9. Development Feasibility, Finance and Risk Analytics

Introduction and Context

Real estate development converts land, capital, planning permission, construction capability and market demand into a completed physical and financial asset. The central professional question is not simply whether a project can be built, but whether it should be built, at what scale, with what financing structure, and under which assumptions about time, price, cost and risk. Development feasibility therefore links urban planning with investment analysis, corporate finance, construction management and strategic decision-making.

A development may be physically possible but financially unattractive. Conversely, a project with strong market demand may fail because land was acquired at an excessive price, debt was poorly structured, approvals were delayed or the project was exposed to an adverse interest-rate cycle. Feasibility analysis provides a disciplined method for examining these relationships before substantial capital is committed.

This chapter develops three connected analytical perspectives. First, residual land value estimates what a developer can afford to pay for land after allowing for revenues, costs, finance and required profit. Second, discounted cash flow analysis evaluates the timing and magnitude of project cash flows. Third, risk analytics examines how changes in assumptions affect value, returns and investment decisions. These tools are not substitutes for professional judgement. They are mechanisms for making judgement explicit, testable and governable.

Learning Objectives

By the end of this chapter, the learner should be able to:

1. Explain the purpose, structure and limitations of development feasibility analysis.

2. Construct a development appraisal using revenues, development costs, finance, taxes, contingencies and developer profit.

3. Calculate residual land value and distinguish it from market value and investment value.

4. Apply discounted cash flow techniques, including NPV, IRR, equity multiple and development yield.

5. Compare debt, equity, mezzanine and joint-venture funding structures.

6. Use sensitivity analysis, scenario analysis, break-even analysis and risk-adjusted returns in investment decisions.

7. Evaluate phasing, timing and optionality in development programmes.

8. Identify governance, ethical, regulatory and professional risks in real estate financial modelling.

The Feasibility Question: From Site Potential to Investment Decision

A development appraisal translates a proposed project into a set of assumptions and cash flows. Its basic logic is:

Gross development value – development costs – finance costs – taxes and charges – required profit = residual land value.

The model normally begins with the site and its planning potential. Relevant variables include site area, permissible floor-area ratio, building height, setbacks, use mix, parking requirements, affordable-housing obligations, environmental restrictions and infrastructure contributions. Planning capacity is not identical to saleable capacity. Gross floor area must be adjusted for common areas, services, circulation, parking and non-revenue space to derive net saleable or lettable area.

Market analysis then establishes achievable prices, rents, absorption rates, vacancy, incentives and likely exit yields. A development appraisal should distinguish between asking prices and achieved transaction prices, between headline rent and effective rent, and between theoretical capacity and demonstrated demand. Market evidence must also be adjusted for location, quality, size, timing and tenure.

Costs are classified by both nature and timing. Land acquisition, construction, professional fees, statutory charges, marketing, sales commissions, insurance, finance, operating expenditure and contingency should be separately identified. A common analytical error is to include construction cost but omit development management, utility connections, interest during construction, taxes, fit-out, escalation and selling expenses.

The final step is decision interpretation. A positive NPV does not automatically mean that a project should proceed. The result must be considered alongside liquidity, risk concentration, strategic fit, planning credibility, organisational capacity and alternative uses of capital.

Core Concepts and Terminology

Gross Development Value (GDV) is the total value of completed units or income-producing space, usually before deduction of development costs.

Net Development Value is GDV after deductions such as sales costs, purchaser incentives, vacancy or other value adjustments.

Gross floor area (GFA) is the total constructed floor area measured according to the applicable regulatory or valuation convention.

Net saleable area (NSA) or net lettable area (NLA) is the portion capable of being sold or leased to occupants.

Development cost includes the direct and indirect expenditure required to deliver the project, excluding or including land according to the stated convention.

Residual land value (RLV) is the maximum land price supported by the project after allowing for all other costs and the required developer return.

Developer profit is the reward for development risk, coordination and entrepreneurial capital.

Profit on cost equals profit divided by total development cost; profit on value equals profit divided by GDV or net development value.

Discount rate is the rate used to convert future cash flows into present value, reflecting time value and risk.

Net present value (NPV) is the present value of future cash flows minus the initial or undiscounted investment required by the model.

Internal rate of return (IRR) is the discount rate at which NPV equals zero.

Equity multiple is total equity distributions divided by total equity invested.

Loan-to-cost (LTC) is debt divided by total project cost; loan-to-value (LTV) is debt divided by property value.

