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Assignment No 4-Construction Finance Management and Cost Accounting

Assignment No 4-Construction Finance Management and Cost Accounting

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NICMAR

CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING

ASSIGNMENT ON

MODULE NO: 19 COURSE NO : NCP 29 SEMESTER : 02
NUMBER OF PAGESS: 22

SUBMITTED BY:
RAJESH M. R REG NO: 210-12-14-8895-2112

Assignment 4

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NICMAR

CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING

INDEX

PAGE

INTRODUCTION FINANCE MANAGEMENT PROJECT SCOPE ENVIRONMENTAL SENSETIVITY FININCIAL WORKING CAPITAL FININCIAL EVALUTION BASED ON THE ESTIMATE FININCIAL AND ECONOMICAL EVELUTION AREA STATEMENT AND PROJECT DETAIL RECOMANDATION AND CONCLUSION BIBLOGRAPHY

03 04 04 08 11 14 16 19 21 22

Assignment 4

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Rest specifications as used for Class A. 5.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING 1.C. Specifications for flooring: 10% Granite 40% Kota stone 50% Mosaic cement tiles R.m will be given free to developer as a cost of development. Developer can invest only Rs. Cost of land is Rs.000 sq.000/sq. Constructions.000 sq. Aluminum sliding windows – Class A.000 sq. 10lakhs as his own funds and can rise not more than Rs.m. health facilities for senior citizens. 10.m of area will be used by the trust for housing. Developer would like to have minimum 18% net profit on his investment. Assignment 4 3 . 50lakhs as bank loan. INTRODUCTION:An offer has been given by a Charitable Trust to develop and build a facility on a 10.m of plot in a prime locality of Pune where 5.C Framed structure. Discuss the financial viability of the project and the financial planning of the project.

CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING FINANCE MANAGEMENT:Financial management is dealing with the procurement of funds to meet financial needs. The capital structure of any firm is related to the form of the enterprise. its objectives. Construction should be with RCC framed structure with Aluminum sliding Window. The cost of capital is subject to and governed by many variables. .Class A. and 50% Mosaic cement tiles. Finance and capital are seen as a considerable problem for cooperative.000 sqm and in that 5000 sqm developed area will be used by the owner and the balance 5000 sqm area will be utilized by the developer to get investment and a profit of 18% on this investment. Cash budgeting will play an important role in any type of construction project also capital revenue. PROJECT SCOPE:To develop a commercial site of 10. 40% Kota stone. which often operate independently of each other. cost accounting. COST CALCULATION Assignment 4 4 3. The firm must consider these influence and their effects on the cost of the individual types of capital to determine the most suitable capital structure. The other construction specification is pertaining to Class A type. and the cost of capital.NICMAR 2. The flooring details are 10% Granite. the sources being the members and loans from banks or other institutions and individuals. management accounting will give proper planning of inflow as well as outflow resources in project. The sources of capital available to any firm are quite numerous but as noted public limited companies have the greatest variety of sources available for their use and the single person enterprise. finance resource mobilization.

project will have the following categories: • • • • Management staffs.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING Manpower requirement In general without this. semiskilled and un-skilled). one labour can do the earthwork excavation up to 2-3 cubic meters for 8-hour upto the lead and lift of about 0. Based on the scope of work. One labor can do 2 cubic meter of soil. type of work. For example. Selection of manpower totally depends up on the nature of work. Based on the above calculation number of manpower for certain activity can be assessed. For workers duration of working hour. Workers (skilled. for labours. Assignment 4 5 . Based on the site requirements. the organization chart should be prepared. output can do assessed based on the nature of work. project cannot be run. cost per hour or day. Earthwork excavation can be done with manually as well as mechanically.5-1 meter. Work distribution should be done according to the organization chart. Moreover compared to manual work is faster and cheaper also Suppose we need to excavate about 5000 cubic meters of earthwork excavation. Now days generally this work are carried out by mechanically since the latter will take lot of time to excavate. One should know the requirements of manpower to run the show. Professional staffs. scope of work. Supervising staffs.

