Sensitivity Analysis of Futuristic Construction's New Sydney Atrium Mall Project

This report contains a sensitivity analysis of Futuristic Construction's New Sydney Atrium Mall Project to understand its viability. It includes analysis of best, neutral, and worst economic conditions, break-even analysis, and identification of key variables.

Contents
INTRODUCTION............................................................................................................................................................................................2
IDENTIFIED THE KEY VARIABLES –.......................................................................................................................................................4
INVESTIGATION OF RESULT OF PROBABLE ADVERSE CHANGES –...............................................................................................5
FOR DECISION MAKING AND EVALUATION OF PROJECT –.............................................................................................................5
SENSITIVITY ANALYSIS OF THE COMPANY –......................................................................................................................................6
ORIGINAL COST AND BENEFIT OF THE PROJECT -.............................................................................................................................6
ECONOMIC CONDITION WISE ANALYSIS:.............................................................................................................................................8
BEST ECONOMIC CONDITION VALUATIONS -......................................................................................................................................8
BREAK EVEN ANALYSIS -..........................................................................................................................................................................9
NEUTRAL ECONOMIC CONDITION:.......................................................................................................................................................10
BREAK EVEN ANALYSIS -........................................................................................................................................................................11
Worst Economic Condition -..........................................................................................................................................................................13
BREAK EVEN ANALYSIS -........................................................................................................................................................................13
ANALYSIS –.................................................................................................................................................................................................14
ANALYSIS OF BEST ECONOMIC CONDITIONS –.................................................................................................................................15
ANALYSIS OF NEUTRAL ECONOMIC CONDITIONS –........................................................................................................................15

ANALYSIS OF WORST ECONOMIC CONDITIONS –............................................................................................................................15
CONCLUSION..............................................................................................................................................................................................16
REFERENCE –..............................................................................................................................................................................................17
INTRODUCTION
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.
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.
SENSITIVITY ANALYSIS

A cash flow diagram will help explain the cost inflows and outflows of the Project.
Figure 1 Cash Flow Diagram

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 –
IDENTIFIED THE KEY VARIABLES –
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 DECISION MAKING AND EVALUATION OF PROJECT –
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.

SENSITIVITY ANALYSIS OF THE COMPANY –
ORIGINAL COST AND BENEFIT OF THE PROJECT -
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
TOTAL
S
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 ,
$
( 7 ,
$
( 7 ,
$
( 7 ,
$
( 7 ,

920 ) 920 ) 920 ) 920 ) 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
ECONOMIC CONDITION WISE ANALYSIS:
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 VALUATIONS -
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 $ $ $ $ ( 6

- , 689.32 ) ( 7 ,
465.36 )
( 7 ,
247.92 )
( 7 ,
036.82 ) , 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
BREAK EVEN ANALYSIS -
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

0 1 2 3 4 5
$-
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
$1,200,000.00
Break Even Analysis
NPV of all BENEFITS NPV of all COSTS
NEUTRAL ECONOMIC CONDITION:
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

BREAK EVEN ANALYSIS -
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
0 1 2 3 4 5
$-
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
Break Even Analysis
NPV of all BENEFITS NPV of all COSTS

Worst Economic Condition -
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 , $ 1 , 49 , $ 1 , 95 , $ 2 , 41 , 259 $ 2 , 41 , 259

803 011 817
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 , 91
)
Overall NPV $ 50 , 347
BREAK EVEN ANALYSIS -
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
0 1 2 3 4 5
$-
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
$300,000.00
Break Even Analysis
NPV of all BENEFITS NPV of all COSTS
ANALYSIS –
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

ANALYSIS OF BEST 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.
ANALYSIS OF NEUTRAL ECONOMIC CONDITIONS –
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.
ANALYSIS OF WORST ECONOMIC CONDITIONS –
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.
REFERENCE –
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”