Debt service coverage ratio (DSCR) is cash available for debt service divided by scheduled debt service.

Sensitivity analysis changes one assumption at a time to observe its effect on outputs.

Scenario analysis changes several related assumptions together to represent coherent future conditions.

Break-even analysis identifies the price, cost, volume, occupancy or timing condition at which a target return is just achieved.

Contingency is a budget allowance for uncertainty in scope, price, design or execution.

Phasing is the deliberate sequencing of construction, sales, leasing or infrastructure delivery.

Building the Development Appraisal

Physical and Planning Programme

The model should begin with a clear development brief. Suppose a site permits a mixed-use scheme comprising residential apartments, ground-floor retail and structured parking. The analyst should record site area, permitted density, proposed GFA, efficiency ratio, unit mix, average unit sizes and expected completion dates. Planning assumptions should be classified as confirmed, probable or speculative. Treating an unapproved density increase as certain can materially overstate value.

The programme should also identify pre-development activities: acquisition, due diligence, planning, design, environmental remediation, infrastructure works, construction, marketing, sales, lease-up and stabilisation. Each activity has both a cost and a time implication.

Revenue Estimation

For a for-sale project, revenue may be estimated as:

Revenue = saleable area × achieved price per unit of area + ancillary income.

A unit-level approach is preferable where apartments differ substantially in size, orientation or specification. Sales should be distributed over time rather than recognised entirely at completion. Deposits may create early cash inflows, but their legal and escrow treatment must be understood.

For an income-producing asset, value is commonly estimated through capitalisation or DCF methods. Stabilised value may be expressed as:

Value = stabilised net operating income ÷ capitalisation rate.

However, the capitalisation rate must correspond to the income definition, market conditions, asset quality and risk. An exit value based on an aggressive yield can conceal a weak operating forecast. Lease-up periods, rent-free incentives, tenant improvements and renewal assumptions should be explicitly modelled.

Cost Estimation

Costs should be prepared using the best available evidence and escalated consistently with the programme. A useful classification is:

• land and acquisition costs;
• construction and site-development costs;
• professional and consultant fees;
• planning, statutory and infrastructure charges;
• marketing, sales and leasing costs;
• insurance, security and project administration;
• taxes, legal costs and transaction charges;
• finance costs; and
• contingency.

A contingency is not a substitute for poor estimating. It should be linked to the maturity of design, procurement strategy, site conditions and market volatility. A project with incomplete design should not receive the same contingency as a fully documented project.

Profit Measures and Feasibility Thresholds

Developers and lenders use several thresholds. Profit on cost is intuitive during construction budgeting, while profit on value is useful when comparing projects with different margins. IRR captures timing but can be misleading where cash flows change direction more than once. NPV is generally the stronger measure for value creation because it expresses the absolute wealth created at a selected required return.

A project can have a high IRR but create little total value if it is small. Another can have a lower IRR but generate greater NPV and better strategic value. Therefore, metrics should be read together rather than ranked mechanically.

Residual Land Value

Residual land value is particularly important in land acquisition and planning negotiations. In its simplest form:

RLV = GDV – non-land development costs – finance costs – required profit.

Assume a proposed project has an expected GDV of 50 million monetary units. Non-land costs, including construction, fees, marketing and statutory charges, are 32 million. Finance costs are 3 million, and the developer requires a profit of 7 million. The residual land value is:

50 – 32 – 3 – 7 = 8 million.

The result means that paying 8 million for the land would theoretically leave the required profit, assuming all assumptions are achieved. It is not necessarily the market value of the land. A competing buyer may pay more because of a lower required return, superior financing, greater optimism or a different proposed use. Conversely, the seller’s price may exceed the economically supportable bid.

A more rigorous residual model is time-based. Revenues and costs are placed in the months or quarters in which they occur, and land value is either paid at acquisition or discounted according to the transaction structure. If land is paid in instalments, the timing of those instalments affects both finance cost and residual value.

Residual land value is highly sensitive to small changes in assumptions. If GDV falls by 5 million while costs remain unchanged, RLV falls by approximately 5 million before secondary effects. This is why land acquisition should be based on a conservative bid strategy, not on a single optimistic appraisal.

Discounted Cash Flow and Investment Metrics

Discounted cash flow analysis recognises that a monetary unit received today is worth more than the same unit received later. The present value of a future cash flow is:

PV = CFt ÷ (1 + r)t

where CFt is the cash flow in period t and r is the discount rate. NPV is the sum of discounted cash flows, including the initial investment. A positive NPV indicates that the project is expected to earn more than the required return under the stated assumptions.