∴ Number of days required to excavate = 5000 / 800 = 6. anyone can do within a week times or so. Suppose here if we do the cost analysis: Labours: We have to keep the labours for 25 days to complete this activity. / trip = 8 m3. executed / day = 8 X 100 = 800 m3. of labours to be engaged/day = 2500/25 = 100 labours. ∴ No. Say = 7days.25 days. 80 per m3.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING So number of labours required to do this activity is = (5000/2) = 2500nos. ∴ Total qty. Keeping labours such a longer duration for a smaller quantity of work will lead to delay in work and loss to the contractor. But the same activity with the machine. One TATA Ex-200 Excavator can load min 25–30 trips/2-hours. ∴ Assume qty. of trip / day = (8 X 25 / 2) = 100 trips. Assignment 4 6 . No. Assume rate of excavation = Rs. suppose assume this has to be done within 25 days. within the time frame. According to priority of the works. it has to complete.

125000. awnings. 25 / m3.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING Total amount = (100 X 25 X 80) / 2 = Rs. The building’s. ones do not have time to do this type of work for longer duration. 100000 m3. and etc. Loss in profit. not the parking lots has been designed to establish the image and character for the development along street frontages. canopies. Slow work more overheads. Design adequacy The considerations given while designing and checked with alternative design were also checked. Now a day’s world is very fast. ∴ Total amount = 5000 X 25 = Rs. such as overhangs. If the project duration increases. to mitigate climate and solar conditions. By seeing the above comparison. Short-term parking has been provided in close proximity to office check in area. Machine: But if we do this activity by machine. Assume rate of excavation = Rs. machine oriented work can be done fast and economically in term of days and with less manpower. we have the following deficiencies: • • • • • Profit will decrease. Manpower will be blocked. Further planning hampered. Delivery and Assignment 4 7 . Provide weather and sun protection.

The scale of buildings should be compatible with the surrounding development patterns. Free standing accessory structure Enclosed service areas and covered parking should be designed to be an integral part of the building architecture. colors. Consistent with the building design minimize impacts on adjacent uses. Walkway.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING loading areas should be screened to minimize adverse visual and noised impacts to adjacent uses. the following measures that promote environmental sensitivity are offered for consideration by the development community: • Orient and design new structures and addition for minimum solar gain. reflectivity and glare. Air conditioning units are not visible from public streets. Room entrances directly adjacent to parking lots or exterior walkways were not provided. • Shelter entries and windows and use architectural shading devices and landscaping to minimize cooling losses. textures and materials used on the main building should be applied to all sides of these structures generally visible to the public. Structures have been incorporated for interior access to guestrooms. The forms. Recreational facilities should be designed to offer privacy to facility users. 8 . ENVIORNMENT SENSITYVITY While not specifically guideline items. • • Assignment 4 4. stairway and balcony railings and other similar details are stylistically. Use energy efficient materials in doors and windows. Articulate fades to provide a visual effect that is consistent with the community’s character and scale. Use energy efficient lighting.

The financial executive has to balance various costs in an effort to keep the total cost of working capital as low as possible. Reference national programs for environmentally sensitive development methods such as Leadership in Energy and Environmental Design (LEED).e. These costs may consist of: • • Cost of having trade credit. cost and risk. Energy Conservation Code (IECC) and Energy Star Labeled. FINANCIAL AND ECONOMICA ELEVATION Basically financial and economics is dependent upon two important parameters and these are: PROPSED CAPITAL STRUCTURE AND FINANCE PLAN The net approach suggests that each asset would be offset with a financial instrument of the same approximate maturity i. It is desirable to have a balance between working capital and the cost differentials of various sources of capital forming part of working capital. On the other hand permanent component of current assets would be financed with long-term funds. from long-term sources. short term or seasonal variations in Current Assets would be financed with short-term debt.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING • • Mitigate urban heat island effects. Assignment 4 9 . the more conservative the firms working capital policy. Cost of extending liberal credit terms to debtors. It is indicated that a profitable firm may not be in a position to meet its costs obligations if funds borrowed on a short-term basis have become tied up in permanent assets. Larger the percentage of funds obtained. There are three primary factors determining the use of longterm versus short-term funds for financing current assets flexibility.

