Construction Management

Financial Management
Basic Definitions
Business Taxes
Capital Gains
Financial Statements

Depreciation
Depletion
Time Value of Money

Income Statement
Balance Sheet
Statement of Cash Flow

Future Value
Present Value

Net Present Value (NPV)

Internal Rate of Return (IRR)

Financial Management
Definitions

Finance
Art and Science of Managing the Money

Sole Proprietorship
A business owned by one person and
operated for his/her own profit

Articles of Partnership (AOP)

The written contract used to formally
establish a business partnership

Financial Management

Private Limited Company

Business owned by the set of members called as Board of

Directors. The company has to register from security
exchange commission and registrar of companies.
Accounts of company are audited by Charted Accountant
No Shares are floated in the Market

Public Limited Company

A business owned by Set of members and investment

made by the general public as well in form of shares in
the financial and stock markets.

State Owned Companies

Owned by the Government or State

NESPAK, NLC, NTC, etc.

Financial Management

Stockholders
The owners of a corporation (Public limited Co.)
Having companies shares, Common Stock or
Preferred Stocks

Stakeholders
Group Such as employees, customers, suppliers,
creditors, owners, and others who have a direct
economic link to the firm.

Risk
The chance that actual outcomes may differ from
those expected.

Financial Management
Business Taxes

Business Taxes
Taxes are a fact of life, and businesses, like
individuals must pay taxes on income
Income Tax
Corporate Tax
Wealth Tax
Sales Tax
Withholding Tax
Capital Gain Tax

Ordinary Income & Capital Gain

Income earned through the sales of a firms goods
and services is ordinary Income While amount by
which the sale price of an asset exceeds the assets
initial purchase price is capital gain.

Examples
Income Tax

Yearly Income
Less Income Tax @ 5% is
400,000 * 5%
After- Tax Income

= Rs. 400,000/= Rs. (20,000/-)

=Rs. 380,000/-

Sales Tax

Unit Price of Computer

Add Sales Tax @ 16%
40,000 * 16%
Net Price Including GST

= Rs. 40,000/= Rs. 6,400/=Rs. 46,400/-

Financial Statements

Income Statement
Provides a financial summary of the firms operating
results during a specified period. Like end of month,
30th June, 31 December etc.

Balance Sheet
Summary Statement of the firms financial position at
a given point in time

Statement of Cash Flows

Provides the summary of the firms operating,
investment, and financing cash flows during the
specified period.

Financial Statements

Current Assets
Short Term Assets, expected to be
converted in to cash within 1 year or less

Current Liabilities
Short Term liabilities, expected to be paid
within 1 year or less

Long Term Debts

Debts for which payment is not due in the
current year

Depreciation

Depreciation
The systematic charging of a portion of the costs of
fixed assets against annual revenues over time.

MACRS (Modified accelerated cost recovery

system)
System used to determine the depreciation of assets
for tax purposes

Depreciable Life
The period over which an asset is depreciated

Depreciation

Table (First Four Classes Under MACRS)

Property Class
(Recovery Period)

Definition

3 Years Research Equipment and certain special tools

5 Years Computers, typewriters, copiers, duplicating
equipments,
cars, light duty trucks, tech equipment,
and similar
7 Years Office furniture, fixtures, most manufacturing equipments,
railroad trucks, single purpose
agricultural & horticultural
structure
10 Years
Equipment used in petroleum refining or in tobacco
products and certain food products

Depreciation

Table (Rounded Depreciation Percentages by

Recovery Year Using MACRS First Four Classes)
Recovery
Year

3 Years

5 Years

7 Years

10 Years

33 %

20 %

14 %

10 %

45

32

25

18

15

19

18

14

12

12

12

12

10

11

Total

100%

100 %

100%

100%

Depreciation
Example

Company Acquired a machine cost 38,000 and 2,000 were

paid for the installation cost. Machine having a recovery
period of 5 years. Calculate depreciation in each year

Year

Cost

% Age

40,00
0
40,00
0
40,00
0
40,00
0

20 %

Depreciatio
n
8,000

32

12,800

19

7,600

12

4,800

2
3
4

Numeric Models For Project

Selection
A)

Profitability Models
1. Payback period

Payback period = initial fixed investment/ estimated net cash

inflow
Project Cost = 10,000,00
Annual net cash inflow =2,50,000
Pay back period = ?

