1. 2. 3. 4. 5. Course Number Course Title Assignment Number Date of Dispatch Last Date of receipt of Assignment at CODE Office NCP 29 Construction Finance Management And Cost Accounting 8 11th August, 2012 15th August, 2012

Submitted By: Name : Lalit Mohan Ranga Course : PGP CM Reg Number : 211-09-11-9889-2134


Discuss the financial viability of the project and the financial planning of the project.m.m of plot in a prime locality of Pune where 5.  Rest specifications as used for Class A. Constructions. 5. health facilities for senior citizens.000 sq.  Aluminum sliding windows – Class A. 10lakhs as his own funds and can rise not more than Rs.C.Assignment An offer has been given by a Charitable Trust to develop and build a facility on a 10.m will be given free to developer as a cost of development.000 sq. 2 . Developer can invest only Rs.m of area will be used by the trust for housing.000 sq.C Framed structure. Specifications for flooring:  10% Granite  40% Kota stone  50% Mosaic cement tiles  R.000/sq. 50lakhs as bank loan.  Cost of land is Rs. Developer would like to have minimum 18% net profit on his investment. 10.

Cash budgeting will play an important role in any type of construction project also capital revenue.FINANCE MANAGEMENT Financial management is dealing with the procurement of funds to meet financial needs. the sources being the members and loans from banks or other institutions and individuals. The capital structure of any firm is related to the form of the enterprise. its objectives. The cost of capital is subject to and governed by many variables. 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. management accounting will give proper planning of inflow as well as outflow resources in project. Finance and capital are seen as a considerable problem for cooperative. 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. and the cost of capital. which often operate independently of each other. 3 . cost accounting. finance resource mobilization.

40% Kota stone. Based on the scope of work.PROJECT SCOPE To develop a commercial site of 10. for labours. Based on the above calculation number of manpower for certain activity can be assessed. Construction should be with RCC framed structure with Aluminum sliding WindowClass A. one labour can do the earthwork excavation up to 2-3 cubic meters for 8-hour upto the lead and lift of about 0. The flooring details are 10% Granite. and 50% Mosaic cement tiles.  Workers (skilled. The other construction specification is pertaining to Class A type. scope of work.5-1 meter. For workers duration of working hour. semiskilled and un-skilled). the organization chart should be prepared. Work distribution should be done according to the organization chart. 4 . type of work.  Professional staffs. cost per hour or day. output can do assessed based on the nature of work. project cannot be run.  Supervising staffs. COST CALCULATION  Manpower requirement In general without this. Based on the site requirements. Selection of manpower totally depends up on the nature of work. One should know the requirements of manpower to run the show. project will have the following categories:  Management staffs. For example.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.

Total amount = (100 X 25 X 80) / 2 = Rs. anyone can do within a week times or so. One TATA Ex-200 Excavator can load min 25–30 trips/2-hours. According to priority of the works. So number of labours required to do this activity is = (5000/2) = 2500 nos. suppose assume this has to be done within 25 days.Earthwork excavation can be done with manually as well as mechanically.  No. One labor can do 2 cubic meter of soil. Now days generally this work are carried out by mechanically since the latter will take lot of time to excavate. of labours to be engaged/day = 2500/25 = 100 labours. But the same activity with the machine.  Assume qty.  Total qty.25 days. 100000 m3. No. Keeping labours such a longer duration for a smaller quantity of work will lead to delay in work and loss to the contractor. within the time frame. of trip / day = (8 X 25 / 2) = 100 trips. Suppose here if we do the cost analysis: Labours: We have to keep the labours for 25 days to complete this activity. 5 . it has to complete. Assume rate of excavation = Rs. Moreover compared to manual work is faster and cheaper also Suppose we need to excavate about 5000 cubic meters of earthwork excavation. 80 per m3. Say = 7days. executed / day = 8 X 100 = 800 m3. / trip = 8 m3.  Number of days required to excavate = 5000 / 800 = 6.

