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Sensitivity Analysis And Cash Flow Analysis Of Futuristic Construction Pty Ltd Project

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Posted on 
April 25th, 2025
Home Uncategorized Sensitivity Analysis And Cash Flow Analysis Of Futuristic Construction Pty Ltd Project

Sensitivity Analysis

Futuristic Construction Pty Ltd. has won the bid for the construction of the New Sydney Atrium Mall. The mall will be constructed by Futuristic Co. under a Design-Bid-Build basis for NSW Investment Corporation, a venture of the NSW Government formed along the lines of the Queensland Investment Corporation. As a result, Futuristic Co. has projected the costs of building and transferring the project at   $  1 ,  54 ,  640.00 . Upon the completion of the building phase of the project ( January 2018- December 2018), the ownership of the Mall will be transferred a 100% to NSW Investment Corporation. According to the contract, the highest amount that the NSW Investment Corporation would be willing to pay is 1,20,000 during the build phase of the project.  In addition to this, the NSW will offer 33% of the Pre-tax revenues accrued from the parking lot of the mall in the form of parking lot fees. This revenue sharing will continue for five years, beginning in the first year of the operation of the mall. The tentative date for the operation of the mall is 1st January 2019.  

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Futuristic construction must obtain a loan in order to fulfil the deficit that would occur during the construction phase of the project. According to Futuristic,  the loan payment will be a recurring cost that Futuristic Co. will have to incur during the next five years. However, the revenues collected from the parking lot will be more than sufficient , not only to be able to pay off the recurring costs but also, to make the project  economically viable. This report contains a sensitivity analysis to understand the viability of the project. 

A cash flow diagram will help explain the cost inflows and outflows of the Project.

Figure 1 Cash Flow Diagram

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The financial and economic benefit for cost analysis of investment project is based on forecast of quantifiable variables based on the approximately predicted forecast the value of these variables estimated and which cover a long time of period. The value of these variables for the most probable outcomes scenario or influenced by a great number of factors and the real value can be differ considerably from forecasted value depending on future development. The main purpose of the sensitivity analysis is to investigate the effect of the changes in project variable on forecasted based lines. It helps into following purposes –

As listed earlier,  the key economic benefit is derived from the payment made by NSW Investment Corporation and revenue sharing of the revenues accrued from the parking lot per year. According to the revenue sharing contract, 33% of the total parking fees collected will be earned very year as the Company’s share. The Contract is for revenue sharing and not ownership sharing. According to the projections provided by the NSW Investment Corporation, at $10 per three hours of parking fee (applicable to every vehicle after the first four hours of free parking)  the economic benefit derived by the firm will average at $  1 ,  05 ,  360  per annum. According to NSW Investment Corporation, these are the current expected revenues given the current market conditions. However, this is the average. Parking lot earnings are dependent on the number of visitors to the mall and vary considerably. Additionally, NSW Investment Corporation may be able to raise the parking lot fee.  Hence, to understand the complete impact of the deal, the  key revenue i.e. revenue from parking lot fees has been subject to a sensitivity analysis where in the worst, neutral and better economic conditions are considered. Worst economic conditions would be expected during an economic downturn where the number of visitors would fall and the parking lot fees would remain the same. The revenues in this scenario are not expected to drop beyond 50%. Hence, the worst conditions of the economic benefit would be considered at 50% of total projected revenues. Neutral economic condition explain the projected revnues. Best economic conditions would reflect a scenario where the number of visitors to the mall will increase and the mall will also be able to increase the parking lot fees. Under any scenario, the revenues are not expected to be more than 200% of the projections. Hence, 200% is considered as the best case scenario.

Investigation Of Result Of Probable Adverse Changes

To investigate the result of probable adverse changes in the key variables are so much important its purpose in sensitivity analysis is to find the correct variable numbers on different economic condition for the project which gives the actual number of project analysis for the sensitivity analysis and make the correct decision making.

For the decision making sensitivity analysis is used and decision maker and senior manager to find the variance of the cost benefit of the project on different economic condition of the project and economy. So that if we will help them to make a plan in advance for the preparation of adverse economic condition for the project.

In the sensitivity analysis we can find the value of project and cash inflows and out flows in different economic condition and the decision makers are able to generate the correct and different net present value and internal rate of return of the project and different phase of the economy and project. This ultimately helps decision makers and higher management to find out the easiest and correct way of evaluation of the project and they are able to find that project should be accepted or project should not be accepted. Sensitivity analysis usually impacts the cash inflows and benefit of the company because cost are mostly similar in all economic conditions of the project duration. This helps into calculation of net correct value of the project and what could be the highest required rate of return for the investors to IRR.

