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ASSIGNMENT NICMAR / CODE OFFICE

1. 2. 3. 4. Name Reg. No. Course No. Course Title & Cost Accounting 5. Assignment No. 4 (FOUR) NCP 29 Construction Finance Management -

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. Developer can invest only Rs Page 1 of 20

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 floors and

measuring an area of approximately 8000 Sq. mts is to be developed on a 10000 Sq. Mts. plot. Above building will house commercial/concession areas, residential including health facilities etc. The building itself will act like an exhibit, as it will be based on latest technology of construction. The building will be of framed structure, Structural glazing, external cladding using composite aluminum sections will also be applied. Beside these finishes for internal as well as external will be of the best type prevailing in the industry referring to Class- a specifications.. THE OBJECTIVE FOR THIS COMPLEX: To utilize the space provided by Charitable trust for a social & noble cause. To provide a better place for senior citizens. To make the society aware about the responsility towards our elders.

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Facilities to be provided: Sr. No Public & Conveniences Particular / Description Provided

Facilities

in the planning of the Building CHARITABLE 1. 2. 3. 4. TRUSTS Enough accommodation For Four Wheelers and Two Wheelers. & Will be provided For providing natural green

SHARE Parking facility Security

Announcement Booth Landscaping Lighting Arrangement

environment to the area For providing necessary Yard and illumination, Luminax per Sq. Ft. will be 160 For providing conveniences, A well equipped

5 6 7. 8.

Public Toilets Fire Fighting System Cafeteria Health facilities

basic fire

public fighting

system A state of art canteen for senior citizen to be provided As a facility for the required health facilities 2 Nos. of elevators for senior

citizens having general and all 9. Elevators. Senior

citizens 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. 1. 2. 3. 4. 5. 6. 7. 8. 9. OUTPUT No. of days form

start date Approval of concept 0 Site Survey To be done Preliminary Drawing, To be done Design and Cost Estimates Preparation of detailed 21 drawings and estimates Tender Notice for 25 Construction Contracts Award of Contract Commencement Construction Completion Construction Completion of Project 45 of 90 of 365 455

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EXECUTIVE SUMMARY Project Estimate S A Civil Works -Construction Building B Services & Utilities - Fire Fighting - Elevator - Electrification - Plumbing Interiors - Finishing Items - Furniture - Miscellaneous Items External Site Development TOTAL Total construction cost /sq. Mt ( not taking into a/c cost trust share of bldg) 0 25000000.25 17000000.68 0.3 0.3 0.2 0.2 1000 0.1 500000 0.05 50000000.5 50000000.5 TOTAL 10.58 10580000 0 Unit Qty Rate Amount In Crs. Remarks

of

MainSq mts 16000 5000

Trust share

developers

L/s Nos L/s L/s

1 4 1

Sq mts 1000 L/s L/s L/s

Calculations Total land area with developer Sq. Mts Total built up area on G.F Sq. Mts .00 .00

5,000 4,000

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Common area on G.F including foyers ,staircases etc Total built up area on F.F Common area on F.F including foyers ,staircases etc Net area for sale Price of land in Pune Sq. Mts Cost of total land 0.00 Undiveded share of land /Sqmt. Of net area for sale Sq. Mts Add for Interest for on year on 60 lacs Intersest per Sq. Mt for net are of sale total cost of land + cost of const + interest /Sq. mt Total Selling price /Sq. Mt. Total amount from selling of 0.00 Sq. Mts Sq. Mts commercial property Selling price of commercial space on G.F Total selling amount for G.F Selling price of commercial space on F.F @ 60% of the G.F rate Total selling amount for F.F Sq. Mts 7.69 Sq. Mts 6.15 0.00 0.00 0.00 Sq. Mts Sq. Mts .00 Sq. Mts Sq. Mts .00

750 4,000 .00 750 6,500 .00 10,00 50,000,00 50,000,00 7,692 .31 900,00 138 .46 24,10 7.69 24,24 6.15 78,800,00

24,24 78,800,00 0.00 14,54 47,280,00 Page 6 of 20

0.00 Total revenue from sales 0.00 Total expenditure for Developer Total construction cost /sq. Mt ( not taking into a/c cost trust share of bldg) Add for Interest for on year on 60 lacs Total expenditure Total Revenue from sales 0.00 Net profit 0.00 Profit % age .16 18 19,380,00 0.00 900,00 0.00 106,700,00 0.00 126,080,00 105,800,00 126,080,00

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TERM LOAN INTEREST AND REPAYMENT SCHEDULE Term loan Rate of Interest Installment (Nos.) Years : : : Opening Quaterly Instalment 1 Balance No. Ist Year 50.00 1 44.00 2 38.00 3 32.00 4 2 Year 26.00 5 20.00 6 14.00 7 8.00 8 3rd year 2.00 9 Amount 6.00 6.00 6.00 6.00 24.00 6.00 6.00 6.00 6.00 2.00 50.00 15% 9 (Rs.Lakh) Principal Closing Interest Total Balance (nterest) 44.00 38.00 32.00 26.00 20.00 14.00 8.00 2.00 0.00 1.88 1.65 1.43 1.20 6.15 0.98 0.75 0.53 0.30 0.08 2.63 Amount of Instalment 7.88 7.65 7.43 7.20 30.15 6.98 6.75 6.53 6.30 2.08 28.63