Raising long-term debt. When depreciation deductions from earnings are not balanced by new investment in fixed assets there may be an increase in working capital provided such funds are not used to pay back loans or to distribute dividends. This is the most desirable source of working capital. Cost of managing cash in off periods. Net profits constitute a potential permanent source of working capital funds from current operations since funds accruing to the depreciation are usually expected to be reinvested at some later date in replacements and additions of fixed assets.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING • • • Cost of letting or allowing cash to remain idle. Additional issue of shares. All other sources of funds are irregular and temporary Capital borrowing is a source of working capital that can be planned with certainty but these funds eventually have to be returned to the creditors and the only source of funds for replacement is working capital. as it does not burden the business with external obligations. The planning of sources of working capital can be: • • • • Net gains from operations. Assignment 4 10 . and Cost of borrowing money from lenders or lending institutions. Funds raised from the sale of shares may be a potential and permanent source of working capital in addition to net profit. These share issues may not add to interest burdens like long term debt but they exert a potential demand for dividends and the use of this source implies sharing of ownership in the business with new investors. Sale of fixed assets.

It is a widely held Assignment 4 11 . On the other hand permanent component of current assets would be financed with long. flexibility. An overdraft is a relatively cheap from of finance due to its being a short. commonly renewable and so.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING 5. the more conservative the firm’s working capital policy. There are three primary factors determining the use of long term versus short-term funds for financing current assets. ma constitute a continual source of short-term capital or liquidity ‘insurance’ facility. short term or seasonal variation in Current Asset would be financed with the short-term debt. It is indicated that a profitable firm may not be in a position to meet its costs obligations if funds borrowed on a short. This is rather similar to a bank loan expected that interest is payable on the amount overdrawn only for the period it remains overdrawn and the account is usually repayable on demand or upon the termination of the overdraft period.term basis have become tied up in permanent assets. however. Larger the percentage of funds obtained from long term sources. THE BANK OVERDRAFTS A bank overdraft is a process whereby a customer of a commercial bank is permitted to overdraw on that account up to an agreed limit for a prescribed period. in practice. cost and risk. Overdraft facilities are.term facility and with interest payable only on the loan actually taken up.term funds. Overdrafts are thus very suitable for firms with a fluctuating financial requirement. FINANCE WORKING CAPITAL:The net approach suggests that each asset would be offset with a financial instrument of the same approximate maturity i.e. such as building contractors.

NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING belief that almost all building firms operate on an overdraft. If the project goes sour. Many project sponsors do not have sufficient equity. In special kind of partnership called syndication. the investor’s liability is limited to the amount of the investment. or in the worst case. a general partner plans and oversees the project and is fully liable for all financial obligations. conventional leaders will lend up to a maximum of only 60 to 70 percent of the projects market value. Assignment 4 12 . Limited partners buy shares of a project’s ownership much as stock certificates are sold. In ordinary partnerships. so that they form partnerships or corporations with two. in bigger projects massive amounts of equity investments may be required. all partners share income and risks in proportion to their investments. may even have to make up further losses. Thus. All financing follows this formula. Equity + debt = total financing Total financing = total development cost In real estate development projects. The real estate industry. As with stocks. all financing grouped into two generic categories debts and equity. But unlike stocks. twenty or even hundreds of investors. syndications pass through tax losses and tax credits to the investors. every partner could lose their original investment. by which equity must make up the gap between total project costs and the amount of loan money that can be raised.

The following are some of the strategies that can make buildings healthy. The sources of short-term capital are both internal and external. the main internal sources being accrued expenses and tax provisions and the main external sources being trade creditors. bank overdrafts. covering most aspects of operating the building. •Day lighting •Properly commissioned and maintained HVAC systems •Narrow floor plans to optimize natural daylight •High benefit lighting upgrades •Under floor air distribution and displacement ventilation •Occupant control of heat. and short-term loans. taxes and insurance. A landlord’s definition of operating expenses is likely to be quite broad. OPERATING EXPENCES The actual costs associated with operating a property including maintenance. It is this type of capital. management. repairs. comfortable and productive and reducing the operating expenses.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING LOAN BORROWINGS PLANNED Short-term capital provision and management is vital to the firm. utilities. which is required for the day-to-day activities. It is short term finance. which provides the circulating capitals for the firm and assists with overcoming potential cash flow problems due to market fluctuation notable the most important source for construction firms is that of bank overdraft. light and air Assignment 4 13 .

