Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
ASSIGNMENT NICMAR / CODE OFFICE 1.
N a me
-
2.
Reg. No.
-
3.
Course No.
-
4.
Course Title
NCP 27 -
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 faci facili liti ties es for for seni senior or citi citize zens ns.. 50 5000 00 Sqm Sqm will will be give given n free 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.
Discus Discuss s the financ financial ial viabil viability ity of the projec projectt and the financ financial ial 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
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
10 lakhs as his own funds and can raise not more than Rs 50 lakhs as bank loan.
PROPOSED COMPLEX:
A
s t at a t e o f a rt rt
b ui ui ld l d in i n g c on o n si si st s t in in g o f M ul ul ti ti
f lo lo or or s a nd nd
measuring measuring an area of approximately approximately 8000 Sq. mts is to be developed on a 10000 Sq. Mts. plot. A b ov ov e b u i lld d i n g w i l l h o u se se c o mm m m e rc rc i a l/ l / c on o n c e ss s s i on o n a r ea ea s , residential including health facilities etc.
Th T h e b u i l d i n g i t s e l f w i l l a c t l i k e a n e x h i b i t , a s i t w i l l b e based on latest technology of construction. The building w i ll l l b e o f f r am a m e d s t ru r u c tu t u r e , S t ru r u c t ur ur a l g l a zi zi n g , e x te t e r na na l cladding using composite aluminum sections will also be a pp pp li li ed e d . B es es id i d e t he he se se
f in i n is is he h e s f or or
i nt n t er er na na l a s w el el l a s
external will be of the best type prevailing in the industry referring to Class- a specifications..
THE OBJECTIVE FOR THIS COMPLEX:
•
To T o u t i l i z e t h e s p a c e p r o v i d e d b y C h a r i t a b l e t r u s t f o r a social & noble cause.
•
To T o p r o v i d e a b e t t e r p l a c e f o r s e n i o r c i t i z e n s .
•
To T o m a k e t h e s o c i e t y a w a r e a b o u t t h e r e s p o n s i l i t y towards our elders.
Page 2 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
Facilities to be provided:
Sr.
P ub li c
No
&
C on ve n ie n ce s Particular / Description
F ac i li t ie s
P ro vi d ed
in the planning of the Building C HA RI TA BL E 1.
T RU ST S
SHARE P ar ki ng f ac il it y
E no ug h a cc om mo da ti on F or F ou r Wheelers and Two Wheelers. & Will be provided
2.
Security
3.
Announcement Booth Landscaping
For
Lig hting Arra nge ment
environment to the area For prov idi ng nec essa ry Yard and
4.
providing
natural
green
illumination, Luminax per Sq. Ft. 5 6 7. 8.
Public Toilets
will be 160 For providing
Fire Fighting System
conveniences, A well equipped
Caf ete ria
system A sta te of art can tee n f or se ni or
Health facilities
citizen to be provided As a facility for the
basic
public
fire
fighting
senior
c it iz en s h av in g g en er al a nd a ll 9.
Elevators.
required health facilities 2 Nos. of elevators for
Senior
citizens convenience. TYPICAL DETAILS THE BUILDING:
Structure: RCC Column frame structure.
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Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
S pe c if i ca ti o n:
u si n g s ta t e o f a r t m o d er n t e c hn ol og y t o
conferring to class-A specification.
PROJECT IMPLEMENTATION SCHEDULE:
A
R EA SO NA BL E
p ro je ct
i mp le me nt at io n
s ch ed ul e
is
as
stated below:
Sl.
OUTPUT
No. of days form
No. 1. 2. 3.
start date Approval of concept 0 Site Survey To be done Preliminary Drawing, To be done
4.
Design and Cost Estimates Preparation of detailed 21
5.
drawings and estimates Tender Notice for 25
6. 7.
Construction Contracts Award of Contract Commencement
45 of 90
8.
Construction Completion
of 365
9.
Construction Completion of Project
455
Page 4 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
EXECUTIVE SUMMARY Project Estimate
Unit
Qty
Rate
S A
Amount
Remarks
In Crs. Civil Works -Construction
of
MainSq mts 16000 5000
8
Trust
Building
+
developers share
B
C
F
Services & Utilities
0
- Fire Fighting
L/s
1
25000000.25
- Elevator
Nos
4
17000000.68
- Electrification
L/s
1
0.3
0.3
- Plumbing
L/s
0.2
0.2
- Finishing Items
Sq mts 1000
1000
0.1
- Furniture
L/s
500000 0.05
- Miscellaneous Items
L/s
50000000.5
External Site Development
L/s
5000000 0.5
Interiors
TOTAL
TOTAL
10.58
Total construction cost /sq.