Cost-Benefit – Input Values

  

Project Development

 $         53  ,   120.00

  

Contract Drafting

 $         29  ,   200.00

  

Bids and Contracts

 $         13  ,   000.00

  

Grading Permits and Shopping Centre Construction Permits

 $         59  ,   320.00

  

Total

 $      1  ,   54  ,   640.00

  

Plumbing

 $           1  ,   680.00

  

Electric

 $           2  ,   240.00

  

Painting

 $           4  ,   000.00

  

Total

 $           7  ,   920.00

  

Foundation

 $         52  ,   880.00

  

Insider Work of Shopping Centre

 $         52  ,   480.00

  

Total

 $      1  ,   05  ,   360.00

  

Discount Rate Used

3.00%

  

Project Cost-Benefit Analysis

 Analysis Variables:

 Enter values for the cost-benefit analysis in the INPUT_VALUES worksheet.

 Discount Rate Used

 $                                               0

 Annual Benefits

  $  1 ,  05 ,  360.00  

 Annual Operational Costs

  $      7 ,  920.00  

 One-Time Development Cost

  $  1 ,  54 ,  640.00  

 Year of Project

 $                     –   

 $              1

 $              2

 $              3

 $              4

 $              5

 TOTALS

 Economic Benefit

 $                     –   

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 Discount Rate

 $                       1

 $              1

 $              1

 $              1

 $              1

 $              1

 PV of Benefits

 $                     –   

 $  1 ,  02 ,  291

 $     99 ,  312

 $     96 ,  419

 $     93 ,  611

 $     90 ,  884

 NPV of all BENEFITS

 $                     –   

 $  1 ,  02 ,  291

 $  2 ,  01 ,  603

 $  2 ,  98 ,  022

 $  3 ,  91 ,  633

 $  4 ,  82 ,  518

 $  4 ,  82 ,  518

 One-Time COSTS

 $          (  1 ,  54 ,  640 )

 Recurring Costs

 $                     –   

 $      (  7 ,  920 )

 $      (  7 ,  920 )

 $      (  7 ,  920 )

 $      (  7 ,  920 )

 $      (  7 ,  920 )

 Discount Rate

 $                       1

 $              1

 $              1

 $              1

 $              1

 $              1

 PV of Recurring Costs

 $                     –   

 $      (  7 ,  689 )

 $      (  7 ,  465 )

 $      (  7 ,  248 )

 $      (  7 ,  037 )

 $      (  6 ,  832 )

 NPV of all COSTS

 $        (  1 ,  54 ,  640 )

 $ (  1 ,  62 ,  329 )

 $ (  1 ,  69 ,  795 )

 $ (  1 ,  77 ,  043 )

 $ (  1 ,  84 ,  079 )

 $ (  1 ,  90 ,  911 )

 $ (  1 ,  90 ,  911 )

 Overall NPV

 $  2 ,  91 ,  607

>

Assumed that we have 3 Economic Condition

Best Economic Condition

200%

of current value

Neutral Economic Condition

100%

of current Value

Worst Economic Condition

50%

of current value

Best Economic Condition Npv Calculation

0

1

2

3

4

5

TOTALS

 Economic Benefit

 $                         –   

 $       2 ,  10 ,  720.00

 $  2 ,  10 ,  720.00

 $  2 ,  10 ,  720.00

 $  2 ,  10 ,  720.00

 $    2 ,  10 ,  720.00

 Discount Rate

 $                     1.00

 $                     0.97

 $                0.94

 $                0.92

 $                0.89

 $                  0.86

 PV of Benefits

 $                         –   

 $       2 ,  04 ,  588.05

 $  1 ,  98 ,  624.67

 $  1 ,  92 ,  829.87

 $  1 ,  87 ,  224.72

 $    1 ,  81 ,  767.07

 NPV of all BENEFITS

 $                         –   

 $       2 ,  04 ,  588.05

 $  4 ,  03 ,  212.72

 $  5 ,  96 ,  042.59

 $  7 ,  83 ,  267.31

 $    9 ,  65 ,  034.38

 $     9 ,  65 ,  034.38

 One-Time COSTS

 $       (  1 ,  54 ,  640.00 )

 Recurring Costs

 $                          –   

 $               (  7 ,  920.00 )

 $          (  7 ,  920.00 )

 $          (  7 ,  920.00 )

 $          (  7 ,  920.00 )

 $            (  7 ,  920.00 )

