Assignment no.

4
Construction finance management
Registration no.

ASSIGNMENT
NICMAR / CODE OFFICE
1. Name

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2. Reg. No.

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3. Course No.

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NCP-29

4. Course Title

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Construction Finance Management

5. Assignment No.

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Four

ASSIGNMENT
An offer has been given by a Charitable Trust to develop and build a
facility on a 10,000 Square Meter of plot in a prime locality of Pune
where 5000 Square Meter of area will be used by the trust housing, health
facilities for senior citizens. 5000 Square Meter will be given free to
developer as a cost of development.
Cost of land is Rs. 10,000 / Square Meter
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.

Page 1 of 19

The Capital investment relates to allocation of Capital & involves the decision to commit funds to long term assets.” Finance Management as an analytical way of looking into the financial problem of the firm & consider financial management. charitable organization or hospitals or Educational Institutions. It is concerned with management of money matter. as a part of Overall Management. which would yield benefits in future but future benefits are difficult to measure & cannot be predicted with certainty. “Financial Management deals with procurement of funds and their effective utilization in the business. INTRODUCTION:Financial Management is concerned with management of funds. efficient allocation etc. Discuss the financial viability of the project and the financial planning of the project. Developer can invest only Rs 10 lakhs as his own funds and can raise not more than Rs 50 lakhs as bank loan.Assignment no. Because of its uncertain nature. Page 2 of 19 . Developer would like to have minimum 18% net profit on his investment. 4 Construction finance management Registration no. The emphasis is on the managerial financial problem from rising of funds to the efficient & effective use of funds. capital investment decision involves risk. Principles of financial management are applicable to every concern whether it is business concern.

Value of a firm is represented by the market price of the company’s common stock. The Financing decision involves decision on when. To Page 3 of 19 . WEALTH MANAGEMENT:. The time should strive for the best financing mix or optimum capital structure for the firm. PROFIT MANAGEMENT:- Profit cannot be sole objective of a company.  If Profit maximization is the only goal then risk factor is altogether ignored  Profit Maximization as an objective does not take into account the time pattern of returns. The financial management in a bid to maximize owner’s wealth should strive to maximize returns while minimizing risk. where and where and how to acquire funds to meet the firm’s investment needs. The central issue is to meet the firm’s investment need.Assignment no. Objectives of financial Management are: 1. The central issue is to determine the proportion of equity capital and debt capital.  The term profit is vague.  2. 4 Construction finance management Registration no. The market price serves as a performance index or report card of the firm’s progress. maximization It is at best a limited objective.

ensure maximum return funds flowing in and out of the firm should be constantly monitored to assure that they are safeguarded property utilized. will be 160. Page 4 of 19 .  Security Announcement Booth will be provided. luminax per sq. They should seek course of action that avoid unnecessary risk.  Public Toilets for providing basic public convenience.  Lighting Arrangement for providing necessary yard and illumination.  Landscaping for providing natural green environment to the area.  Parking Facility should have enough space for four wheelers & two wheelers. FACILITIES TO BE PROVIDED: Charitable Trust Share. The financial reporting system must be produce timely and accurate information for action.Assignment no.  To make the society aware about the responsibly towards our elders. 4 Construction finance management Registration no.  To provide a better place for senior citizens. Then we have to find out the Objectives & Facilities to be provided of the given Project: OBJECTIVE :  To utilize the space provided by charitable trust for a social & noble cause. ft.

A REASONABLE project implementation schedule is as stated below: Sl. No. OUTPUT No.  Cafeteria  Health facilities.  Elevators Then we have to finalize the Schedule for the Project . PROJECT IMPLEMENTATION SCHEDULE:For preparing Project Schedule we have to prepare the Break down Structure which should cover the total Scope of the work then we will provide the duration for the each activity. Design and Cost Estimates Preparation of detailed drawings and estimates Tender Notice for Construction Contracts Award of Contract Commencement of Construction 8 Completion of Construction 365 9 Completion of Project 460 4 Page 5 of 19 25 27 50 92 . of days form start date 1 2 3 0 To be done To be done 5 6 7 Approval of concept Site Survey Preliminary Drawing.Assignment no. 4 Construction finance management Registration no.  Fire Fighting system.