The discount rate should reflect the risk of the cash flows, not simply the cost of the cheapest available loan. Project-level unlevered DCF commonly uses a weighted average cost of capital or a project-specific required return. Equity cash flows, by contrast, are discounted at an equity return reflecting leverage and residual risk.

IRR is useful for communication but has limitations. It assumes interim cash flows can be reinvested at the IRR and may generate multiple answers in non-conventional cash-flow patterns. Modified IRR or NPV can provide better decision support. Analysts should also report the timing of invested capital, peak funding requirement and cash-on-cash distributions.

For a completed income-producing asset, terminal value often represents a large proportion of total DCF value. It should therefore be tested using alternative exit yields, growth assumptions and holding periods. A terminal value based on a perpetuity is especially sensitive to small changes in the exit yield.

Financing the Development

The capital structure determines who provides capital, who bears risk and how returns are distributed. Senior debt usually has priority over other claims and is priced at a lower return because it has contractual repayment terms and security. Equity bears residual risk and receives the residual return. Mezzanine finance, preferred equity and subordinated debt occupy intermediate positions.

Senior construction loans commonly involve drawdowns tied to certified progress, interest reserves, covenants, completion tests and maximum LTC or LTV limits. The borrower must understand not only the headline interest rate but also arrangement fees, commitment fees, monitoring charges, hedging costs, default margins and required reserves.

A joint venture may combine a landowner’s contribution with a developer’s expertise and an investor’s capital. The agreement should define capital calls, decision rights, related-party transactions, guarantees, deadlock procedures, distribution waterfalls, removal rights and exit mechanisms. A nominally attractive promote structure may become contentious if valuation, refinancing or timing is unclear.

Leverage can increase equity IRR when project returns exceed the effective cost of debt. It can also magnify losses, create refinancing risk and reduce flexibility during market stress. Debt should therefore be assessed through downside DSCR, maturity risk, interest-rate exposure and covenant headroom, not merely through the base-case equity IRR.

Risk Analytics: From Single-Point Forecasts to Decision Ranges

A feasibility model should not present uncertain assumptions as precise facts. At minimum, major assumptions should be assigned a base case, downside case and upside case. Key uncertain variables commonly include achieved price, sales velocity, rent, exit yield, construction cost, interest rate, approval timing, absorption, vacancy and foreign-exchange exposure.

Sensitivity analysis changes one variable while holding others constant. It can show, for example, how NPV responds to a 5 percent fall in prices or a 10 percent increase in construction cost. Tornado diagrams are useful for ranking variables by effect, but they do not represent realistic combinations of events.

Scenario analysis changes several variables coherently. A recession scenario might combine lower prices, slower sales, higher vacancy, increased financing spreads and delayed completion. A planning-success scenario might combine additional density with higher infrastructure contributions and longer approval time. Scenarios should be plausible narratives rather than arbitrary collections of extreme numbers.

Break-even analysis asks what must be true for the project to meet its threshold. Examples include the minimum sales price, maximum land price, maximum construction cost, minimum sales rate or maximum delay compatible with a target NPV. Such analysis is highly useful in negotiations because it converts abstract risk into operational limits.

Probabilistic methods, including Monte Carlo simulation, assign distributions to uncertain inputs and generate a distribution of outcomes. The output may show the probability that NPV is negative, the range of possible IRRs or the capital reserve required at a selected confidence level. The apparent sophistication of simulation does not eliminate model risk: unreliable distributions, correlations or assumptions can produce precise but misleading results.

Risk-adjusted returns may be assessed through a higher discount rate, explicit probability-weighted scenarios, contingency reserves, risk-adjusted pricing or staged investment. A single risk premium added mechanically to the discount rate can obscure the source of risk. It is better to identify whether uncertainty arises from planning, construction, market demand, financing, legal title or operations and address each risk through an appropriate response.

Phasing, Timing and Real Options

Phasing is both a construction strategy and a risk-management instrument. A developer may build in stages to match absorption, reduce peak debt, learn from early sales, preserve cash or avoid delivering excess supply. Phasing can also increase costs through repeated mobilisation, temporary works and loss of economies of scale.

