Profit on paper is not enough to decide a housing project. Money goes out first for land and roads, while money from buyers and banks comes in over time. A feasibility study works out when money goes out and comes in, then judges whether the return is worth the capital and the risk.
- Land Rp2.4 bn
- Infrastructure Rp1.2 bn
- 40 houses Rp6 bn
- Permits, marketing Rp0.8 bn
- Profit Rp1.2 bn
Cash flow and results
| Start (year 0) | Year 1 | Year 2 | Total | |
|---|---|---|---|---|
| Cash out | Rp3.6 bn (land, infrastructure) | Rp4.0 bn | Rp2.8 bn | Rp10.4 bn |
| Cash in | Rp0 | Rp5.0 bn | Rp6.6 bn | Rp11.6 bn |
| Net cash flow | minus Rp3.6 bn | Rp1.0 bn | Rp3.8 bn | Rp1.2 bn |
| Cumulative | minus Rp3.6 bn | minus Rp2.6 bn | Rp1.2 bn |
- NPV at 12% a year: minus 3.6 + 1.0 ÷ 1.12 + 3.8 ÷ 1.12² = about Rp0.32 bn. Positive, so feasible at 12%.
- IRR: the rate that makes NPV zero, about 17.6%. Compare it with the cost of capital or the loan rate.
- Payback: cumulative cash turns positive in year 2, after about 1.7 years.
Sensitivity test
| Scenario | NPV at 12% | Decision |
|---|---|---|
| Base | Rp0.32 bn | Feasible |
| Selling price 5% lower | about minus Rp0.16 bn | Not feasible |
| Sales 6 months later | lower, recalculate with the new schedule | Check the capital needed |
This example shows a 10% profit can disappear with only a 5% price drop. So the selling price, sales speed and mortgage disbursement schedule must be tested before buying land.
Common mistakes
- Only working out total profit, ignoring when money comes in.
- Infrastructure, permit and marketing costs forgotten.
- Over-optimistic sales speed.
- No sensitivity test.
The full guide is in How to create a construction finance report in Google Sheets. It has a free template (Excel or Google Sheets) and a checker that reads your own workbook.
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Common questions
What is NPV?
The present value of all project cash flows at a given rate. Above zero means the project earns more than its cost of capital.
What is IRR?
The rate that makes NPV zero. A project is feasible if its IRR is above the cost of capital.
Why test sensitivity?
Because a small change in price or sales speed can turn a feasible project into a loss.
References
- UMY journal: housing project investment feasibility (Indonesian): BEP, NPV, IRR, payback and PI example