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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 difficulties. Capital expenditure decisions involve substantial investment. Due to the inherent uncertainty, future predictions become difficult. It is difficult to identify and measure the costs and benefits of a capital expenditure since they are spread out over a long period of time, 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. Page 9 of 20

Capital budgeting is the process of analysing the financial benefits of acquiring a capital asset with a view to determine the viability of the project. It is a complex process, as it takes into consideration depreciation, taxes and cash flow. This appendix outlines the methodology of the project budgeting. The capital budgeting process involves the following steps: a) b) c) Estimate the cash flow. Establish the cost of capital. Apply the investment appraisal criterion.

L.2

Estimating Cash Flow

L.2.1 Cash Flow Components These components in the product lifecycle 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. Initial investment = Cost of capital assets + Installation costs + Working capital margin +Preliminary and preoperative expenses Tax benefit on capital assets, where applicable.

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Operating Cash Flows. These are the relevant cash inflows and outflows resulting from the operation of the project during its economic life. 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 lifecycle on account of project liquidation. 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. minimum of the following: Physical life of the project or plant. It refers to the It is the

number of years the project or plant would perform the function for which it has been acquired. Technological life of the project or plant. the period after which the present would become obsolete. It refers to

project or plant

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Product market life. the product of

It refers to the period for which project or plant enjoys a

the

reasonably satisfactory market. Investment planning horizon of the firm. It is the

time period which a firm 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 installing a readymix concrete plant), it may be ten years, and for largesized investments (say, setting up of a new precast 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 time 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 analysing proposal. investment There are many for methods for proposals making financial

decisions. The commonly-used decision criterion can be Page 12 of 20

divided

into

two

broad

categories,

i.e.,

discounting

criterion and non-discounting criterion. Discounting criterion. These are based on and cost-benefit analysis. Non-discounting criterion. In this category, pay back period is the commonly-used technique. net

present value, internal rate of return techniques

Net Present Value (NPV).

It is the total of all the cash

flows, out and in, over the product / plant lifecycle. The Net Present Value (NPV) is calculated as follows:

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 all future proceeds can be invested by the organization at the cost of capital.

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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. 4) Calculation of the Net Present Value (NPV) is

accomplished using the following formula:


t =n

NPV = NCF /(1 + r) n Investment


t =1

NPV=

NCF1 NCF2 NCF3 NCFn + + + ............... Investment 2 3 (1+r) (1+r) (1+r) (1+r) h
NCFn, are the net cash

where NCF1, NCF2, NCF3,

flows (NCF) for the respective years, r is the cost of capital and n is the expected life 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 lifecycle. IRR ( r ) is calculated using the following formula: Page 14 of 20

0=

NCF1 NCF2 NCF3 NCFn 5 + + + ........... Investment 2 3 h (1+r) (1+r) (1+r) (1+r) 2

where all the terms have the same definitions as those used in the NPV method. IRR can be found using trial and error using PV tables. In the IRR method, it is assumed that all 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 STATEMENT: Table: Cash Flow Forecast Rs. (In Lakhs) Years 0 A. Building and 105 preliminaries

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B. Plant and equipment C. Working capital margin 10

D. Revenue E. Annual operating costs F. Depreciation G. Interest on short term bank Borrowings

126.0 105

9.0

H. General administrative cost I. Total cost of sale (E+F+G+ H) J. Profit before tax (DI) K. Tax (Assessed) L. Net profit after tax M. Sale value of plant & equipment after four years N.Net recovery working capital Margin O. Initial investment 115 (A+B+C)

1.6 115.6 10.4 0.0 10.4

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P. Operating cash inflows (L+F) Q. Terminal cash flow (M+N) R. Net cash flow (O+P+Q) -115

10.4

10.4

Payback 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 payback periods. The payback 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

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conforms methods.

to

the

results

obtained

from

NPV

and

IRR

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. BCR = Present Value of benefits / Initial

investment If 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 Payback Period (PBP) Net Present Value (NPV) Internal Rate of Return (IRR) Benefit-Cost ratio ( BCR ) < Target period > 0 > Cost of capital >1

Net Present Value of Cash Inflow on Investment NCF1 NCF2 NCF3 NCFn + + + ........... Investment 2 3 (1+r) (1+r) (1+r) (1+r) h

NPV=

Internal Rate of Return (IRR)

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The interest rate or discount rate, which gives zero IRR ( r ) is calculated using the following formula: NCF1 NCF2 NCF3 NCFn + + + ........... Investment 2 3 (1+r) (1+r) (1+r) (1+r) h

0=

By trial using statistical table, r = Y

Payback investment

Period. from the

It

is

the

time

(in

years) net cash

that

project/plant takes to pay back the initial cost of the expected future flows resulting from the investment. Payback Period = First year + Second year + Third Year + X of Forth year = N years. Benefit-Cost Ratio = Present Value of benefits / Initial 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.

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Reference: NICMAR Course Material

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