The correct comparison is not simply total cost under one phase versus another. The analyst should compare the complete time-based cash flows, including delay, escalation, financing, revenue timing, infrastructure requirements and the value of flexibility. A smaller first phase may produce lower immediate profit but preserve the option to expand only if demand is confirmed.

Real-options thinking recognises that waiting, staging, switching use or abandoning a project can have value under uncertainty. Planning permission may create an option to develop, but exercising it is sensible only when expected benefits exceed construction, financing and opportunity costs. Option value is often present but should not be used as an excuse to justify speculative assumptions.

Illustrative Case: Riverside Exchange Development

Background

Riverside Exchange is an illustrative mixed-use project proposed on a former industrial site near a metropolitan transit corridor. The concept comprises 180 residential units, 4,000 square metres of retail space and a small office component. The site requires remediation, and the planning authority is considering a contribution toward public-realm improvements.

Situation and Problem

The landowner requests 24 million monetary units. The developer’s preliminary model indicates a GDV of 118 million. Construction and site works are estimated at 68 million, professional and statutory costs at 9 million, marketing and sales costs at 4 million, remediation at 5 million, and finance costs at 8 million. The developer requires a minimum profit of 18 million.

The initial residual calculation is:

RLV = 118 – (68 + 9 + 4 + 5 + 8) – 18 = 6 million.

On this basis, the requested price is substantially above the supportable residual land value. However, the developer must determine whether the estimate is overly conservative, whether the scheme can be redesigned, and whether an alternative transaction structure can bridge the gap.

Analysis

The team reviews the assumptions. A design revision increases residential saleable area by 6 percent but reduces retail space. Market evidence supports a modest price premium for transit proximity, but absorption is expected to take four years. Remediation is uncertain because intrusive surveys are incomplete. Debt is available at a floating rate, with a requirement that the project maintain a minimum DSCR after completion.

Three scenarios are prepared:

• Downside: GDV of 108 million, costs 95 million including finance, and a required profit of 17 million. RLV is negative 4 million.
• Base: GDV of 118 million, costs 94 million, and required profit of 18 million. RLV is 6 million.
• Upside: GDV of 128 million, costs 96 million, and required profit of 19 million. RLV is 13 million.

The base case itself does not support the asking price. Moreover, the downside case produces a loss before considering extraordinary events. Sensitivity testing shows that construction cost escalation and residential pricing are the dominant variables, while small changes in office rents have limited influence.

Strategy and Solution

The developer rejects an unconditional purchase at 24 million. It proposes either a lower land price of 6 million, a deferred consideration structure in which the landowner receives a percentage of surplus after a preferred return, or an option agreement allowing the developer to complete remediation and planning before committing to acquisition.

The project is also phased. The first phase includes residential units and essential public-realm works, while the office component is deferred until leasing evidence improves. A fixed-price procurement package is sought for major construction elements, and a remediation allowance is supported by further technical investigation. Interest-rate exposure is partly hedged, and an interest reserve is included in the funding plan.

Governance arrangements require independent cost certification, monthly variance reporting, approval thresholds for design changes and formal review gates before each phase. The investment committee receives the base case, downside case and a probability-weighted risk report rather than a single headline IRR.

Outcome

The landowner accepts a structure consisting of 8 million at completion of planning and a contingent payment linked to achieved sales. The revised structure increases the developer’s potential cost if the project performs strongly, but materially reduces initial capital exposure and protects against planning and remediation risk. The first phase achieves the required sales threshold, after which the second phase proceeds.

Learning Points

The case demonstrates that feasibility analysis is not merely a valuation exercise. It informs price negotiation, contract design, phasing, funding, due diligence and governance. It also shows why residual land value should be treated as a negotiation boundary rather than an unquestionable market fact. Finally, the quality of a decision depends on the quality and transparency of assumptions, not on the apparent complexity of the spreadsheet.

Professional Practice, Governance and Ethics

Development models influence land prices, lending decisions, investor communications and public-sector negotiations. Analysts must distinguish verified information from assumptions, disclose material uncertainty and avoid manipulating inputs to achieve a desired investment outcome. Selective presentation of an upside case can mislead investment committees even where every individual calculation is mathematically correct.

Conflicts may arise where valuers, brokers, consultants or development managers have contingent fees or relationships with counterparties. Independent review is appropriate for major assumptions, especially planning capacity, remediation, construction cost, market evidence and terminal value. Model versions should be controlled, changes documented and approval rights defined.

