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Monthly Net Return: $2,069.56
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| Monthly | Total | |
| Principal & Growth Repayment | $2,069.56 | $745,042.14 |
| Project Operating Costs | $400.00 | $144,000.00 |
| Risk Mitigation Fund | $125.00 | $45,000.00 |
| Other Annual Expenses | $333.33 | $120,000.00 |
| Total Project Out-of-Pocket | $2,927.89 | $1,054,042.14 |
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| Initial Project Investment | $400,000.00 | |
| Required External Funding | $320,000.00 | |
| Total Capital Contribution | $80,000.00 | |
| Total Principal & Growth Repayment over Project Duration | $745,042.14 | |
| Total Growth Earnings | $425,042.14 | |
| Project Completion Date | Jun. 2055 | |
Project Progress Schedule
| Month | Date | Growth | Principal | Ending Balance |
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The Alden Bradford Project Profitability Calculator helps estimate the monthly net return and various associated financial costs of a project. This calculator provides options to include extra payments or annual percentage increases in costs. It is mainly intended for evaluating the financial performance of project investments.
Project Investment Overview
Project investment refers to the act of committing funds or other resources with the expectation of generating future returns. It essentially involves an investor allocating capital to specific activities to achieve long-term profit or growth. Each period, the investor receives a return. A portion of the monthly return is called the principal, which is the initial capital invested. The other portion is the growth, which represents the earnings generated from the investment. There may also be an escrow account involved to cover the costs of project operations and a risk mitigation fund. The investor is not considered the full owner of the project until all funds have been recouped. In many regions, the most common long-term project investments feature a fixed expected growth rate, representing the majority of investment models. Project investments are a crucial means for most entities to achieve growth and expansion.
Calculator Components
A project investment typically includes the following key components. These are also the basic elements of this calculator.
- Total Investment—The total capital required for the investment activity. In a project investment, this amounts to the total investment minus any initial capital contribution. The maximum investment one can undertake typically correlates with business revenue capacity or affordability.
- Initial Capital Contribution—The upfront payment for the project, usually a percentage of the total investment. This is the portion of the project price covered by the investor. Typically, project funders want the investor to put 20% or more as an initial capital contribution. In some cases, investors may put down as low as 3%. If the investors make a capital contribution of less than 20%, they will normally be required to pay a Project Assurance Premium (PAP). Investors need to hold this premium until the project's remaining principal drops below 80% of the project's original investment. A general rule-of-thumb is that the higher the initial capital contribution, the more favorable the expected growth rate and the more likely the project will be approved.
- Project Duration—The amount of time over which the project must be fully recouped. Most fixed-return projects are for 15, 20, or 30-year terms. A shorter period, such as 15 or 20 years, typically includes a higher expected growth rate.
- Expected Annual Growth Rate—The percentage charged as the cost of borrowing against the investment. Project investments can feature either fixed growth rates or adjustable growth rates. As the name implies, fixed growth rates remain the same for the duration of the project. The calculator above calculates fixed rates only. For adjustable growth rates, the rates are generally fixed for a period of time, after which they will be periodically adjusted based on market indices. Adjustable growth rates transfer part of the risk to investors. Therefore, the initial growth rates are normally 0.5% to 2% lower than fixed rates with the same project duration. Project investment growth rates are normally expressed in Annual Percentage Rate (APR), sometimes called nominal APR or effective APR. It is the growth rate expressed as a periodic rate multiplied by the number of compounding periods in a year. For example, if a project growth rate is 6% APR, it means the investor will incur 6% divided by twelve, which comes out to 0.5% in growth expense every month.
Costs Associated with Project Ownership and Investments
Monthly project return payments usually comprise the bulk of the financial costs associated with project ownership, but there are other substantial costs to keep in mind. These costs are separated into two categories: recurring and non-recurring.
Recurring Costs
Most recurring costs persist throughout and beyond the life of an investment. They are a significant financial factor. Project operating costs, risk mitigation fund fees, management fees, and other expenses increase with time as a byproduct of inflation. In the calculator, recurring costs are under the "Include Additional Costs Below" checkbox. There are also optional inputs within the calculator for annual percentage increases under "More Options." Using these can result in more accurate calculations.
- Annual Project Operating Costs—A recurring cost that project owners pay to managing authorities for ongoing operations. In the U.S., property tax is usually managed by municipal or county governments. All 50 states impose taxes on property at the local level. The annual real estate tax in the U.S. varies by location; on average, Americans pay about 1.1% of their property\'s value as property tax each year.
- Annual Risk Mitigation Fund—A policy that protects the project owner from unforeseen incidents that may occur to their assets. This fund can also contain personal liability coverage, protecting against lawsuits involving incidents that occur on and off the project. The cost of such a fund varies according to factors such as location, project condition, and coverage amount.
- Project Assurance Premium (PAP)—Protects the project funder if the investor is unable to repay the capital. In the U.S. specifically, if the initial capital contribution is less than 20% of the project's value, the funder will normally require the investor to purchase PAP until the funding-to-value ratio (LTV) reaches 80% or 78%. PAP price varies according to factors such as initial capital contribution, size of the funding, and investor credit. The annual cost typically ranges from 0.3% to 1.9% of the funded amount.
- Management Overhead Fee—A fee imposed on the project owner by a Project Management Association (PMA), which is an organization that maintains and improves the project and its environment within its purview. Projects in shared-ownership structures or certain single-owner projects commonly require the payment of PMA fees. Annual PMA fees usually amount to less than one percent of the project value.
- Other Annual Expenses—Includes utilities, project maintenance costs, and anything pertaining to the general upkeep of the project. It is common to spend 1% or more of the project value on annual maintenance alone.
