NCP 29-Construction Finance Management & Cost Accounting
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Transcript of NCP 29-Construction Finance Management & Cost Accounting
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
ASSIGNMENT
NICMAR / CODE OFFICE
1. Name -
2. Reg. No. -
3. Course No. - NCP 27
4. Course Title - Construction Finance Management &
Cost Accounting
5. Assignment No. - 4 (FOUR)
ASSIGNMENT
An offer has been given by a Charitable Trust to develop and build a facility on a
10,000 Sqm of plot in a prime locality of Pune where 5000 Sqm of area will be
used by the trust housing, health facilities for senior citizens. 5000 Sqm will be
given free to developer as a cost of development.
Cost of land is Rs. 10,000 / Sqm.
Specifications for flooring:
10% Granite
40% Kota Stone
50% Mosaic cement tiles
R.C.C. framed structure
Aluminium sliding windows – Class A.
Rest specifications as used for Class A constructions.
Discuss the financial viability of the project and the financial planning of the
project. Developer would like to have minimum 18% net profit on his investment.
Page 1 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Developer can invest only Rs 10 lakhs as his own funds and can raise not more
than Rs 50 lakhs as bank loan.
PROPOSED COMPLEX:
A state of art building consisting of Multi f loors and measuring an area
of approximately 8000 Sq. mts is to be developed on a 10000 Sq. Mts.
plot.
Above building wil l house commercial/concession areas, residential
including health faci l it ies etc.
The building itself wil l act l ike an exhibit, as it wil l be based on latest
technology of construction. The building wil l be of framed structure,
Structural glazing, external cladding using composite aluminum
sections wil l also be applied. Beside these finishes for internal as well
as external wil l be of the best type prevail ing in the industry referring
to Class- a specifications..
THE OBJECTIVE FOR THIS COMPLEX:
To uti l ize the space provided by Charitable trust for a social &
noble cause.
To provide a better place for senior cit izens.
To make the society aware about the responsil ity towards our
elders.
Page 2 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Facil it ies to be provided:
Sr.
No
Public Conveniences &
Facil it ies Provided in the
planning of the Building
Particular / Description
CHARITABLE TRUSTS
SHARE
1. Parking faci l ity Enough accommodation For Four
Wheelers and Two Wheelers.
2. Security & Announcement
Booth
Will be provided
3. Landscaping For providing natural green
environment to the area
4. Lighting Arrangement For providing necessary Yard and
i l lumination, Luminax per Sq. Ft. wil l be
160
5 Public Toilets For providing basic public conveniences,
6 Fire Fighting System A well equipped fire f ighting system
7. Cafeteria A state of art canteen for senior cit izen
to be provided
8. Health faci l it ies As a faci l ity for the senior cit izens
having general and al l required health
faci l it ies
9. Elevators. 2 Nos. of elevators for Senior cit izens
convenience.
TYPICAL DETAILS THE BUILDING:
Structure: RCC Column frame structure.
Page 3 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Specification: using state of art modern technology to conferring to
class-A specification.
PROJECT IMPLEMENTATION SCHEDULE:
A REASONABLE project implementation schedule is as stated below:
Sl.
No.
OUTPUT No. of days form
start date
1. Approval of concept 0
2. Site Survey To be done
3. Preliminary Drawing, Design and
Cost Estimates
To be done
4. Preparation of detailed
drawings and estimates
21
5. Tender Notice for Construction
Contracts
25
6. Award of Contract 45
7. Commencement of
Construction
90
8. Completion of Construction 365
9. Completion of Project 455
Page 4 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
EXECUTIVE SUMMARY
Page 5 of 19
S
Project Estimate Unit Qty Rate Amount In
Crs.
