DEVELOPING AN ECONOMIC ANALYSIS

Setting:

After some time, the owner, the architect, and the engineer met again. Claire was very pleased

because Tony's design exceeded her expectations. During this meeting Angie told Claire that it was time

for Claire to get in contact with a contractor in order to get a good estimate of project costs before talking

with the banks. Claire appreciated the design engineer's advice, because without additional funding there

would be no mall. Angie recommended that Claire talk to Cornelius "Corny" Cornell, the owner of Corny

Construction & Co., with whom she had good experiences.

Claire gave Corny a call and they set an appointment for the next day at Corny's office, where their

conversation went like this:

Corny: Nice to see you. I hear you have a property you want to develop. What can I do for you?

Claire: I hope you can help me with some cost estimates, because soon I have to go to the bank to get

funding for the project. I brought you the preliminary drawings from my architect and engineer. What do you

think the project will cost?

Corny: Let's have a look. That is a nice preliminary design for the mall. Well, Corny Construction has done

some malls before; we will be able to provide you with an estimate. However, first I need to check out the

property and what is needed from the site work, utilities, and landscaping points of view. I see you have

some estimates on the site development. Whom did you get those from?

Claire: The numbers are from "Big Builders."

Corny: Oh, good. I know Bob. I'll give him a call. In addition, I will talk to your architect and your engineer.

I'll be done with the estimate in two days, okay?

Claire: Great. Which bank do you do business with?

Corny: I work with Betsy Benefit from "Best Banking." She is very reasonable when it comes to lending

money.

Two days later Claire was back in the office of Corny Construction. While she was waiting for Corny

in his office-room, she took a look at his bookshelf. There were some interesting book titles, such as

Construction Scheduling, Estimating, Means and Methods, Contract Administration, and Financing

Construction Projects. "This is an interesting subject," she thought. Her thoughts were disturbed when

Corny walked in and gave her the list of estimates (see Table 3.1).

Based on the information Corny had provided, Claire realized that she would need a loan of

$25,696,000 to complete construction of the project, after the use of the $6.75 million inheritance. She

estimated the interest on the loan would be 7 percent, compounded annually over a 20-year period. Claire

also estimated that she could expect $30 per square foot of rental space (160,000 SF) and that her

maintenance and operating costs would be approximately 2 percent of total cost of the project. She began

to wonder exactly how much profit (if any) she could expect to make from the project while she was paying

off such a substantial loan over the next twenty years. It would be necessary to convey this to the bank to

receive funding. After she returned to her office, Claire set about developing a profit picture for the Mount

Hokie shopping facility to determine if the project was economically feasible.

CEE-3014 Construction Management Assignment 4

CEE-3014 Construction Management Page 3 of 3

Table 3.1: Parameter Estimate of Costs for the Mount Hokie Project Item Description Estimated Cost $

1

Land

3,040,000

2

Bob Builder consulting fee

50,000

3

Corny Cornell consulting fee

34,000

4

Architect fee

105,000

5

Permitting cost

25,000

6

Design & consulting engineer fee

165,000

7

Grading and site work sub

2,380,000

8

Construction of shopping facility

17,670,000

9

Construction of parking lot

2,078,000

10

Installation of utilities by sub

1,451,000

11

Installation of electrical reticulation by sub

550,000

12

Landscaping sub

378,000

13

Allowance for fees of loans and interests

4,520,000 Total 32,446,000

Deliverables:

Assume you are Claire and are trying to determine if the Mount Hokie shopping mall is a good investment of your $6.75 million inheritance, using a 25-year period. Assume operation of the facility begins in year 2 and the equity is utilized in year 1.

Determine the:

Gross annual revenue

Annual Maintenance Costs

Net Annual Revenue

Estimated Annual Debt Service

Estimated Annual Profit

Net Present Value of Claire's investment, if the discount rate = 9%

Internal Rate of Return for the project investment

summarize your findings from above and make a firm recommendation as to whether the project is a sound investment.