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.

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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.

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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.

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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

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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


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

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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

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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


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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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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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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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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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.

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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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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

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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)

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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.

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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

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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

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Documents

NCP 29-Construction Finance Management & Cost Accounting