to repay to the

bank in equal monthly installments, within a period of two years. The corresponding
interest of the loan is of 8.5% per year.
SCENARIO NO. 3
SOURCES OF FINANCING
The third alternative that GREEN PROJECT is taking into consideration is that of
financing part of the project with the advances received from the clients. For
obtaining the funds necessary before the actual start-up moment, the company will
engage in a more aggressive marketing campaign, starting with May 2009. This is the
reason why, unlike in the previous two scenarios, the marketing budget is allocated
entirely to the first quarter and not spread along the two years of construction.
FINANCIAL VALUATION
The financial ratios are a management tool for making strategic and operating
decisions. Strategic decisions involve the overall profitability of the firm and the
overall efficiency of the firm in its use of its assets. [...] Ratios allow managers to
assess current performance, examine business trends, evaluate business strategies and
monitor progress.
The liquidity ratios indicate the ability of the company to meet its short-term
obligations. GREEN PROJECT has a positive working capital in each of the analyzed
years, illustrated by an increasing trend. The current and quick ratios for the third
scenario could not be computed, as the company estimates that at the end of the
financial years 2009 and 2010, the liabilities will be null.
In terms of the company's profitability, the values reached by ratios such as gross
profit, net profit or operating profit margins are situated in the green area in 2010.
None of the profitability ratios for the years 2009 and 2010 takes values located in the
red area.
CONCLUSIONS
The present paper is a feasibility study created in order to analyze the success and
profitability of an investment that GREEN PROJECT Bacau intends to make in the
construction and sales of neighborhood often deluxe houses.
The study focuses on four main aspects important to the success of the project. First
of all, the detailed presentation of the idea and the stress put on the vast experience of
the company in the field define the premises of the subsequent analysis.
The second part of the project focuses on the market. Three main traits describe the
target customers for this particular product: in sustainable increase in the purchasing
power of the inhabitants of the region, due to the continuous economic growth, the

supply of similar products and of their substitutes that can currently cover up to 60%
of the demand on the market and the competition that provides relevant information
regarding the demand and the prices practiced in Bacau.
Finally, the financial and economic evaluation starts by the computation of the direct
costs related to the construction activity and continues with an analysis of the sources
of financing. The funds necessary for the implementation of the project set the limits
of three different scenarios.
Each of the assumptions taken into consideration by GREEN PROJECT is evaluated
using various criteria like the net present value, payback period, internal rate of
return, break-even point, etc. All the methods used in the evaluation and analysis of
the alternatives point out that the least expensive and most profitable choice that the
company can make is to finance its project using advances taken from the clients in
the first three quarters of the first year of construction. This assumption is clearly the
last expensive one for the company, as costs for the marketing campaign are still the
same, with the only difference that the money is invested in a period prior to the
commencement of the construction.
Another advantage presented by this alternative resides in the fact that, taking no loan
from the bank, during the two years' period, the company does not register any
financial expenses with interests. By this, GREEN PROJECT has lower total
expenses than in the other two scenarios.
The break-even analysis is also relevant, providing information regarding the number
of products that the company has to sell in order to avoid registering any loss. If in
the first two scenarios analyzed, the break-even point was reached for four houses,
the advances from clients' assumption permits the achievement of the BEP for just
three houses sold.
Moreover, the third scenario presented has the advantage the company does not have
to waste time and energy preparing the documentation required by the bank in order
to establish if the desired loan can or cannot be granted to it.
The risk and return analysis of the project also places the third scenario as the holding
period return reaches the highest value among all three assumptions. This also means
that the last alternative presented in this project is characterized by the highest risk in
real value 6,25%.
Although, it is obvious that the best choice the company can make regarding the
sources of the funds is to attract the customers prior to the starting point of the
project, enabling it to use the advances paid by these clients in the construction
activity, the other two alternatives must not be overlooked. Both of the assumptions
that take into consideration the contracting of loans from a bank for financing the
project are highly profitable. The main advantage of these two alternatives resides in
the fact that the company adopted a more pessimistic view over the responsiveness of

the potential customers, appreciating that the most probable moment of selling the
houses would be in the last three quarters of the second year, when the interested
persons will already have an idea of how the buildings look, but still have a chance of
getting involved in the finishing operations that can personalize their own acquisition.
After a thorough analysis of the three financing alternatives, the company performed
a sensitivity analysis. The first part of this analysis takes into consideration the
changes in the fixed costs due to different financial expenses, meaning an analysis of
the three scenarios previously presented.
The second part of the sensitivity analysis is based on changes that can occur jn the
selling price charged by GREEN PROJECT. For this reason, the minimum amount
that the company can charge its clients without registering a loss was computed. This
value is presented for each of the three alternatives. Obviously, as the results of the
other financial evaluation methods, the sensitivity analysis point out that the highest
safety margin related to the selling price is provided by the third scenario: 36,67%.
As a conclusion, the company should invest in the project under discussion as in all
the presented alternatives, it registers a profit, the net profit margin being of 13%,
meaning a net profit in the second year of around 1.600.000 - 1.700.000 Euro. This
investment not only proves to be highly profitable for GREEN PROJECT, but it can
also contribute to the reputation and notoriety this company will further have on the
market.