Regulatory obligations may include planning conditions, environmental law, building standards, housing obligations, anti-money-laundering requirements, taxation, consumer protection and disclosure rules. Sustainability requirements increasingly affect capital expenditure, operating costs, insurance, financing terms and asset liquidity. Social impacts also matter: displacement, affordability, public access and infrastructure burden can affect both legitimacy and long-term value.

A professionally responsible appraisal should make clear what is known, what is estimated, what is contingent and what must be verified before commitment. The most dangerous model is not necessarily one containing an arithmetic error; it is one that creates unjustified confidence.

Technology and Contemporary Developments

Modern feasibility practice increasingly uses integrated project platforms connecting geographic information systems, planning databases, building information models, cost plans, sales systems and financial models. Automated data validation can identify inconsistent areas, duplicate costs, missing dates or improbable margins. Parametric models can test alternative massing and use mixes before detailed design.

Artificial intelligence can assist with document extraction, comparable analysis, scenario generation and anomaly detection. Its outputs require human review because training data may be incomplete, market evidence may be non-comparable and generated assumptions may not be auditable. Confidential transaction data also raises privacy and cybersecurity concerns.

Digital twins and construction-progress data can improve forecasts by comparing planned and actual progress. Real-time dashboards may track commitments, cash flow, sales velocity, procurement exposure and covenant headroom. Nevertheless, technology improves decisions only when data definitions, governance and accountability are sound. A visually sophisticated dashboard cannot compensate for an invalid residual model.

Emerging investment practice also places greater emphasis on climate transition risk, energy performance, resilience, embodied carbon, climate insurance and adaptation costs. These factors may affect future rents, vacancy, financing access, regulation and exit yields. They should be incorporated into scenarios rather than treated solely as non-financial reporting issues.

Common Errors and Best Practices

Frequent errors include double-counting or omitting costs, confusing GFA with saleable area, treating planning potential as guaranteed, using headline prices without incentives, ignoring absorption, understating contingency, capitalising temporary income as stabilised income, applying inconsistent inflation assumptions and relying on IRR alone.

Best practice is to:

1. State the purpose, valuation date, currency, tax basis and convention of the model.

2. Separate inputs, calculations and outputs, with clear audit trails.

3. Link physical quantities to financial assumptions.

4. Model monthly or quarterly timing where development risk is material.

5. Use independent market, cost and planning evidence.

6. Present base, downside and upside cases with explicit triggers.

7. Report NPV, IRR, profit measures, peak funding and break-even conditions together.

8. Test land price, cost, price, delay, interest rate and exit assumptions.

9. Review the model at approval, procurement, construction, sales and completion gates.

10. Treat uncertainty as a management issue requiring contractual, technical and financial responses.

Chapter Summary

Development feasibility integrates planning capacity, market evidence, cost estimation, finance and risk into an investment decision. Residual land value identifies the maximum economically supportable land price after development costs, finance and required profit. Discounted cash flow analysis evaluates the timing of project cash flows, while NPV, IRR, equity multiple, profit margins and coverage ratios provide complementary perspectives. Debt can enhance equity returns but increases downside exposure and covenant risk. Sensitivity, scenario, break-even and probabilistic analysis reveal how uncertainty affects outcomes. Phasing and real-options thinking preserve flexibility where demand, planning or construction conditions are uncertain. Effective practice requires transparent assumptions, independent review, ethical disclosure, strong governance and appropriate use of digital tools.

Key Terms

Residual land value: Maximum land price supported by a development after costs and required profit.

Gross development value: Total value of completed development before specified deductions.

Net saleable area: Revenue-generating area available for sale.

Discounted cash flow: Valuation method that converts future cash flows into present values.

Net present value: Present value of benefits less investment at a selected discount rate.

Internal rate of return: Discount rate producing an NPV of zero.

Profit on cost: Development profit divided by total development cost.

Loan-to-cost: Debt expressed as a proportion of total project cost.

Loan-to-value: Debt expressed as a proportion of property value.

Debt service coverage ratio: Cash available for debt service divided by debt service obligations.

Terminal value: Estimated value of an asset at the end of the explicit forecast period.

Contingency: Allowance for identified or unidentified cost uncertainty.

Sensitivity analysis: One-variable-at-a-time examination of output changes.

Scenario analysis: Evaluation of coherent combinations of changed assumptions.

Break-even analysis: Identification of the condition required to achieve a target result.

Phasing: Sequencing development activities or project components over time.