2. Average Rate of Return

Avg.Rate of Return = Avg. Annual Profits / initial
or
average investment
If Average Annual profits
= 15,000
Initial Investment is
= 100,000
Average Rate of Return
=?

3. Discounted cash flow

Time value of money
Future Value
Present value
Compounding
Discounting

Time Value of Money

Time value of money is one of the most
important concept in finance. Money that the
firm has in its possession today is more
valuable than future payments because it can
be invested and can earn positive returns.
Compound Interest

Interest that is earned on a given deposit and has

become part of the principal at the end of a specified
period.

Principal

The amount of money on which interest is paid

Future Value

The value of the present amount at a future

date, found by compounding interest over a
specified period of time
Example
Account 100 in saving paying 8 % interest
compounded annually
F V at the end of 1st Year = 100+ (8/100)* 100
=108
F V at the end of 2nd Year = 108 + (8/100) *100 = 116.64
F V at the end of 3rd Year = 116.64 + (8/100) * 100
=
125.97

Future Value/
Compounding

Eqn. for F V of Money

F Vn = P V (1+ i ) n or P V * FV I F i,n

Example
P V = Rs. 800
i =6%
F V end of 5 years
F V 5 = 800 (1+ 0.06)5
= Rs. 1070.40

Present Value/Discounting

The current value of the future amount

Discounting cash flow = the process of finding the
present values

P V Eqn.
P V= F Vn * 1/(1+i)n or P V = F V n * P V I F i,n

Example
F V8 = Rs. 1700
i= 8 % (discounting rate, opportunity cost)
PV= 1700/(1+0.08)8
= Rs. 918.45

Annuity

A stream of equal periodic cash flows, over a

specified period of time. These cash flows can
be inflows of returns earned on investment or
out flows of funds invested to earn future
returns

Ordinary Annuity

An annuity for which the cash flows occur

at the end of each period

Annuity Due

An annuity for which the cash flow occurs

at the beginning of each period

Future Value/ Compounding

for Annuity

Eqn. for F V of Money

P V * FV I F i,n

Example
P V = Rs. 1000
i =5%
F V end of 7 years
5.751) from Table
F V 5 = 1000* 5.571
= Rs. 5,751

(FV I F 5,7=

Present Value/Discounting for

Annuity
P V Eqn.
P V = F V n * P V I F i,n

Example
F V8 = Rs. 700

(P V I F 8,5 =3.993) from table

i= 8 % (discounting rate, opportunity cost)

N= 5 Years
PV= 700*3.993
= Rs. 2794.90

Future Value/ Compounding for

Mixed Stream

Mixed Stream
A stream of unequal periodic cash
flows that reflect no particular
pattern

1
11,500

2
14,000

3
12,900

4
16,000

5
18,000

Future Value/ Compounding for

Mixed Stream
Year

Cash Flow

Number of
Years earning
Interest

FVIF 8%,n

Future Value

11,500

5-1=4

1.360

15,640

14,000

5-2=3

1.260

17,640

12,900

5-3=2

1.166

15,041.40

16,000

5-4=1

1.080

17,280

18,000

5-5=0

1.000

18,000

Total

83,601.40

Present Value for Mixed Stream

Year

Cash Flow

PVIF 9%,n

Future Value

400

0.917

366.80

800

0.842

673.60

500

0.772

386.00

400

0.708

283.20

300

0.650

195.00

Total

1904.60

Net Present Value

(NPV)

A sophisticated capital budgeting

technique found by subtracting projects
initial investment from the present value
of its cash inflows
NPV = present values of cash in flows

(Minus) - Initial Investment

If NPV is greater than 0 accept the project
If NPV is less than 0 reject the project

Example

Cost of Capital 10 %
Project A
1

0
42000

14000

14000

14000

4
14000

5
14000

PV = 53,071, NPV =11,071

Project B
0

28000
12000
45000
PV = 55,924 NPV =10,924

3
10000

4
10000

5
10000

IRR (Internal Rate of

Return)

The discount rate that equates the NPV of

investment opportunity with 0 zero
If IRR is greater than the cost of capital
accept the project otherwise reject

NPV = Sum FVn/(1+i)n initial Investment

IRR = putting NPV=0 = Sum FVn/ (1+i)n

(Thanks)