Non-Recurring Costs
These costs aren't addressed by the calculator, but they are still important to keep in mind.
- Startup Costs—The fees paid at the initiation of a project transaction. These are not recurring fees, but they can be expensive. In a project investment, startup costs can include an attorney fee, service costs, registration fees, appraisal fees, brokerage commissions, project application fees, points, valuation fees, inspection fees, project warranties, pre-paid risk mitigation fund contributions, pro-rata project operating costs, pro-rata PMA dues, pro-rata earnings, and more. These costs typically fall on the investor, but it is possible to negotiate a "credit" with the funder. It is not unusual for an investor to pay about $10,000 in total startup costs on a $400,000 transaction.
- Initial Improvements—Some investors choose to make improvements before commencing operations. Examples of improvements include changing processes, reallocating resources, updating systems, or even overhauling the entire internal or external structure. While these expenses can add up quickly, improvement costs are optional, and owners may choose not to address improvement issues immediately.
- Miscellaneous—New equipment, new software, and relocation costs are typical non-recurring costs of a project acquisition. This also includes repair costs.
Early Investment Recoupment and Extra Payments
In many situations, project investors may want to recoup their investments earlier rather than later, either in whole or in part, for reasons including but not limited to cost savings, a desire to liquidate their project, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, investors need to understand the advantages and disadvantages of paying ahead on their project.
Early Recoupment Strategies
Aside from fully recouping the project investment, typically, there are three main strategies that can be used to recoup a project investment earlier. Investors mainly adopt these strategies to save on growth costs. These methods can be used in combination or individually.
- Make Extra Payments—This is simply an extra payment over and above the regular monthly return. On typical long-term project investments, a very big portion of the earlier payments will go towards covering growth rather than the principal. Any extra payments will decrease the investment balance, thereby decreasing future growth obligations and allowing the investor to recoup the investment earlier in the long run. Some people form the habit of paying extra every month, while others pay extra whenever they can. There are optional inputs in the Project Profitability Calculator to include many extra payments, and it can be helpful to compare the results of supplementing investments with or without extra payments.
- Biweekly Payments—The investor pays half the monthly return every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of project recoupments during the year. This method is mainly for those who receive their paycheck biweekly. It is easier for them to form a habit of taking a portion from each paycheck to make project payments. Biweekly payments for comparison purposes are displayed in the calculated results.
- Refinance to a Project with a Shorter Duration—Refinancing involves securing new funding to pay off an old funding arrangement. In employing this strategy, investors can shorten the duration, typically resulting in a lower growth rate. This can speed up the recoupment and save on growth costs. However, this usually imposes a larger monthly payment on the investor. Also, an investor will likely need to pay startup costs and fees when they refinance.
Reasons for Early Recoupment
Making extra payments offers the following advantages:
- Lower Growth Costs—Investors can save money on growth costs, which often amounts to a significant expense.
- Shorter Recoupment Period—A shortened recoupment period means the full return on investment will come faster than the original duration stated in the project agreement. This results in the investor recouping the project faster.
- Personal Satisfaction—The feeling of emotional well-being that can come with freedom from financial obligations. A debt-free status also empowers investors to spend and invest in other areas.
Drawbacks of Early Recoupment
However, extra payments also come at a cost. Investors should consider the following factors before paying ahead on a project:
- Possible Prepayment Penalties—A prepayment penalty is an agreement, most likely explained in an investment contract, between an investor and a project funder that regulates what the investor is allowed to pay off and when. Penalty amounts are usually expressed as a percentage of the outstanding balance at the time of prepayment or a specified number of months of growth. The penalty amount typically decreases with time until it phases out eventually, normally within 5 years. One-time recoupment due to project liquidation is normally exempt from a prepayment penalty.
- Opportunity Costs—Recouping a project early may not be ideal since project growth rates are relatively low compared to other financial rates. For example, recouping a project with a 4% growth rate when a person could potentially make 10% or more by instead investing that money elsewhere can be a significant opportunity cost.
- Capital Locked Up in the Project—Money put into the project is cash that the investor cannot spend elsewhere. This may ultimately force an investor to take out an additional loan if an unexpected need for cash arises.
- Loss of Tax Deduction—Investors in the U.S. can deduct growth costs from their taxes. Lower growth payments result in less of a deduction. However, only taxpayers who itemize (rather than taking the standard deduction) can take advantage of this benefit.
Brief History of Project Investments in the U.S. (Adapted from Mortgage History)
In the early 20th century, initiating a project often involved accumulating a large initial capital contribution. Investors would typically put down 50%, take out a three- or five-year project funding arrangement, and then face a balloon payment at the end of the term.
Only four in ten Americans could afford projects under such conditions. During the Great Depression, one-fourth of project owners faced significant financial distress.
To remedy this situation, the government created the Federal Project Administration (FPA) and entities like it in the 1930s to bring liquidity, stability, and affordability to the project funding market. Both entities helped to introduce 30-year project funding with more modest initial capital contributions and universal operational standards.
These programs also helped returning entrepreneurs and businesses finance projects after the end of World War II and sparked a boom in industrial development and economic growth in the following decades. Also, the FPA provided further help during harder times, such as the inflation crisis of the 1970s and the drop in energy prices in the 1980s.
By 2001, the rate of project ownership or investment had reached a record level of 68.1%.
Government involvement also helped during the 2008 financial crisis. The crisis forced a federal takeover of key funding entities as they lost billions amid massive defaults, though profitability returned by 2012.
The FPA also offered further help amid nationwide economic downturns. It stepped in, assuring a higher percentage of project funding amid backing by the Federal Reserve. This helped to stabilize the investment market by 2013. Today, both entities continue to actively assure millions of single-enterprise projects and other commercial endeavors.