Delivery and loading areas should be screened to minimize adverse visual and noised impacts to adjacent uses. awnings. By seeing the above comparison. ones do not have time to do this type of work for longer duration. The building’s. and etc. 25 / m3. we have the following deficiencies:  Profit will decrease. canopies. If the project duration increases. Short-term parking has been provided in close proximity to office check in area. Consistent with the building design minimize impacts on adjacent uses. Walkway.  Manpower will be blocked. to mitigate climate and solar conditions. Assume rate of excavation = Rs. stairway and balcony railings and other similar details are stylistically. Air conditioning units are not visible from 6 .125000. not the parking lots has been designed to establish the image and character for the development along street frontages.  Total amount = 5000 X 25 = Rs. The scale of buildings should be compatible with the surrounding development patterns. Now a day’s world is very fast. Recreational facilities should be designed to offer privacy to facility users.  Slow work more overheads. Provide weather and sun protection.  Further planning hampered.Machine: But if we do this activity by machine.  Design adequacy The considerations given while designing and checked with alternative design were also checked. machine oriented work can be done fast and economically in term of days and with less manpower. such as overhangs.

7 .  Use energy efficient lighting. colors.  Use energy efficient materials in doors and windows.  Mitigate urban heat island effects.public streets.  Free standing accessory structure Enclosed service areas and covered parking should be designed to be an integral part of the building architecture. The forms. reflectivity and glare.  Shelter entries and windows and use architectural shading devices and landscaping to minimize cooling losses. Structures have been incorporated for interior access to guestrooms. ENVIORNMENT SENSITYVITY While not specifically guideline items. Energy Conservation Code (IECC) and Energy Star Labeled. Room entrances directly adjacent to parking lots or exterior walkways were not provided. Articulate fades to provide a visual effect that is consistent with the community’s character and scale. textures and materials used on the main building should be applied to all sides of these structures generally visible to the public.  Reference national programs for environmentally sensitive development methods such as Leadership in Energy and Environmental Design (LEED). 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.

 Cost of extending liberal credit terms to debtors. It is desirable to have a balance between working capital and the cost differentials of various sources of capital forming part of working capital. short term or seasonal variations in Current Assets would be financed with short-term debt. Larger the percentage of funds obtained. 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. There are three primary factors determining the use of long-term versus short-term funds for financing current assets flexibility. cost and risk.e. The financial executive has to balance various costs in an effort to keep the total cost of working capital as low as possible. the more conservative the firms working capital policy.  Cost of letting or allowing cash to remain idle.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. These costs may consist of:  Cost of having trade credit. and  Cost of borrowing money from lenders or lending institutions.  Cost of managing cash in off periods. 8 . On the other hand permanent component of current assets would be financed with long-term funds. from long-term sources.  The planning of sources of working capital can be:  Net gains from operations.

cost and risk. 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. FINANCE WORKING CAPITAL The net approach suggests that each asset would be offset with a financial instrument of the same approximate maturity i. as it does not burden the business with external obligations. 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. Sale of fixed assets.  Additional issue of shares. On the other hand permanent component of current assets would be financed with long.term funds. There are three primary factors determining the use of long term versus short-term funds for financing current assets. Funds raised from the sale of shares may be a potential and permanent source of working capital in addition to net profit. Larger the percentage of funds obtained from long term sources. flexibility.e. This is the most desirable source of working capital. 9 .term basis have become tied up in permanent assets. 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. 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. the more conservative the firm’s working capital policy.  Raising long-term debt. 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.

