ASSIGNMENT CONSTRUCTION FINANCE MANAGEMENT

SUBJECT CODE: PGPM 12

SUBMITTED BY SUNIL SHETTIGAR Reg. No.212-12-31-11194-2142

Project Scope: An offer has been given by a Charitable Trust to develop and build a facility on a 11,000 sq.m of plot in a prime locality of Pune where 5,000 sq.m of area will be used by the trust for housing, health facilities for senior citizens. 5,000 sq.m. will be given free to the developers as a cost of development Cost of Land is Rs. 11,000/- sq.m. Flooring specifications for flooring: 11% Granite, 40% Kota stone, 50% Mosaic cement tiles. Developers would like to have minimum 18% net profit on their investment. Developer can invest only Rs. 11 lakhs as his own funds and can raise not more than Rs. 50 lakhs as bank loan.

Technical Studies:

The technical study is to determine the needs for material and human means necessary to achieve the objectives. These take account of the market (availability of raw material, there is a demand, customer requirement), regulatory and standards-related product and also the financial (amount to invest and returns expected) The study focuses on two general areas: study of supply and the study of transformation. To carry out critical analysis of technical feasibility, there must be enough knowledge of technical, economic and regulatory environment . Cost of Construction: The cost of construction includes both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components. The capital cost for a construction project includes the expenses related to the initial

establishment of the facility:

Land acquisition, including assembly, holding and improvement:

Planning and feasibility studies Architectural and engineering design Construction, including materials, equipment and labor Field supervision of construction Construction financing Insurance and taxes during construction Equipment and furnishings not included in construction Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:

Land rent, if applicable Operating staff Labor and material for maintenance and repairs Periodic renovations Insurance and taxes Financing costs

Utilities:

The magnitude of each of these cost components depends on the nature, size and location of the project as well as management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives. It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.

Particulars Cost of Superstructure Cost of Brick work, Plaster etc Cost of Electric work Cost of Plumbing Cost of Finishing Cost of Granite Flooring Cost of Kota Flooring Cost of Mosaic Flooring Total Cost

Rs./Sq. Ft. 450 90

Amount 24219000 4843800

118 90 54 130 40 40

5812560 484380 2906280 6996600 2152800 2152800 53927640

Work Schedule represents the necessary framework to permit scheduling of construction activities, along with estimating the resources required by the individual work tasks and any necessary precedence or required sequence among the tasks. The terms work "tasks" or "activities" are often used interchangeably in construction plans to refer to specific, defined items of work. The scheduling problem is to determine an appropriate set of activity start time, resource allocations and completion times that will result in completion of the project in a timely and efficient fashion. Construction planning is the necessary fore-runner to scheduling. In this planning, defining work tasks, technology and construction method is typically done either simultaneously or in a series of iterations. The definition of individual work tasks, this definition phase can also be expensive and time consuming. Fortunately, many tasks may be repeated indifferent parts of the facility or past facility construction plans can be used as general models for new projects. For example, the tasks involved in the construction of a building floor may be repeated with only minor differences for each of the floors in the building.

Sl No 1 2

Activity Contract Finalization Document Review, finalization and GFC

Duration 20 Days 30 Days

Start 01-May -2013 21-May-2013

Finish 20-May-2013 20-June-2013

3 4

Excavation and Mobilization Structure Footing, Columns and Carpentry

15 Days 30 Days

21-June-2013 06-July-2013

05-July-2013 06-Aug-2013

5 6 7 8 9

Slab Casting Plumbing and Drainage Electrical Works Specialty Services Exterior and Interior Finishes / Fire Closure Work