Real option: Value arising from flexibility to delay, stage, switch or abandon an investment.

Mezzanine finance: Subordinated capital positioned between senior debt and equity.

Model risk: Risk that a model’s structure, data or assumptions produce misleading results.

Review Questions

Short Answer Questions

1. What is residual land value, and why is it useful in land acquisition?

2. Distinguish between NPV and IRR.

3. Explain the difference between sensitivity analysis and scenario analysis.

4. What does the loan-to-cost ratio measure?

5. Why should terminal value be tested carefully in a development DCF?

Long Answer Questions

1. Explain the stages involved in constructing a development feasibility appraisal.

2. Discuss the relationship between planning capacity, saleable area and development value.

3. Compare senior debt, mezzanine finance, equity and joint-venture funding.

4. Explain how phasing can reduce risk while also creating additional costs.

5. Discuss the ethical and governance responsibilities of a development financial analyst.

Analytical / Application Questions

1. A project has GDV of 80 million, non-land costs of 51 million, finance costs of 5 million and a required profit of 12 million. Calculate the residual land value and explain two reasons why the actual bid should differ from the mathematical result.

2. A scheme has a positive base-case NPV but becomes negative when completion is delayed by nine months. Design a risk-response strategy involving financing, contracting, phasing and governance.

3. An investor must choose between a high-IRR small project and a lower-IRR larger project with greater NPV. Develop a decision framework that considers capital constraints, risk, liquidity, strategic fit and portfolio effects.

22. Multiple Choice Questions with Answers

Question 1

A project has a GDV of 60 million, non-land costs of 38 million, finance costs of 4 million and a required profit of 10 million. What is its residual land value?

A. 4 million

B. 8 million

C. 12 million

D. 16 million

Correct Answer: B. 8 million

Question 2

Which measure most directly expresses the absolute wealth created by a project at a selected required return?

A. Profit on cost

B. Equity multiple

C. Net present value

D. Loan-to-value

Correct Answer: C. Net present value

Question 3

Why can a high project IRR be misleading when used alone?

A. It ignores the timing of cash flows

B. It may show a high percentage return on a small amount of value

C. It cannot be calculated for development projects

D. It always assumes debt financing

Correct Answer: B. It may show a high percentage return on a small amount of value

Question 4

Which statement best describes sensitivity analysis?

A. It changes several assumptions to create a coherent economic narrative

B. It assigns probability distributions to every input

C. It changes one assumption while holding other assumptions constant

D. It eliminates uncertainty from the appraisal

Correct Answer: C. It changes one assumption while holding other assumptions constant

Question 5

A lender is primarily using loan-to-cost analysis. What relationship is being measured?

A. Debt relative to total project cost

B. Debt service relative to net operating income

C. Profit relative to gross development value

D. Land price relative to saleable area

Correct Answer: A. Debt relative to total project cost

Question 6

Which action is most consistent with real-options thinking?

A. Committing immediately to the maximum permitted scheme regardless of demand

B. Staging development so later investment depends on evidence from the first phase

C. Ignoring the value of delay because it creates no revenue

D. Using only the upside case to measure flexibility

Correct Answer: B. Staging development so later investment depends on evidence from the first phase

Question 7

In the Riverside Exchange case, why was contingent land consideration attractive to the developer?

A. It guaranteed a higher base-case GDV

B. It reduced initial capital exposure and linked payment to project performance

C. It removed all construction risk

D. It eliminated the need for planning permission

Correct Answer: B. It reduced initial capital exposure and linked payment to project performance

Question 8

Which change would most directly increase the risk of financial distress in a highly leveraged project?

A. A reduction in debt and a longer maturity

B. A lower construction cost with unchanged revenues

C. A delay combined with higher interest rates and slower sales

D. An increase in equity contribution

Correct Answer: C. A delay combined with higher interest rates and slower sales

Question 9

What is the principal purpose of a downside scenario?

A. To prove that the project will fail

B. To examine the consequences of a plausible adverse combination of conditions

C. To replace all professional judgement

D. To calculate only the construction budget

Correct Answer: B. To examine the consequences of a plausible adverse combination of conditions

Question 10

Which practice best reduces model risk?

A. Using as many decimal places as possible

B. Presenting only the most optimistic forecast

C. Separating inputs, calculations and outputs and maintaining an audit trail

D. Applying a higher discount rate without identifying specific risks

Correct Answer: C. Separating inputs, calculations and outputs and maintaining an audit trail