Remarks
A Civil Works
-Construction of Main Building Sq mts 16000 5000 8 Trust +
developers
share
B Services & Utilities 0
- Fire Fighting L/s 1 2500000 0.25
- Elevator Nos 4 1700000 0.68
- Electrification L/s 1 0.3 0.3
- Plumbing L/s 0.2 0.2
C Interiors
- Finishing Items Sq mts 1000 1000 0.1
- Furniture L/s 500000 0.05
- Miscellaneous Items L/s 5000000 0.5
F External Site Development L/s 5000000 0.5
TOTAL TOTAL 10.58
Total construction cost /sq. Mt
( not taking into a/c cost trust share
of bldg)
105800000
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Calculations
Total land area with developer Sq. Mts 5,000.00
Total built up area on G.F Sq. Mts 4,000.00
Common area on G.F including
foyers ,staircases etc Sq. Mts 750.00
Total built up area on F.F Sq. Mts 4,000.00
Common area on F.F including
foyers ,staircases etc Sq. Mts 750.00
Net area for sale Sq. Mts 6,500.00
Price of land in Pune Sq. Mts 10,000.00
Cost of total land 50,000,000.00
Undiveded share of land /Sqmt. Of net
area for sale 50,000,000.00
Sq. Mts 7,692.31
Add for Interest for on year on 60 lacs 900,000.00
Intersest per Sq. Mt for net are of sale 138.46
total cost of land + cost of const + interest
/Sq. mt Sq. Mts 24,107.69
Total Selling price /Sq. Mt. Sq. Mts 24,246.15
Total amount from selling of commercial
property 78,800,000.00
Selling price of commercial space on G.F Sq. Mts 24,246.15
Total selling amount for G.F 78,800,000.00
Selling price of commercial space on F.F @
60% of the G.F rate Sq. Mts 14,547.69
Total selling amount for F.F 47,280,000.00
Page 6 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Total revenue from sales 126,080,000.00
Total expenditure for Developer
Total construction cost /sq. Mt ( not taking
into a/c cost trust share of bldg) 105,800,000.00
Add for Interest for on year on 60 lacs 900,000.00
Total expenditure 106,700,000.00
Total Revenue from sales 126,080,000.00
Net profit 19,380,000.00
Profit % age 18.16
Page 7 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Page 8 of 19
TERM LOAN INTEREST
AND REPAYMENT
SCHEDULE
Term loan : 50.00
Rate of Interest : 15%
Installment (Nos.) : 9
(Rs.Lakh)
Years Opening Quaterly
Instalment
No.
Principal Closing
Balance
(nterest)
Interest Total
Amount of
Instalment Balance Amount
1 Ist Year
50.00 1 6.00 44.00 1.88 7.88
44.00 2 6.00 38.00 1.65 7.65
38.00 3 6.00 32.00 1.43 7.43
32.00 4 6.00 26.00 1.20 7.20
2 2 Year 24.00 6.15 30.15
26.00 5 6.00 20.00 0.98 6.98
20.00 6 6.00 14.00 0.75 6.75
14.00 7 6.00 8.00 0.53 6.53
8.00 8 6.00 2.00 0.30 6.30
3 3rd year
2.00 9 2.00 0.00 0.08 2.08
2.63 28.63
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Sufficiency of –Design: The responsible person has to check & satisfied himself
before regarding correctness and sufficiency of the design for the works. prices shall,
except as otherwise provided, cover all its obligations under the contract and all
matters and things necessary for the proper completion and maintenance of the
works. The design in itself should be complete and should cover all the points
required in a finished building.
3 Financial and economics evaluation:
L.1 Introduction and Scope
A project involves the current outlay (or current and future outlays) of
funds with the expectation of getting future benefits. While capital
expenditure decisions are extremely important, they also pose
diff iculties. Capital expenditure decisions involve substantial
investment. Due to the inherent uncertainty, future predictions
become diff icult. It is diff icult to identify and measure the costs and
benefits of a capital expenditure since they are spread out over a long
period of t ime, usually 10 to 20 years for industrial projects and 20 to
50 years for infrastructure projects. Capital expenditure decisions are
irreversible; a wrong capital investment decision often cannot be
reversed without incurring a substantial loss. Capital loss increases
with advances in technology. Capital investment decisions have an
enormous bearing on the future of an organization. Capital budgetary
proposals, therefore, demand a conscious approach in the early stages
of the project formulation.