20 Days 15 Days 20 Days 27 Days 30 Days

07-Aug-2013 28-Aug-2013 28-Aug-2013 13-Sep-2013 04-Oct-2013

27-Aug-2013 12-Sep-2013 12-Sep-2013 03-Oct-2013 31-Oct-2013

10 11

Floor/Wall/Ceiling Finish Glazing/ Services Final Fix/ Fit Outs

31 Days 30 Days

1-Nov-2013 1-Dec-2013

30-Nov-2013 31-Dec-2013

12 13 14

Landscaping and Exterior Deep Cleaning Handover

30 Days 10 Days 1 Day

1-Jan-2014 31-Jan-2014 10-Feb-2014

30-Jan-2014 09-Feb-2014

Financial and Economic Evaluation Capital

Business requires capital. The term capital is used differently in different contexts. It is used in the sense of means of production, usually the assets held by the firm. It is also used in the sense of finance obtained by a firm. In accounting, capital is used in the second sense. A part of the finance obtained by a firm is in the form of interest free credit, such as credit allowed by suppliers of materials or services and advance payment received by customers. The interest free credit is settled in the normal operating cycle of the business and is not included in the capital.

Revenue
Revenue is the income that arises from exchange transactions with customers in the course of ordinary activities of an enterprise. An entitys revenue earning activities include selling of goods, rendering of services, and allowing others to use entitys resources yielding interest, royalties and dividends. Revenue increases the equity of the enterprise. As a general principle, an enterprise recognizes revenue when it receives cash, receivables or other consideration in its own account. For example, in an agency relationship, the agent recognizes the commission as revenue.

Finance Resource Mobilization

Resource mobilization can facilitate the flow of resources from various sources and catalyze the flow of additional resources from official and private institutions. For projects and programs that are too large to be handled by one funding agency, mobilizing co-financing from various funding sources can help meet these large resource requirements. Resources can be in any form such as finances, technology, manpower both skilled and labor, knowledge, information, etc

Financial accounting

Financial accounting consists of recording, classifying and analyzing the business transactions so as to facilitate the preparation of Profit and loss account for a period and also the position statement (i.e. Balance Sheet) as on a particular day. Thus, the emphasis of financial accounting is on the ascertainment of profit and loss of the concern and

not on the more important aspects of the business i.e. planning, control and decision-making.

Cost accounting
Cost accounting analyses the transactions in an objective manner for the purposes of planning, control and decision making. Cost accountancy is the application of costing and Cost accounting principle, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. Cost accounting is also defined as the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units.

Management accounting
Management accounting is another aspect of accounting which has developed in recent years and is being employed in many concerns as an informative mechanism to aid the management in decision making by providing various information they need for the purpose. Both cost and management accounting working together can keep the management well informed about what is going on in the business and what changes, if any, is required to be given effect to.

Capital budgeting
Or investment appraisal is the planning process used to determine whether a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. Many formal methods are used in capital budgeting, including the techniques such as Accounting rate of return, Net present value, Profitability index, Internal rate of return, Modified internal rate of return, Equivalent annuity etc. These methods use the incremental cash flows from each potential investment, or project Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.

Cash flow forecasting

In a corporate finance sense, the modeling of a company or assets future financial liquidity over a specific timeframe. Cash usually refers to the companys total bank balances, but often what is forecast is treasury position which is cash plus short-term investments minus short-term debt. Cash flow is the change in cash or treasury position from one period to the next; in the context of the entrepreneur or manager, forecasting what cash will come into the business or business unit in order to ensure that outgoing can be managed to as to avoid them exceeding cash flow coming in. If there is one thing entrepreneurs learn fast, it is to become very good at cash flow forecasting.

Proposed Project Financing

Capital structure-refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. The proposed capital structure for the project is as below:

Capital Structure

Assets Equity Debt

50,000,000.00 1,000,000.00 4,000,000.00

The debt raised by the promoter is Rs 40 lakhs. The total debt would not be taken all at once rather it would be disbursed in 4 equal quarterly installments. These debts will carry a fixed interest expense as follows:

Month

Amount (Rs.)