It is the responsibility of the management accountant to see that management is presented with useful information about each project. but the choice still remains. It is also useful to consider the accountants concepts of profit. Profit after tax is net profit minus tax payable on that profit.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING •Operable windows and mixed mode HVAC Buildings consume 40 percent of the world’s total energy. The choice of a method should be carefully made. observe Brown and Howard. so that decisions are based not on guesswork but on reasoned calculations. Assignment 4 14 . 6. ‘Various techniques have been introduced’. according to the U S Department of Energy’s Center of Excellence for Sustainable Development. These methods ascertain the profitability of capital projects and are invaluable aids to the management in the process of making decisions about capital expenditure. FINANCIAL EVALUATION BASED ON THE ESTIMATES Several methods are available for evaluation of the proposal on expenditure. 25 percent of wood harvest and 16 percent of water consumption. Net profit is gross profit minus depreciation and interest on loans. to help management take decisions. All these methods or techniques claim to have certain merits but they have certain limitations too. PROFITABILITY Profit is defined as the return rightly accruing to the entrepreneur for enterprise and use of funds. Gross profit is total sales revenue minus production and sales expenses.

The period of repayment is popularly known as ‘pay-back period’. Thus: Earnings= Sale of the products − its cost of production − Income Tax payable. PAY BACK OF INVESTMENT This is widely used technique of assessing proposals on capital expenditure. This method. It determines the period in which the investment is recovered. investment = No of years Earnings or Net cash flow per year If there are alternatives proposals of investment in different models or makes of an asset. ‘Earnings’ here means profits. the payback is determined as: Pay-back period = cost of asset i.e. arising out of the use of assets before deducting depreciation but after deducting income tax. which may be used as a source of capital or may be distributed among owners. Those proposals with shortest pay-back Assignment 4 15 . with the shortest pay-back period to quote Keller and Ferrara. tends to ascertain the period in which the cost incurred on a capital project and there from is equated. also known as pay-of-method. say machines. Only then the cost generated to ‘pay-off’ the cost of the asset can be known.e. the choice would fall on the model that pays for itself the earliest of all i. The basic profit (or less) = Revenues in terms of sale proceeds and rental income − Expenses in terms of hard land and construction costs and other soft costs such as professional fees and interest payments.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING Thus profit represents the earnings available as a surplus. In case of annual earnings are fairly uniform.

NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING periods. capital input capital output of the project. FINANCIAL AND ECNOMIC EVALUATION Generally the construction project depends on the financial activities i. would considered the most desirable and those with the longest pay-back periods would be considered least desirable cash flow.e. There are certain types of projects depending probability and productivity. which have been found feasible. Those projects. For the accepted projects. have to be ranked from two points •Liquidity •Profitability The different methods of capital investment proposals we need top management accords its approval or notes its rejection. necessary sanction is accorded for its financial outlay and orders are passed for their execution following are some proposals •Pay-back method •Average rate of return •Net present value method •Internal rate of interest method PAY-BACK METHOD Assignment 4 16 . 7.

The period of repayment is popularly known as pay-back method. with the shortest pay-back method.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING This is widely used technique of assessing proposals on capital expenditure. It determines the period in which the investment is recovered.e. 2. Average investment approach Assignment 4 17 . the choice would fall on the model that pays itself the earliest of all i. Basically there are two principal variations in approach 1. Original investment approach It refers the total cost of the project till its commissioning minus any salvage value divided. Pay-back method = cost of asset i. say machines.e. Those proposals with shortest pay-back periods would be considered the most desirable and those with the longest pay-back periods would be considered least desirable. investment /earnings or net cash flow per year = no of years AVERAGE RATE OF RETURN Rate of return is the ratio of investment. tends to ascertain the period in which the cost incurred on capital project and earnings there from are equated. If there are alternative proposals of investment in different models or makes of an asset. This method is also known as pay-off-method.

it would be ½ (original cost − salvage value) + salvage value. and where there is some salvage value recoverable at the end of the life the asset. since the investment gradually decreases over the number of years. NPV = CF1 /(1+K) + CF2 /(1+K)*2 + CFN /(1+K)*N-L CFN = cash after occurring at the end of year N L = initial investment K = cost capital N = life of the project Internal Rate of return (I I R) Assignment 4 18 average investment . Approach.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING It means the original cost divided by 2. Average annual earnings after = average depreciation and taxes × 100 Rate of return 3. The average investment approach is more realistic than the original investment. Discounted cash flows techniques Net present value method (N P V) The net present value of the project is equal to the some of the present value of the all cash flows associated with the project.