Plumbing Interiors D . A Unit Qty Rate Amount Remarks in Crs.Electrification .Assignment no.58 105800000 Page 6 of 19 .25 0.1 . EXECUTIVE SUMMARY:SL Project Estimate No.Elevator .2 SQM 1000 1000 0.3 0.Finishing Items 8 Trust + developers share 0 1 4 1 2500000 1700000 3000000 2000000 0.5 TOTAL TOTAL Total construction cost /sq. 4 Construction finance management Registration no.5 F External Site Development L/s 5000000 0.68 0.05 E .Fire Fighting . Mt ( not taking into a/c cost trust share of bldg) 10. Civil Works Construction of Main Building SQM 16000 5000 B Services & Utilities L/s Nos L/s L/s C .Furniture L/s 500000 0.Miscellaneous Items L/s 5000000 0.

Of net area for sale Add for Interest for on year on 60 lacs Page 7 of 19 SQM SQM SQM SQM SQM SQM SQM RS RS SQM RS 5000 4000 750 4000 750 6500 10000 50000000 50000000 7692 900000 .Assignment no. Calculations Total land area with developer Total build up area on G. 4 Construction finance management Registration no. staircases etc Net area for sale Price of land in Pune Cost of total land Undivided share of land /SQM.F including foyers.F Common area on G.F including foyers .staircases etc Total built up area on F.F Common area on F.

F rate Total selling amount for F.F Total selling amount for G. Cost of letting or allowing cash to remain idle.F Selling price of commercial space on F. The Finance executive has to balance various costs in an effort to keep the total cost of working capital as low as possible. Mt for net are of sale total cost of land + cost of const + interest /Sq.F @ 60% of the G. 2. Page 8 of 19 . mt Total Selling price /Sq. Interest per Sq. These costs may consist of: 1. 3. Total amount from selling of commercial property Selling price of commercial space on G. Cost of extending liberal credit term to debtors. 4 Construction finance management Registration no.Assignment no.F Total revenue from sales 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 Total Revenue from sales Net profit Profit % age RS SQM SQM RS SQM RS 138 24108 24246 78800000 24246 78800000 SQM RS RS 14548 47280000 126080000 RS RS RS RS RS % 105800000 900000 106700000 126080000 19380000 18 It is desirable to have a balance between working capital & cost differentials of various sources of capital forming part of working capital. Mt. Cost of having trade credit.

Cost of managing cash in off periods. Sales to fixed assets.88 7.Assignment no.43 Principal Page 9 of 19 7. TERM LOAN INTEREST AND REPAYMENT SCHEDULE Term loan Rate of Interest Installment (Nos. Additional issue of shares.Lakh) Closing Balance (Interest) Total Interest Amount of Installment 6 6 6 44 38 32 1. return rate and other many useful things which will be helpful in future control & monitoring the financial planning of working capital. 3.65 7.65 1. and 5. 4 Construction finance management Registration no. Ist Year 50 1 44 2 38 3 Amount (Rs.) : Years 1 : 50 : 15% 9 Opening Quarterly Installment Balance No. Net gains from operations 2. So we have to calculate the long term interest rate. The Planning of sources of working capital can be: 1.88 1. Raising long term debt 4. 4.43 . Cost of borrowing money from lenders or lending institutions.

75 6.75 0.3 7.2 30. The design in itself should be complete and should cover all the points required in a finished building. FINANCIAL AND ECONOMICS EVALUTION:L.2 6. Page 10 of 19 .08 28.98 6.63 2.15 6.1 INTRODUCTION & BASIC FEATURES OF CAPITAL BUDGETING:Capital Budgeting deals with problems of Capital Investment and take a long range and futuristic view.Assignment no.53 6. 4 Construction finance management Registration no.63 Sufficiency of Design: The responsible person has to check & satisfied himself before regarding correctness and sufficiency of the design for the works. It involves huge investment of capital resources and inherent risk. 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.08 2.98 0.3 0.53 0. Prices shall.15 0. 32 2 26 20 14 8 2 4 2 Year 5 6 7 8 3rd year 9 6 24 6 6 6 6 26 2 0 20 14 8 2 1.