Int. Payable Interest (Monthly) payable (Quarterly)

Closing Loan Balance 1000000 1000000

Apl-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-13 Feb-13 Mar-13

1000000

10000 10000 10000 30000

1000000 2000000 2000000

1000000

20000 20000 20000 60000

2000000 3000000 3000000

1000000

30000 30000 30000 90000

3000000 4000000 4000000

1000000

40000 40000 40000 120000

4000000

Loan disbursed in 4 equal quarterly installments

Assuming interest @ 12%p.a.

Profit Measures

A profit measure is defined as an indicator of the desirability of a project from the standpoint of a decision maker. A profit measure may or may not be used as the basis for project selection. Since various profit measures are used by decision makers for different purposes, the advantages and restrictions for using these profit measures should be fully understood. There are several profit measures that are commonly used by decision makers in both private corporations and public construction projects. Each of these measures is intended to been indicator of profit or net benefit for a project under consideration. Some of these measures indicate the size of the profit at a specific point in time; others give the rate of return per period when the capital is in use or when reinvestments of the early profits are also included. Some of the most frequently used profit measures are as follows:

1. Net Future Value and Net Present Value

When an organization makes an investment, the decision maker looks forward to the gain over a planning horizon, against what might be gained if the money were invested elsewhere. A minimum attractive rate of return (MARR) is adopted to reflect this opportunity cost of capital. The MARR is used for compounding the estimated cash flows to the end of the planning horizon, or for discounting the cash flow to the present. The profitability is measured by the net future value (NFV) which is the net return at the end of the planning horizon above what might have been gained by investing elsewhere at the MARR. The net present value (NPV) of the estimated cash flows over the planning horizon is the discounted value of the NFV to the present. A positive NPV for a project indicates the present value of the net gain corresponding to the project cash flows.

2. Internal Rate of Return

The internal rate of return (IRR) is defined as the discount rate which sets the net present value of a series of cash flows over the planning horizon equal to zero. It is used as a profit measure since it has been identified as the "marginal efficiency of capital" or the "rate of return over cost". The IRR

gives the return of an investment when the capital is in use as if the investment consists of a single outlay at the beginning and generates a stream of net benefits afterwards. However, the IRR does not take into consideration there investment opportunities related to the timing and intensity of the outlays and returns at the intermediate points over the planning horizon. For cash flows with two or more sign reversals of the cash flows in any period, there may exist multiple values of IRR; in such cases, the multiple values are subject to various interpretations.

3. Adjusted Internal Rate of Return

If the financing and reinvestment policies are incorporated into the evaluation of a project, an adjusted internal rate of return (AIRR) which reflects such policies may be a useful indicator of profitability under restricted circumstances. Because of the complexity of financing and reinvestment policies used by an organization over the life of a project, the AIRR seldom can reflect the reality of actual cash flows. However, it offers an approximate value of the yield on an investment for which two or more sign reversals in the cash flows would result in multiple values of IRR. The adjusted internal rate of return is usually calculated as the internal rate of

return on the project cash flow modified so that all costs are discounted to the present and all benefits are compounded to the end of the planning horizon.

4. Return on Investment
When an accountant reports income in each year of a multi-year project, the stream of cash flows must be broken up into annual rates of return for those years. The return on investment (ROI) as used by accountants usually means the accountant's rate of return for each year of the project duration based on the ratio of the income (revenue less depreciation) for each year and the un-depreciated asset value (investment) for that same year. Hence, the ROI is different from year to year, with a very low value at the early years and a high value in the later years of the project.

5. Payback Period

The payback period (PBP) refers to the length of time within which the benefits received from an investment can repay the costs incurred during the time in question while ignoring the remaining time periods in the planning horizon. Even the discounted payback period indicating the "capital recovery period" does not reflect magnitude or direction of the cash flows in the remaining periods. However, if a project is found to be

profitable by other measures, the payback period can be used as a secondary measure of the financing requirements for a project.

BIBILOGRAPHY NICMAR - Construction Finance Management.