 Discount Rate

 $                      1.00

 $                       0.97

 $                  0.94

 $                  0.92

 $                  0.89

 $                    0.86

 PV of Recurring Costs

 $                          –   

 $               (  7 ,  689.32 )

 $          (  7 ,  465.36 )

 $          (  7 ,  247.92 )

 $          (  7 ,  036.82 )

 $            (  6 ,  831.86 )

 NPV of all COSTS

 $       (  1 ,  54 ,  640.00 )

 $          (  1 ,  62 ,  329.32 )

 $     (  1 ,  69 ,  794.68 )

 $     (  1 ,  77 ,  042.60 )

 $     (  1 ,  84 ,  079.42 )

 $       (  1 ,  90 ,  911.28 )

 $        (  1 ,  90 ,  911.28 )

 Overall NPV

 $         7 ,  74 ,  123.10

Year

0

1

2

3

4

5

NPV of all BENEFITS

 $                         –   

 $       2 , 04 , 588.05

 $  4 , 03 , 212.72

 $  5 , 96 , 042.59

 $  7 , 83 , 267.31

 $    9 , 65 , 034.38

NPV of all COSTS

 $      1 , 54 , 640.00

 $       1 , 62 , 329.32

 $  1 , 69 , 794.68

 $  1 , 77 , 042.60

 $  1 , 84 , 079.42

 $    1 , 90 , 911.28

Neutral Economic  Condition NPV calculation

 $               –   

 $                1

 $                2

 $                3

 $                4

 $                5

 TOTALS

 Economic Benefit

 $               –   

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 $  1 ,  05 ,  360

 Discount Rate

 $                1

 $                1

 $                1

 $                1

 $                1

 $                1

 PV of Benefits

 $               –   

 $  1 ,  02 ,  294

 $     99 ,  312

 $     96 ,  415

 $     93 ,  612

 $     90 ,  884

 NPV of all BENEFITS

 $               –   

 $  1 ,  02 ,  294

 $  2 ,  01 ,  606

 $  2 ,  98 ,  021

 $  3 ,  91 ,  634

 $  4 ,  82 ,  517

 $  4 ,  82 ,  517

 One-Time COSTS

 $  (  1 ,  54 ,  640 )

 Recurring Costs

 $               –   

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 Discount Rate

 $                 1

 $                 1

 $                 1

 $                 1

 $                 1

 $                 1

 PV of Recurring Costs

 $               –   

 $         (  7 ,  689 )

 $         (  7 ,  465 )

 $         (  7 ,  248 )

 $         (  7 ,  037 )

 $         (  6 ,  832 )

 NPV of all COSTS

 $  (  1 ,  54 ,  640 )

 $    (  1 ,  62 ,  329 )

 $    (  1 ,  69 ,  795 )

 $    (  1 ,  77 ,  043 )

 $    (  1 ,  84 ,  079 )

 $    (  1 ,  90 ,  911 )

 $    (  1 ,  90 ,  911 )

 Overall NPV

 $     2 ,  91 ,  606

Year

0

1

2

3

4

5

NPV of all BENEFITS

 $                         –   

 $       2,04,588.05

 $  4,03,212.72

 $  5,96,042.59

 $  7,83,267.31

 $    9,65,034.38

NPV of all COSTS

 $      1,54,640.00

 $       1,62,329.32

 $  1,69,794.68

 $  1,77,042.60

 $  1,84,079.42

 $    1,90,911.28

Worst Economic Condition NPV calculation

 $               –   

 $             1

 $                2

 $                3

 $                4

 $                5

 TOTALS

 Economic Benefit

 $               –   

 $   52 ,  680

 $     52 ,  680

 $     52 ,  680

 $     52 ,  680

 $     52 ,  680

 Discount Rate

 $                1

 $             1

 $                1

 $                1

 $                1

 $                1

 PV of Benefits

 $               –   

 $   51 ,  147

 $     49 ,  656

 $     48 ,  207

 $     46 ,  806

 $     45 ,  442

 NPV of all BENEFITS

 $               –   

 $   51 ,  147

 $  1 ,  00 ,  803

 $  1 ,  49 ,  011

 $  1 ,  95 ,  817

 $  2 ,  41 ,  259

 $  2 ,  41 ,  259

 One-Time COSTS

 $  (  1 ,  54 ,  640 )

 Recurring Costs

 $               –   

 $      (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 $         (  7 ,  920 )

 Discount Rate

 $                 1

 $              1

 $                 1

 $                 1

 $                 1

 $                 1

 PV of Recurring Costs

 $               –   

 $      (  7 ,  689 )

 $         (  7 ,  465 )

 $         (  7 ,  248 )

 $         (  7 ,  037 )

