Prior to taking on a new project or continuing to develop an existing one, it is beneficial to conduct a cost-benefit analysis as a method of evaluating the risk and reward of a particular development option. This involves consideration of all of the potential expense and revenue that may be created if a venture has forward motion. The conclusion of the analysis will clarify whether the project is financially viable, or if an alternative should be pursued. Simplified, cost benefit analysis is a course of action where business choices are examined. The benefits of a particular development or project are given a sum total followed by the deduction of the related associated costs.
A cost-benefit analysis has become a valuable tool for evaluating a wide range of business opportunities and is often the basic consideration behind many business decisions. Given that real estate is either the focus of a development option, or at least a major component of an operation, this type of study can form the basis of a sound business decision. Although it may seem straightforward, there is often a measure of complexity and subjectivity to the actual application of such an analysis as not all costs or benefits are obvious at first. The subtle effect of other events require a significant degree of careful consideration to fully evaluate its impact. One of the most difficult challenges is quantifying the trend in values, with limited hard market data. The real estate market with its upwards and downward trends, financial institution pre-sale thresholds and the success or lack thereof of similarly developed properties all may contribute to a ripple effect of the cost benefit analysis.
The role of the appraiser or consultant is to offer an independent third party review providing a series of summary discussions including probable servicing and development costs in order of magnitude, a summary of the taxation analysis and the economic spin-off, cost and benefit calculations. The primary recommendation of the appraiser focuses on assisting the client in making an informed decision as to whether the qualitative and quantitative benefits appear to offset the costs. This leads directly to a recommendation to proceed with the venture or ultimately making the critical decision to bring an end to the process.