10580000
Mt ( not taking into a/c cost
0
trust share of bldg)
Calculations Total land area with developer
5,000 Sq. Mts
.00
Total built up area on G.F
4,000 Sq. Mts
.00 Page 5 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
Common area on G.F including foyers ,staircases etc Total built up area on F.F
750 Sq. Mts
.00 4,000
Sq. Mts Common area on F.F including
.00
foyers ,staircases etc Net area for sale
.00
Sq. Mts
750 6,500
Sq. Mts
.00
Price of land in Pune
10,00 Sq. Mts
0.00
Cost of total land
50,000,00 0.00
Undiveded share of land /Sqmt. Of net area for sale
50,000,00 0.00 7,692
Sq. Mts
.31
Add for Interest for on year on 60
900,00
lacs Intersest per Sq. Mt for net are of
0.00
sale total cost of land + cost of const
.46
+ interest /Sq. mt Total Selling price /Sq. Mt. Total
amount
from
selling
Sq. Mts
138 24,10 7.69 24,24
Sq. Mts of
commercial property
6.15 78,800,00 0.00
Selling price of commercial space on G.F Total selling amount for G.F
24,24
Sq. Mts
6.15 78,800,00 0.00
Selling price of commercial space on F.F @ 60% of the G.F rate Total selling amount for F.F
14,54 Sq. Mts
7.69 47,280,00 Page 6 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
0.00 Total revenue from sales
126,080,00 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
105,800,00 0.00 900,00 0.00 106,700,00 0.00
Total Revenue from sales
126,080,00 0.00
Net profit
19,380,00 0.00
Profit % age
18 .16
Page 7 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
TERM LOAN INTEREST AND REPAYMENT SCHEDULE Term loan Rate of Interest Installment (Nos.) Years
: : : Opening Quaterly
50.00 15% 9 (Rs.Lakh) P ri nc ip al C lo si ng I n t er e s t T o ta l
Instalment 1
2
3
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
Balance
Amount of
Amount
(nterest)
Instalment
6.00 6.00 6.00 6.00 24.00 6.00 6.00 6.00 6.00
44.00 38.00 32.00 26.00
2.00
0.00
20.00 14.00 8.00 2.00
1.88 1.65 1.43 1.20 6.15 0.98 0.75 0.53 0.30
7.88 7.65 7.43 7.20 30.15 6.98 6.75 6.53 6.30
0.08 2.63
2.08 28.63
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Assignment No. 4 Sub: 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 o ut la y s) o f f u nd s w it h t h e e x pe c ta t io n o f g et t in g f ut ur e benefits.
While
capital
expenditure
decisions
are
e x t re m e ly i m po r ta n t , t h e y a l s o p o se d i f fi c u lt i e s. C a p it a l expenditure decisions involve substantial investment. Due t o t h e i n he re n t u n ce rt a in ty , f ut u re p re d ic t io ns b e co me difficult. It is difficult to identify and measure the costs and benefits of a capital expenditure since they are spread o u t o v e r a l o ng p e ri o d o f t i me , u s u a l ly 1 0 t o 2 0 y e a r s f o r i n du s t ri a l p r oj e c ts a n d 2 0 t o 5 0 y e a rs f o r i n f ra s t ru c t ur e projects. Capital expenditure decisions are irreversible; a wrong
ca pi tal
in ves tme nt
de cis ion
ofte n
ca nnot
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 o rg a ni z at i on .
C ap i ta l
b u d ge ta ry
p ro po sa l s,
t h er e fo re ,
demand a conscious approach in the early stages of the project formulation. Page 9 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
Capital budgeting is the process of analysing the financial ben efi ts
of
ac quiri ng
a
ca pita l
asse t
wi th
a
vie w
to
d et er mi ne t he v ia bi li ty o f t he p ro je ct . I t i s a c om pl ex process, as it takes into consideration depreciation, taxes and cash flow. This appendix outlines the methodology of t he
p ro je ct
b ud ge ti ng .
T he
c ap it al
b ud ge ti ng
p ro ce ss
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 lifecycle costing can be divided into an initial investment, operating cash flows and a terminal cash flow.
•
Initial investment. I t r e p r e s e n t s t h e r e l e v a n t c a s h 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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Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
•
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 oc cu rr in g a t t he
e nd
o f t he
p ro du ct
l if ec yc le
on
account of project liquidation.
Terminal cash inflow = Post -tax proceeds from the sale o f c a p it a l a s se t s
+
N e t r e c ov e ry o f w o rk i n g c a p it a l
margin + tax adjustment, where applicable.
L . 2 .2 T i m e P e ri o d C o ns i d er e d f or A n a l ys i s .
It is the
minimum of the following:
•
Physical life 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 life of the project or plant. the period after which the present
It refers to
project or plant
would become obsolete.
Page 11 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
•
Product market life. the
product
of
It refers to the period for which
the
project
or
plant
enjoys
a
reasonably satisfactory market.