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Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Capital budgeting is the process of analysing the financial benefits of
acquiring a capital asset with a view to determine the viabil ity of the
project. It is a complex process, as it takes into consideration
depreciation, taxes and cash flow. This appendix outl ines the
methodology of the project budgeting. The capital budgeting process
involves the following steps:
a) Estimate the cash flow.
b) Establish the cost of capital.
c) Apply the investment appraisal criterion.
L.2 Estimating Cash Flow
L.2.1 Cash Flow Components
These components in the product l ifecycle costing can be divided into
an initial investment, operating cash flows and a terminal cash flow.
Initial investment. It represents the relevant cash outflow or
the cost of setting up the project.
Init ial investment = Cost of capital assets + Installation costs +
Working capital margin +Preliminary and pre-operative expenses –
Tax benefit on capital assets, where applicable.
Operating Cash Flows. These are the relevant cash inflows and
outflows resulting from the operation of the project during its
economic l ife.
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Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Operating cash inflow in a given year= Profit after tax +
Depreciation + Other non-cash charges + Interest on long-term debt
– Tax rebate
Terminal Cash Inflow. It is the relevant cash inflow occurring at
the end of the product l ifecycle on account of project
l iquidation.
Terminal cash inflow = Post -tax proceeds from the sale of capital
assets + Net recovery of working capital margin + tax adjustment,
where applicable.
L.2.2 Time Period Considered for Analysis. It is the minimum of the
following:
Physical l i fe of the project or plant. It refers to the number of
years the project or plant would perform the function for which
it has been acquired.
Technological l i fe of the project or plant. It refers to the period
after which the present project or plant would become
obsolete.
Product market l ife. It refers to the period for which the
product of the project or plant enjoys a reasonably satisfactory
market.
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Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Investment planning horizon of the firm. It is the time period
which a f irm wishes to consider for the investment analysis. It
varies with the complexity and size of the investment. For small
investments (say, the installation of a pumping set), it may be
five years; for medium sized investments (say, purchasing a bull
dozer or install ing a readymix concrete plant), it may be ten
years, and for large–sized investments (say, setting up of a new
pre–cast concrete factory), it may be fifteen years.
L.3 Establishing the Cost of Capital
It involves determination of the present value of the cash flow
projections occurring at different points of t ime and making
adjustments for the time value of money.
L.4 Applying the Investment Appraisal Criterion
After the capital costs and cash flows are computed, the next step is
to analyse the financial worthiness of the investment proposal. There
are many methods for analysing investment proposals for making
financial decisions. The commonly-used decision criterion can be
divided into two broad categories, i .e., discounting criterion and non-
discounting criterion.
Discounting criterion. These are based on net present
value, internal rate of return techniques and cost-benefit
analysis.
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Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Non-discounting criterion. In this category, pay–back
period is the commonly-used technique.
Net Present Value (NPV). It is the total of al l the cash flows, out and
in, over the product / plant l ifecycle. The Net Present Value (NPV) is
calculated as fol lows:
NPV = PV of cash flows – Investment
Note.
1) The expected future net cash flows (Inflows – outflows) are
discounted at the cost of capital (r) to the base year (present time) to
obtain the present value (PV) of these flows. Therefore, it is assumed
that al l future proceeds can be invested by the organization at the
cost of capital.
2) The initial cost of the investment (1) is subtracted from the present
value (PV) to obtain the net present value (NPV) of the investment.
3) If the cost of the investment is spread over more than one year, the
future cost must also be discounted at the cost of capital to the base
year.
Page 13 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
4) Calculation of the Net Present Value (NPV) is accomplished using
the following formula:
t nn
t 1
NPV NCF /(1 r) Investment
31 2 n2 3 h
NCFNCF NCF NCFNPV= ............... Investment
(1+r) (1+r) (1+r) (1+r)
where NCF1, NCF2, NCF3, …… NCFn, are the net cash flows (NCF) for
the respective years, r is the cost of capital and n is the expected l ife
of the project.