But unlike stocks. 10 . commonly renewable and so. or in the worst case. syndications pass through tax losses and tax credits to the investors. all financing grouped into two generic categories debts and equity. conventional leaders will lend up to a maximum of only 60 to 70 percent of the projects market value.term facility and with interest payable only on the loan actually taken up. ma constitute a continual source of shortterm capital or liquidity ‘insurance’ facility. every partner could lose their original investment. An overdraft is a relatively cheap from of finance due to its being a short. Equity + debt = total financing Total financing = total development cost In real estate development projects. a general partner plans and oversees the project and is fully liable for all financial obligations. Limited partners buy shares of a project’s ownership much as stock certificates are sold. may even have to make up further losses. all partners share income and risks in proportion to their investments. Overdraft facilities are. If the project goes sour. In special kind of partnership called syndication. in practice. such as building contractors. As with stocks. 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.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. The real estate industry. the investor’s liability is limited to the amount of the investment. All financing follows this formula. by which equity must make up the gap between total project costs and the amount of loan money that can be raised. however. Overdrafts are thus very suitable for firms with a fluctuating financial requirement. Thus. It is a widely held belief that almost all building firms operate on an overdraft. in bigger projects massive amounts of equity investments may be required. In ordinary partnerships.

and short-term loans. The following are some of the strategies that can make buildings healthy. It is short term finance. the main internal sources being accrued expenses and tax provisions and the main external sources being trade creditors. The sources of short-term capital are both internal and external. It is this type of capital. taxes and insurance. bank overdrafts. light and air  Operable windows and mixed mode HVAC 11 . A landlord’s definition of operating expenses is likely to be quite broad. management.LOAN BORROWINGS PLANNED Short-term capital provision and management is vital to the firm. covering most aspects of operating the building. repairs. comfortable and productive and reducing the operating expenses. which is required for the day-to-day activities. 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. utilities. OPERATING EXPENCES The actual costs associated with operating a property including maintenance.  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.

Gross profit = sales revenue .Buildings consume 40 percent of the world’s total energy. It is the responsibility of the management accountant to see that management is presented with useful information about each project. FINANCIAL EVALUATION BASED ON THE ESTIMATES Several methods are available for evaluation of the proposal on payable on that profit.  PROFITABILITY Profit is defined as the return rightly accruing to the entrepreneur for enterprise and use of funds. but the choice still remains. 25 percent of wood harvest and 16 percent of water consumption. 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. All these methods or techniques claim to have certain merits but they have certain limitations too. which may be used as a source of capital or may be distributed among owners. to help management take decisions. ‘Various techniques have been introduced’.depreciation and interest on loans.production and sales expenses. 12 . It is also useful to consider the accountants concepts of profit. observe Brown and Howard. The choice of a method should be carefully made. Net profit = gross profit . Profit after tax = net profit . Thus profit represents the earnings available as a surplus. according to the US 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. so that decisions are based not on guesswork but on reasoned calculations.

Thus. also known as pay-of-method. Only then the cost generated to ‘pay-off’ the cost of the asset can be known.e.e. Earnings = Sale of the products − its cost of production − Income Tax payable. This method. PAY BACK OF INVESTMENT This is widely used technique of assessing proposals on capital expenditure. FINANCIAL AND ECNOMIC EVALUATION Generally the construction project depends on the financial activities i. the payback is determined as: Pay . 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.e. There are certain types of projects depending probability and productivity. In case of annual earnings are fairly uniform. 13 .back period = cost of asset i. arising out of the use of assets before deducting depreciation but after deducting income tax. with the shortest pay-back period to quote Keller and Ferrara. the choice would fall on the model that pays for itself the earliest of all i. Those proposals with shortest pay-back periods. The period of repayment is popularly known as ‘pay-back period’. It determines the period in which the investment is recovered. ‘Earnings’ here means profits. capital input capital output of the project. would considered the most desirable and those with the longest pay-back periods would be considered least desirable cash flow. say machines. tends to ascertain the period in which the cost incurred on a capital project and there from is equated.

For the accepted projects. say machines. Basically there are two principal variations in approach  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. If there are alternative proposals of investment in different models or makes of an asset. This method is also known as pay-off-method. The period of repayment is popularly known as pay-back method.e. investment /earnings or net cash flow per year = no of years  AVERAGE RATE OF RETURN Rate of return is the ratio of investment.Those projects. tends to ascertain the period in which the cost incurred on capital project and earnings there from are equated. 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. which have been found feasible. with the shortest pay-back method. 14 . It determines the period in which the investment is recovered.e. necessary sanction is accorded for its financial outlay and orders are passed for their execution. the choice would fall on the model that pays itself the earliest of all i. 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. Following are some methods:  PAY-BACK METHOD This is widely used technique of assessing proposals on capital expenditure.

