ZEMCH 2015 - International Conference Proceedings | Page 103

Further complementary methods used beside the NPV to determine the return are the Internal
Rate of Return (IRR) and the payback period:
b) The IRR can be considered as the rate of return that renders the NPV equal to zero. This method
has its appeal in practice because of the tendency to look at investments in terms of percentage
return of the capital invested (Bagajewicz 2008).
c) Finally, the payback period of a project refers to the number of periods or years it takes before
the cumulative forecasted cash flow equals the initial investment (Brealey et al. 2002).
(3)

A second crucial aspect is Project Financing (PF) to assure that the stream of cash flows generated
by the project is able to repay for the debt. Usually, lenders assess the capacity of the company
to service the loan looking at the annual DSCR. This important indicator is defined as the ratio of
annual cash flow available for debt service to annual principal and interest payments, as shown in
the following equation (Zhang et. al. 2005).

(4)

where is the yearly debt service coverage ratio; is the operating cash flow at year j; is the debt
instalment (principal plus interest); and N is the debt repayment period.
According to the definition, it is clear that the DSCR is strictly related to the company’s financial
leverage. Generally, lenders prefer a high equity level to minimize their risks as debt has a higher
rank in repayment than equity investment (Zhang et. al. 2005). On the other hand, private investors aim to ask for more debts since it is a cheaper source of capital. Thus, the choice of the minimum DSCR determines the maximum amount of debt the company can ask.
For lenders, a project is considered bankable if it doesn’t fall below certain DSCR targets anytime.
In other words, this achieved if the revenue stream generated is sufficient enough to protect the
lenders from the perceived risk. The minimum DSCR required by lenders depends on the site
country, industrial sector, lenders involved and market situation (Zhang et. al. 2005). Generally,
the DSCR of the project must be in the range of 1.10 - 1.25 in order to be considered bankable. The
comfortable range of DSCR is 1.30 – 1.50 and even realistic a DSCR greater than 1.50 is preferable
(Koh et al. 1999). However, according to the risk profile of the project, the bankable target may rise
up to 1.5-2.0 (Yescombe 2007).

3. Research Methodology
The methodology for this study is developed through the analysis of two set up Mock-Up Buildings with equal 3m3, positioning and shading in Kuala Lumpur/Malaysia. Both are life labs, each
simulating a small bedroom in a residential area to stay in. The first one, the Mock-Up Green Building (MUGB), is equipped with green passive materials and active technologies available in the Malaysian market. Instead, the Mock-Up Conventional Building (MUCB) is a reference demo-house
built up following the nowadays common industrial building design of local conventional and
not-sustainable houses with sand bricks, zinc roof, louver windows with aluminium frames (IBS).
The analysis section of this research investigates the financial plan of both case studies. Typically, real estate projects face negative balance of the cash flows in their initial phase due to the
construction costs. With this model, the authors try to solve the financial gap by suggesting the
amount debt capital the developers can ask using financial-leverage based mechanisms. Further-

Financial Analysis of Green Mock-Up Buildings in Tropical emerging Countries

101