How to do a cost-benefit analysis and how to interpret it for practical use

Data Given (Example)

  Lettable area – 80%           Estimated Rent - £ 85 per m² per month

  Construction period           - 18 months

  Short term Finance            - 17%

  Developer’s Profit             - 15% of GDV

  Land cost                           - £ 145,000

  Assumptions                      - Construction cost - £ 540 per m²

  GDV                                  - 15 Times of the land Cost

Analysis

a)     Estimated rent of £ 85 per square meter per month appears reasonable and assume that there is a greater demand for shop space in the location considered.

b)    According to the desired return of the Developer, the minimum gross floor area recommended is 2033 square meters. But, assume that the demand is more than the recommended area.

c)     Extent of land is unknown. Thus, it is not possible to comment on the possibility of increasing the ground floor area of the complex. As such, if additional floor space is required the only possibility is to increase the height of this building to achieve the necessary floor space.

d)    Let-table area of 80% appears satisfactory due to the fact that a shopping complex requires a greater circulation space.

e)     Interest on short term finance is said to be 17% per annum and it is assumed that the entire development will be implemented on borrowed funds.

f)      If the interest on loan is 17%, the same lending institution would pay around 12-14% for fixed deposits. Considering this point, 15% profit on GDV expected by the Developer appears fairly low. He can deposit this money and still earn the 15% interest without going through the struggle of constructing the shopping complex, selecting tenants, and attending to the legal requirements of renting the shops and maintaining it. He must at least target earning twice the amount of interest on deposits.

His current profit is estimated to be £ 326,250 over a period of one year.

There are many risk factors such as Cost, Time and Quality which can be badly affected to a project. Hence required precautions must be taken to minimize the impact on the project. To minimize risk in cost factor, the investor can go through strategic partner/s or investor/s for financing, Project to be developed phase by phase, and also by design and built procurement method investor can minimize his responsibility and cost as well as time and quality risk.

From this kind of project there are many cost benefits such as generate more job opportunities, Increase good will of the investor, many relationships can be created. Investor will get more opportunities in the future due to that good will and relationships.