An organization should accept projects with a positive NPV and reject
projects with a negative NPV.
Internal Rate of Return (IRR). It is the interest rate or discount rate,
which gives zero Net Present Value (NPV) of the investment over the
project/plant l ifecycle.
IRR ( r ) is calculated using the following formula:
31 2 n2 3 h
NCFNCF NCF NCF 50= + ........... Investment
(1+r) (1+r) (1+r) (1+r) 2
where all the terms have the same definitions as those used in the
NPV method.
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Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
IRR can be found using trial and error using PV tables. In the IRR
method, it is assumed that al l the future proceeds can be invested at
the IRR rate.
An organization can accept a project that exceeds its cost of capital
and reject those projects with IRR below its cost of capital. Projects
with higher IRR can be preferred over lower IRR projects.
CASH FLOW FORECAST STAT EMENT:
Table: Cash Flow Forecast
Rs. (In Lakhs)
Years 0 1
A. Building and
preliminaries
105
B. Plant and equipment
C. Working capital margin 10
D. Revenue 126.0
Page 15 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
E. Annual operating costs 105
F. Depreciation
G. Interest on short–term
bank
9.0
Borrowings
H. General administrative
cost
1.6
I. Total cost of sale
(E+F+G+ H)
115.6
J. Profit before tax (D-I) 10.4
K. Tax (Assessed) 0.0
L. Net profit after tax 10.4
M. Sale value of plant &
equipment
after four years
N.Net recovery working
capital
Margin
O. Initial investment
(A+B+C)
115
P. Operating cash inflows
(L+F)
10.4
Q. Terminal cash flow
(M+N)
Page 16 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
R. Net cash flow (O+P+Q) -115 10.4
Pay–back Period. It is the time (in years) that a project / plant takes
to pay back the initial cost of investment from the expected future net
cash flows resulting from the investment. In other words, it is the time
during which the cumulative cash inflows equal to the original cash
outflow. In this method, a cut -off number of years can also be used to
select or reject the investment proposal. Projects/Plants with shorter
payback periods is preferred to those with longer pay–back periods.
The pay–back period method does not take into consideration the time
value of money and as such, can lead to incorrect results. If the
expected future net cash flows can be discounted at the cost of capital
to the base year (present time), then the payback period ranking
conforms to the results obtained from NPV and IRR methods.
Benefit-Cost Ratio. It is the ratio of the present value of benefits to
the initial investment. In other words, it measures the NPV per rupee
of outlay.
Page 17 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
BCR = Present Value of benefits / Initial investment
I f BCR > 1, accept the proposal.
If BCR < 1, reject the proposal.
If BCR = 1, consider other factors for decision.
Summary of Decision Criterion
Factors Acceptance Criterion
Pay–back Period (PBP) < Target period
Net Present Value (NPV) > 0
Internal Rate of Return (IRR) > Cost of capital
Benefit-Cost ratio ( BCR ) > 1
Net Present Value of Cash Inflow on Investment
31 2 n2 3 h
NCFNCF NCF NCFNPV= + ........... Investment
(1+r) (1+r) (1+r) (1+r)
Internal Rate of Return (IRR)
The interest rate or discount rate, which gives zero IRR ( r ) is
calculated using the following formula:
31 2 n2 3 h
NCFNCF NCF NCF0= + ........... Investment
(1+r) (1+r) (1+r) (1+r)
By trial using statistical table, r = Y
Page 18 of 19
Assignment No. 4Sub: Construction Finance Management & Cost Accounting
Reg. No
Pay–back Period. It is the time (in years) that a project/plant takes to
pay back the initial cost of the investment from the expected future
net cash flows resulting from the investment.
Pay–back Period = First year + Second year + Third Year + X of Forth
year
= N years.
Benefit-Cost Ratio = Present Value of benefits / Init ial investment
Recommendations:
These are a rough schematic planning of the project. Detailed planning
can be done after preliminary design as well site survey and market
survey is done.
Reference:
NICMAR Course Material
Page 19 of 19