Feasibility Modelling & DCF Analysis

Feasibility modelling and discounted cash flow analysis is the primary technique used to assess the viability of a proposed development by projecting development cost and revenue over the anticipated project programme and, where the programme extends over a material period, discounting projected cash flows to present value. Node 32210 addresses the methodology, core inputs and practice conventions underlying this technique.

A feasibility model translates a development concept into a financial outcome, typically expressed as a development margin, residual land value or project internal rate of return. The reliability of this outcome depends on the accuracy of underlying assumptions concerning construction cost, sales or rental revenue, programme duration and finance cost, each of which is subject to material uncertainty at the early stages of a project where feasibility modelling is most influential.

Discounted cash flow analysis is applied within feasibility modelling principally where a development programme extends over a sufficiently long period, or generates cash flows of materially different timing, that the time value of money meaningfully affects the appraised outcome relative to a simpler undiscounted residual calculation.

This node covers:

• The methodology of feasibility modelling and discounted cash flow analysis as applied to development appraisal
• Core inputs, outputs and sensitivity testing conventions used in Australian development feasibility practice

This node does not cover:

• The specific residual land value technique used to determine maximum supportable acquisition price → refer to Node 32220
• Discounted cash flow analysis applied to a completed investment asset rather than a development appraisal → refer to the 33000 series
• Detailed construction cost estimation methodology → refer to the 32600 sub-series

• AASB accounting standards (for example, AASB 102 and AASB 138)

  the Australian Accounting Standards Board

  Govern the treatment of development costs as inventory or intangible assets in the financial statements of entities undertaking the development being modelled.
• A New Tax System (Goods and Services Tax) Act 1999 (Cth)

  the Australian Taxation Office

  Governs margin scheme and input tax credit treatment of development costs and revenue, materially affecting net feasibility cash flows.
• Corporations Act 2001 (Cth)

  the Australian Securities and Investments Commission

  Imposes disclosure obligations where feasibility model outputs are presented to investors in a managed investment scheme product disclosure statement.
• API and RICS valuation and appraisal standards

  the Australian Property Institute and the Royal Institution of Chartered Surveyors

  Establish professional practice standards underpinning the methodology and disclosure conventions applied in feasibility modelling.

Feasibility modelling methodology also connects analytically to discounted cash flow analysis applied to completed investment assets, maintained elsewhere within the APN content architecture, though detailed treatment of that application sits outside the scope of this node.