Advancing Financial Analysis in Geodesign

Summary

I describe a plugin that performs Discounted Cash Flow Analysis on project ideas. The goal of this plugin is to provide slightly more advanced financial analysis and calculations at the design stage beyond just calculating the area and multiplying with the construction cost.

Background

When I first started with geodesign, design and finance seemed two different worlds. In the most simple form of financial analysis, the area of a project is multiplied by a per hectare or per acre construction cost. This type of simplistic analysis does not work in the real world and even though everyone understands this, it is very prevalent in design practice especially in the early stages. There are no simple tools to perform slightly sophisticated financial analysis on an idea.

Objective

Generally design and finance work in silos even though their work is intricately connected. One way to improve the financial capability of a non-finance professional is to provide simple tools to gently introduce financial analysis. A good technic to assess the “fair value” of a project or idea is the Discounted Cash Flow Analysis. I am not going to get into the details of it but it is quite straight forward to understand. I set about to build a plugin with the goal to provide slightly more sophisticated financial analysis for individual project ideas in Geodesign Hub. Of course it cannot replace professional financial assessments but it can be used to educate users on how implementation can work and how decisions are made in the real world away from simplistic calculations.

Demo and Screenshot

You can play with the plugin by clicking on the link here and a brief explanation is below

annotated
Discounted Cash Flow Main Interface

Annotations Explained

  1. The Input diagram, it is a idea that the designer has that needs to be built or constructed.
  2. The name, size and estimated construction cost and the geometry. All of these are downloaded using the Geodesign Hub API, in this case, it is a 270 hectare development.
  3. At a estimated EUR 100k / hectare the cost of construction is estimated by multiplying the area of the project with the cost of construction per hectare. This can be changed to another if you think that it can done cheaper or more expensively.
  4. Estimate the annual income for your investment.
  5. Estimate the annual growth as a percentage. e.g. if you choose 2% and annual income of 100,000 then on year 1 you will earn 100,000, year 2 will be 102,000, year 3 your income will be 104,040 etc.
  6. Weighted Annual Cost of Capital (WACC): This is the cost of money or your opportunity cost. A way to think about this is if you did not invest in this project, and invested in say the stock market how much return you think you can get.
  7. 8. 9. 10. Once the “Compute NPV” button is pressed, this shows the total expected cash flow and the chart of Actual and Discounted Cash flow and most importantly the Net Present Value. If the NPV is positive, it could mean that given your model parameters, this investment is overvalued and it may not be a good investment given the parameters. On the other hand, if the NPV is negative, then it may be a good investment.

Limitations

As with a lot of things finance related, there are a number of limitations of the technique. A good blog post about the limitations is here. But this can provide a good understanding of how prospective investors think and what drives their decision. 

More Information

You can use the API provided by Geodesign Hub to build your plugins and models that integrate directly with the workflow. In fact, you can build paid plugins and microservices and get paid for access. I will share more details about the Store and paid plugins shortly. All of this is open source and you can see it in action on Geodesign Hub and also see the code on the Github repository.

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