Capital budgeting deals with problems of capital investment and takes a long range and futuristic view. therefore. Due to the inherent uncertainty. they also pose difficulties. Capital expenditure decisions involve substantial investment. usually 10 to 20 years for industrial projects and 20 to 50 years for infrastructure projects. Characteristics of capital budgeting are enumerated below. While capital expenditure decisions are extremely important. demand a conscious approach in the early stages of the project formulation. 4 Construction finance management Registration no. It involves huge investment of capital resources and inherent risk. a wrong capital investment decision often cannot be reversed without incurring a substantial loss. Capital budgetary proposals. Capital Budgeting refers to the planned and pre-decided allocation of funds available to the firm so as achieve the maximum profitability.Assignment no.  Capital budgeting entails heavy investment of funds Page 11 of 19 . Capital loss increases with advances in technology. A project involves the current outlay (or current and future outlays) of funds with the expectation of getting future benefits. Capital investment decisions have an enormous bearing on the future of an organization. future predictions become difficult. It is difficult to identify and measure the costs and benefits of a capital expenditure since they are spread out over a long period of time. Capital expenditure decisions are irreversible.

since capital budgeting concerns that future. b) Establish the cost of capital.  There is greater uncertainty of the outcome.  There is the anticipation of large benefits spread over a long period. It is a complex process. Page 12 of 19 . operating cash flows and a terminal cash flow. Investment in fixed assets widens the base of activity and increases the profit earning capacity of the concern. c) Apply the investment appraisal criterion. Capital budgeting is the process of analysing the financial benefits of acquiring a capital asset with a view to determine the viability of the project. This appendix outlines the methodology of the project budgeting.2 CASH FLOW:These components in the product lifecycle costing can be divided into an initial investment.  A capital budget thus looks ahead to a much longer range in the future than other budgets do. The capital budgeting process involves the following steps: a) Estimate the cash flow. 4 Construction finance management Registration no. taxes and cash flow. Every decision has an element of uncertainty is much more potent here. L.Assignment no. as it takes into consideration depreciation.

Initial investment = Cost of capital assets + Installation costs + Working capital margin + Preliminary and pre-operative expenses . where applicable.Assignment no. Terminal cash inflow = Post -tax proceeds from the sale of capital assets + Net recovery of working capital margin + tax adjustment. L.These are the relevant cash inflows and outflows resulting from the operation of the project during its economic life. where applicable. 4 Construction finance management Registration no.  INITIAL INVESTMENT:.Tax benefit on capital assets.  OPERATING CASH FLOWS:.3 WEIGHTED AVERAGE COST OF CAPITAL:The weighted average cost of capital for a firm is of use in two major areas: in consideration of the firm’s position and in evaluation of proposed change necessitating a change in the Page 13 of 19 .  TERMINAL CASH INFLOW:.It represents the relevant cash outflow or the cost of setting up the project.It is the relevant cash inflow occurring at the end of the product lifecycle on account of project liquidation. Operating cash inflow in a given year= Profit after tax + Depreciation + Other non-cash charges + Interest on long-term debt – Tax rebate.

Assignment no. i. firm’s capital. the next step is to analyse the financial worthiness of the investment proposal. There are many methods for analysing investment proposals for making financial criterion can be decisions. The Net Present Value (NPV) is calculated as follows: NPV = PV of cash flows – Investment Note.  Non-discounting criterion. In this category.. over the product / plant lifecycle. discounting criterion and non-discounting criterion.4 APPLYING THE INVESTMENT APPRAISAL CRITERION:After the capital costs and cash flows are computed.e. 4 Construction finance management Registration no. These are based on net present value. Thus a weighted average technique may be used in quasi marginal way to evaluate a proposed investment project. NET PRESENT VALUE (NPV):. 1) The expected future net cash flows (Inflows – outflows) are discounted at the cost of capital (r) to the base year (present Page 14 of 19 . pay–back period is the commonly-used technique. L.  Discounting criterion. internal rate of return techniques and costbenefit analysis.It is the total of all the cash flows. divided The into two commonly-used broad decision categories. out and in. such as the construction of anew building.