L = initial investment . It is value of K in the equation. The average investment approach is more realistic than the original investment. Approach. it would be ½ (original cost − salvage value) + salvage value. NPV = (CF1 / (1+K) )+ (CF2 /(1+K)*2) + (CFN /(1+K)*N-L) .K = cost capital . and where there is some salvage value recoverable at the end of the life the asset. which notes its net present value equal to zero. L = (CF1 / (1+K)) + (CF2 /(1+K)*2) +(CFm /(1+K)*m) 15 . since the investment gradually decreases over the number of years. Average annual earnings after Rate of Return = average depreciation and taxes average investment × 100  Discounted cash flows techniques  Net present value method (NPV) 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.N = life of the project  Internal Rate of return (IIR) IRR of a project is the discount rate. Average investment approach : It means the original cost divided by 2.CFN = cash after occurring at the end of year N .

(say Rs 3 crore) Developer is going to generate the amount of 1000000 Rs on his own and 5000000Rs from the bank. which will give him an asset of 5000 x 10000 = 50000000 (Rs 5 crore)  Developer will get the area to develop for the trust is 5000 square meter at the rate of 10000/ m2. Within this area total usable area will be 85%.e. 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. Thus developer has to develop the total area is 5000 X 0. 10.000/ m2.  Generally construction rate is varying with area to area.85 = 4250 m2.000/ m2  Developer is going to get 5.000 m2 developed area will be used by the owner and the balance 5.000sqmt at the rate of 10. 7000/ m2.  The cost of land is Rs.  Payback period This is the period by which initial investment is entirely recovered.000 m2 area will be utilized by the developer to get back investment and a profit on his investment. We can assume the construction cost at this prime locality is 750 Rs/ ft2 i.000sqmt and in that 5. AREA STATEMENT AND PROJECT DETAILS To develop a commercial site 10. 16 . Thus total cost of construction will be 4250X7000=29750000 Rs. This total 6000000 Rs 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.IRR method also takes into account the time value of money.

Developer is going to generate the total amount of 30000000 Rs. Thus the total investment of the developer will be 30700000 Rs. We can say the amount generated from bank is having the rate of interest 14% i.628 i. Developer is going to get the rent of 400Rs/ m2/mount. which will generate the amount for the year as 400 X 5000 X 12 = 24000000 Rs. developer is getting 62% net profit on his investment 17 .14) .14 = 57000000 Rs.e. within the year. NET PRESENT VALUE METHOD (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. 62% Thus the investment is most beneficial to developer because he is getting net profit more than 18% i.Thus developer can generate the amount by giving this land for rents to private authorities.e. at the end of the year we have to return total amount of 5000000 X 1.e.30700000 = 13159649 Thus the investment is most beneficial to developer INTERNAL RATE OF RETURN (IIR) L = (CF1/(1+K)) + (CF2/(1+K)*2) + (CFm/(1+K)*m) 30700000 = 50000000/(1+K)*1 K = 0.

Oxford Publication by Srivastava Misra. at the same time he is going to make an asset of 50000000 Rs. Text Books from NICMAR. Developer is going to invest the total amount for development within one year is 30700000Rs. Second Edition. their next role or assignment should be identified. monitor and control costs and revenues with diligence far surpassing that employed during more buy-ant time. this choice should be clear well in advance so they have sufficient warning and details can be agreed. in terms as a land property. 18 . Bibliography 1. Hence considering real estate value is going up it is recommended to take up the project financial term in the project. RECOMMENDATION Particularly during periods of economic recession construction firms are exceedingly conscious of the problem of survival and seek to predict.PAYBACK PERIOD This is the period by which initial investment is entirely recovered. 2. Detailed planning and resourcing for the following phase should be performed well in advance. Where team members will be leaving. Financial Management. this shows the developer is going to recover his investments made in the development within a year. Ideally.