•
I nv e st me n t p la nn i ng h o r iz on o f t h e f ir m.
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,
t he i ns ta ll at io n o f a p um pi ng s et ), i t ma y b e f iv e years; for medium sized investments (say, purchasing a bull dozer or installing 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 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 n ex t s te p i s t o a na ly se t he f in an ci al w or th in es s o f t he inv estmen t a na ly si ng
proposa l. i nv es tme nt
There
a re
p ro po sa ls
many f or
me thods
ma ki ng
f or
f in an ci al
d e c is i o ns . T h e c o mm o nl y - us e d d e c is i o n c r it e r io n c a n b e Page 12 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
d iv id ed
i nt o
t wo
b ro ad
c at eg ori es ,
i .e .,
d is cou nt in g
criterion and non-discounting criterion.
•
D i sc o u nt i n g cr i t er i on . T h es e a r e ba s ed o n
net
present value, internal rate of return techniques and cost-benefit analysis.
•
Non-discounting criterion. In this category, pay– back period is the commonly-used technique.
N et P r e se nt V a l ue ( N PV ).
I t i s t h e t ot a l o f a ll t h e c a sh
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.
Page 13 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
2) The initial cost of the investment (1) is subtracted from t he p re se n t v al ue ( PV ) t o o bt ai n t he n e t p re s en t v al u e (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
NCF1 NPV= (1+r)
+
NCF2 (1+r)
2
+
NCF3 (1+r)
3
+
...............
w h er e N C F1 , N C F2 , N C F3 , … …
NCFn (1+r)
h
−
Investment
N C Fn , a r e t h e n e t c a s h
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). I t i s t h e i n t e r e s t r a t e o r 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
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
0=
NCF1
+
NCF2 NCF3
(1+r) (1+r)
2
+
(1+r)
3
+ ...........
NCFn (1+r)
h
−
5 2
Investment
w he re a l l t he t er ms h av e t he s am e d e fi n it i on s a s t ho se 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
1
preliminaries
Page 15 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
B. Plant and equipment C. Working capital
10
margin
D. Revenue E. Annual operating
126.0 105
costs F. Depreciation G. Interest on short–
9.0
term bank Borrowings
H. General
1.6
administrative cost I. Total cost of sale
115.6
(E+F+G+ H) J. Profit before tax (D-
10.4
I) K. Tax (Assessed) L. Net profit after tax
0.0 10.4
M. Sale value of plant & equipment after four years N.Net recovery working capital Margin O. Initial investment 115 (A+B+C)
Page 16 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
P. Operating cash
10.4
inflows (L+F) Q. Terminal cash flow (M+N) R. Net cash flow
-115
10.4
(O+P+Q)
Pay–back Period.
It is the time (in years) that a project /
plant takes to pay back the initial cost of investment from t he e xp ec te d f ut ur e n et c as h f lo ws r es ul ti ng f ro m t he 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 w it h s ho rt e r p a yb a ck p e ri od s i s p re f er re d t o t ho se w it h 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 y ea r ( pr es en t t im e) , t he n t he
p ay ba ck
p er io d r an ki ng Page 17 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
conforms
to
the
re sul ts
obta ine d
from
NPV
a nd
IRR
methods.
Benefit-Cost Ratio. It is the ratio of the present value of b en ef it s
to
t he
i ni ti al
i nv es tme nt .
In
ot he r
w ord s,
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
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
NCF1 NPV= (1+r)
+
NCF2 (1+r) 2
+
NCF3 (1+r) 3
+ ...........
NCFn (1+r) h
−
Investment
Internal Rate of Return (IRR)
Page 18 of 20
Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
The interest rate or discount rate, which gives zero IRR ( r ) is calculated using the following formula:
0=
NCF1 (1+r)
+
NCF2 (1+r)2
+
NCF3
+ ...........
(1+r)3
NCFn (1+r)h
−
Investment
By trial using statistical table, r = Y
P a y– b a ck
P e r io d .
It
is
the
time
(in
years)
that
a
p ro je ct /p la nt t ak es t o p ay b ac k t he i ni ti al c os t o f t he i nv es tme nt
f ro m
t he
e xp ec te d
f ut ure
n et
c as h
f lo ws
resulting from the investment. Pay–back Period = First year + Second year + Third Year + X of Forth year = N years.
B en e fi t -C os t R at i o = P re s en t V al u e o f b en e fi t s / I ni t ia l investment
Recommendations: These are a rough schema tic planning of the project. D e ta i l ed p l a nn i ng c a n b e d o ne a f t er p r e li m in a ry design as well site survey and market survey is done.
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Assignment No. 4 Sub: Construction Finance Management & Cost Accounting Reg. No
Reference:
NICMAR Course Material
Page 20 of 20