.... An organization should accept projects with a positive NPV and reject projects with a negative NPV. NCF3. Page 15 of 19 . 4) Calculation of the Net Present Value (NPV) is accomplished using the following formula: t n NPV   NCF /(1  r) n  Investment t 1 NPV= NCF1 NCF2 NCF3 NCFn    ... it is assumed that all future proceeds can be invested by the organization at the cost of capital..Assignment no. …… NCFn. 2) The initial cost of the investment (1) is subtracted from the present value (PV) to obtain the net present value (NPV) of the investment.. the future cost must also be discounted at the cost of capital to the base year. r is the cost of capital and n is the expected life of the project. 3) If the cost of the investment is spread over more than one year... NCF2... Therefore. 4 Construction finance management Registration no. time) to obtain the present value (PV) of these flows...  Investment 2 3 (1+r) (1+r) (1+r) (1+r) h where NCF1. are the net cash flows (NCF) for the respective years.

. IRR (r) is calculated using the following formula: 0= NCF1 NCF2 NCF3 NCFn 5   + . a cut-off number of years can also be used to select or reject the investment proposal..  Investment 2 3 h (1+r) (1+r) (1+r) (1+r) 2 where all the terms have the same definitions as those used in the NPV method. Page 16 of 19 . In this method.Assignment no. IRR can be found using trial and error using PV tables.It is the interest rate or discount rate. In the IRR method. 4 Construction finance management Registration no.. INTERNAL RATE OF RETURN (IRR):. PAY–BACK PERIOD: .. which gives zero Net Present Value (NPV) of the investment over the project/plant lifecycle. it is assumed that all the future proceeds can be invested at the IRR rate..It is the time (in years) that a project / plant take to pay back the initial cost of investment from the expected future net cash flows resulting from the investment. An organization can accept a project that exceeds its cost of capital and reject those projects with IRR below its cost of capital..... it is the time during which the cumulative cash inflows equal to the original cash outflow. In other words. Projects with higher IRR can be preferred over lower IRR projects.. Projects/Plants with shorter payback periods is preferred to those with longer pay–back periods.

can lead to incorrect results. it measures the NPV per rupee of outlay. then the payback period ranking conforms to the results obtained from NPV and IRR methods. If the expected future net cash flows can be discounted at the cost of capital to the base year (present time). If BCR < 1. consider other factors for decision. accept the proposal. BENEFIT-COST RATIO: . reject the proposal. In other words. If BCR = 1. 4 Construction finance management Registration no. BCR = Present Value of benefits / Initial investment If BCR > 1.It is the ratio of the present value of benefits to the initial investment. 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 Page 17 of 19 . The pay–back period method does not take into consideration the time value of money and as such.Assignment no.

..  Investment 2 3 (1+r) (1+r) (1+r) (1+r) h By trial using statistical table.......Assignment no.. is calculated using the following formula: 0= NCF1 NCF2 NCF3 NCFn   + ....  Investment 2 3 (1+r) (1+r) (1+r) (1+r) h IERNAL RATE OF RETURN (IRR):The interest rate or discount rate. 4 Construction finance management Registration no. which gives zero IRR (r)..... r = Y RECOMMENDATION:- Page 18 of 19 .... NPV= NCF1 NCF2 NCF3 NCFn   + ..

4 Construction finance management Registration no. REFERENCE:Course Material. NICMAR Page 19 of 19 .Assignment no. Feasibility report. We have done rough schematic planning of the project because detailed planning is subjected to Preliminary designs & can be done successfully after it. Preliminary design/drawings as well as site survey and market survey is necessary is required for better Financial Planning.