000/sqmt. 10. Generally construction rate is varying with area to area.000sqmt and in that 5.000sqmt developed area will be used by the owner and the balance 5. which will give him an asset of 5000 x 10000 = 50000000 (5 crore) Developer will get the area to develop for the trust is 5000 square meter at the rate of 10000/sqmt. which notes its net present value equal to zero. AREA STATEMENT AND PROJECT DETAILS To develop a commercial site 10.85 4250sqmt. We 8. Developer is going to get 5. Thus developer has to develop the total area is 5000 X 0. Payback period This is the period by which initial investment is entirely recovered. It makes sense to businessmen who want to think in terms of rate of return and not in terms of absolute quantity such as net present value. It is value of K in the equation. The cost of land is Rs.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING IRR of a project is the discount rate.000/sqmt. within this area total usable area will be 85%. L = CF1 /(1+K) + CF2 /(1+K)*2 + CFm /(1+K)*m IRR method also takes into account the time value of money. Assignment 4 19 .000sqmt area will be utilized by the developer to get back investment and a profit on his investment.000sqmt at the rate of 10.

NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING can assume the construction cost at this prime locality is 750Rs/sqft. at the end of the year we have to return total amount of 5000000X1. This total 6000000Rs is not at all sufficient to develop the proposed development therefore he is going to use the land which he got as a development cost for generate the amount. which will generate the amount for the year as 400X5000X12 = 24000000Rs. (say 3 crore) Developer is going to generate the amount of 1000000Rs on his own and 5000000Rs from the bank.14) .30700000 = 13159649 Thus the investment is most beneficial to developer Assignment 4 20 . Thus the total investment of the developer will be 30700000Rs. Thus total cost of construction will be 4250X7000=29750000Rs.14=57000000Rs. Developer is going to get the rent of 400Rs/sqmt/mount. within the year.(NPV) NPV = (CF1/(1+K)) + (CF2/(1+K) * 2) + (CFN/(1+K) * N –L) Life of the project is one year NPV = 50000000 / (1+0. We can say the amount generated from bank is having the rate of interest 14% i. Developer is going to generate the total amount of 30000000Rs. Thus developer can generate the amount by giving this land for rents to private authorities. that is we can say 7000/sqmt.e. NET PRESENT VALUE METHOD: .

their next role or assignment should be identified RECOMMENDATION Particularly during periods of economic recession construction firms are exceedingly conscious of the problem of survival and seek to predict. Detailed planning and resourcing for the following phase should be performed well in advance.(IIR) L = (CF1/(1+K)) + (CF2/(1+K)*2) + (CFm/(1+K)*m) 30700000 = 50000000/(1+K)*1 K = 0. Where team members will be leaving. this choice should be clear well in advance so they have sufficient warning and details can be agreed. Assignment 4 21 . monitor and control costs and 9. in terms as a land property. Developer is going to invest the total amount for development within one year is 30700000Rs. developer is getting 62% net profit on his investment PAYBACK PERIOD This is the period by which initial investment is entirely recovered. 62% Thus the investment is most beneficial to developer because he is getting net profit more than 18% i.NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING INTERNAL RATE OF RETURN: .e. Ideally.628 i. this shows the developer is going to recover his investments made in the development within a year. at the same time he is going to make an asset of 50000000Rs.e.

NICMAR CONSTRUCTION FINACE MANGEMENT & COST ACCOUNTING revenues with diligence far surpassing that employed during more buy-ant time. PERSONAL SITE EXPERIENCE Assignment 4 22 . BIBLIOGRAPHY TEXT BOOKS PROVIDED BY NICMAR GUIDE LINES OBTAINED FROM SENIORS. Hence considering real estate value is going up it is recommended to take up the project financial term in the project.

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