 $         (  6 ,  832 )

 NPV of all COSTS

 $  (  1 ,  54 ,  640 )

 $ (  1 ,  62 ,  329 )

 $    (  1 ,  69 ,  795 )

 $    (  1 ,  77 ,  043 )

 $    (  1 ,  84 ,  079 )

 $    (  1 ,  90 ,  911 )

 $    (  1 ,  90 ,  911 )

 Overall NPV

 $        50 ,  347

Year

0

1

2

3

4

5

NPV of all BENEFITS

 $                     –   

 $      51,147.01

 $  1,00,803.18

 $  1,49,010.65

 $  1,95,816.83

 $  2,41,258.60

NPV of all COSTS

 $  1,54,640.00

 $  1,62,329.32

 $  1,69,794.68

 $  1,77,042.60

 $  1,84,079.42

 $  1,90,911.28

In this project, it is assumed that there are following three economic conditions for the project –

  • Best Economic Conditions
  • Neutral Economic Conditions
  • Worst Economic Conditions

In this economic conditions, it is assumed that company’s total economic benefit would be 200 % of the current economic benefit which will make the double profit for the project but cost would remain the same because it will not impact the cost in anyway. In this conditions, company break – even point of the project is come in lessor year rather than other one because in this conditions company will generate more profit due to its favourable conditions and as per the above analysis, it is the best phase of the company. Net present value in this phase is $ 7,74,123.10.

In this conditions, project will run in same phase as the company has expected and net present value and profitability of the company would be same. As this is a neutral phase, so company would not need to do extra analysis of this phase and net present value would be same as company expected and it would be $ 2,91,606. In this phase, company breakeven point will take more years and time to capture its cost.

In this phase, it is assumed that company will generate 50 % of its benefit of current value of economic benefit which will make company profit in to half, however, cost will remain the same and there could be changes to improvement in cost as well. In this conditions, net present value of the project will be $ 50,347. Hence, company breakeven point will take highest year to capture is cost and this is the worst conditions for the project.

Depreciation Analysis

Depreciation is not a paid up cost and has not been included in the cost analysis. Given the experience of the previous projects of the Company, commercial projects tend to have a life cycle of 25 years. Hence, it is expected that there will be a depreciation of 4% per annum on a straight line basis. However, the ownership of project will be transferred to NSW Investment Corporation and shall not be listed as an asset for the Company. Hence, depreciation is not applicable. No depreciation is expected in the build phase of the project.

Year

Depreciation (in $)

After Depreciation Value (in $)

Year 0

0

154,640

Year 1

6185.6

148454.4

Year 2

6185.6

142268.8

Year 3

6185.6

136083.2

Year 4

6185.6

129897.6

Year 5

6185.6

123712

Year 6

6185.6

117526.4

Year 7

6185.6

111340.8

Year 8

6185.6

105155.2

Year 9

6185.6

98969.6

Year 10

6185.6

92784

Year 11

6185.6

86598.4

Year 12

6185.6

80412.8

Year 13

6185.6

74227.2

Year 14

6185.6

68041.6

Year 15

6185.6

61856

Year 16

6185.6

55670.4

Year 17

6185.6

49484.8

Year 18

6185.6

43299.2

Year 19

6185.6

37113.6

Year 20

6185.6

30928

Year 21

6185.6

24742.4

Year 22

6185.6

18556.8

Year 23

6185.6

12371.2

Year 24

6185.6

6185.6

Year 25

6185.6

0

Conclusion 

On the basis of the above explanation, we can say that the financial and economic benefit for cost analysis of investment project is based on forecast of quantifiable variables based on the approximately predicted forecast the value of these variables estimated and which cover a long time of period. The value of these variables for the most probable outcomes scenario or influenced by a great number of factors and the real value can be differ considerably from forecasted value depending on future development. In the sensitivity analysis we can find the value of project and cash inflows and out flows in different economic condition and the decision makers are able to generate the correct and different net present value and internal rate of return of the project and different phase of the economy and project. This ultimately helps decision makers and higher management to find out the easiest and correct way of evaluation of the project and they are able to find that project should be accepted or project should not be accepted. So that as per the above analysis in all conditions of the economy, it could be find that company is able to generate net present value in positive term. Hence, company should accept this project.

References

David. J. Pannell, 1997, “Sensitivity analysis: strategies, methods, concepts, examples” Martina Bris, 2017, “SENSITIVITY ANALYSIS AS A MANAGERIAL DECISION MAKING TOOL”

Cheyenne O, 2018, “Sensitivity Analysis: Definition, Uses & Importance”

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