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ASSIGNMENT IV

(Construction Finance Management)

NICMAR / CODE OFFICE


1.

Name

Arvind K

2.

Reg. No.

214-04-11-12192-2163

3.

Course No.

NCP-29

4.

Course Title

Construction Finance Mgt.

5.

Assignment No.

Four

6.

Date of Dispatch

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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.
Discuss the financial viability of the project and the financial
planning of the project. Developer would like to have minimum 18%
net profit on his investment. Developer can invest only Rs 10 lakhs
as his own funds and can raise not more than Rs 50 lakhs as bank
loan.

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INTRODUCTION:
Financial Management is concerned with management
of funds. Principles of financial management are applicable
to every concern whether it is business concern, charitable
organization or hospitals or Educational Institutions. It is
concerned with management of money matter.
Financial Management deals with procurement of funds
and their effective utilization in the business.
Finance Management as an analytical way of looking
into the financial problem of the firm & consider financial
management. as a part of Overall Management. The emphasis
is on the managerial financial problem from rising of funds
to

the

efficient

&

effective

use

of

funds,

efficient

allocation etc.
The Capital investment relates to allocation of Capital
& involves the decision to commit funds to long term assets,
which would yield benefits in future but future benefits are
difficult to measure & cannot be predicted with certainty.
Because of its uncertain nature, capital investment decision
involves risk.
The Financing decision involves decision on when,
where and where and how to acquire funds to meet the firms
investment needs.

The central issue is to meet the firms

investment need. The central issue is to determine the


proportion of equity capital and debt capital. The time
should strive for the best financing mix or optimum capital
structure for the firm.

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Objectives of financial Management are:


1. PROFIT MANAGEMENT: Profit maximization cannot be
sole objective of a company.

It is at best a limited

objective.
The term profit is vague.
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.

2. WEALTH

MANAGEMENT:

Value

of

firm

is

represented by the market price of the companys


common

stock.

performance

The

index

market

or

report

price
card

serves
of

the

as

firms

progress.
The financial management in a bid to maximize owners
wealth should strive to maximize returns while minimizing
risk. To ensure maximum return funds flowing in and out of
the firm should be constantly monitored to assure that they
are safeguarded property utilized. They should seek course
of action that avoid unnecessary risk. The financial reporting
system must be produce timely and accurate information for
action.
Then we have to find out the Objectives & Facilities to be
provided of the given Project:

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OBJECTIVE:
To utilize the space provided by charitable trust for a
social & noble cause.
To provide a better place for senior citizens.
To

make

the

society

aware

about

the

responsibly

towards our elders.


FACILITIES TO BE PROVIDED:
Charitable Trust Share.
Parking Facility should have enough space for four
wheelers & two wheelers.
Security Announcement Booth will be provided.
Landscaping for providing natural green environment to
the area.
Lighting Arrangement for providing necessary yard and
illumination, luminax per sq. ft. will be 160.
Public Toilets for providing basic public convenience.
Fire Fighting system.
Cafeteria
Health facilities.
Elevators
Then we have to finalize the Schedule for the Project.

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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.
A

REASONABLE

project

implementation

schedule

is

as

stated below:
Sl.

OUTPUT

No. of days form

No.

start date

Approval of concept

Site Survey

To be done

Preliminary

Drawing,

Estimates
Preparation

of

estimates
Tender Notice for Construction Contracts

27

Award of Contract

50

Design

detailed

and

Cost To be done

drawings

Commencement of Construction

and 25

92

Completion of Construction

365

Completion of Project

460

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EXECUTIVE SUMMARY:
SL
No.
A

Project Estimate

Building

SQM

Amount
in Crs.

Remarks

16000

5000

developers
share

Services & Utilities

- Fire Fighting

L/s

2500000 0.25

- Elevator

Nos

1700000

- Electrification

L/s

3000000 0.3

- Plumbing

L/s

Interiors

- Finishing Items

SQM

- Furniture
- Miscellaneous Items

Rate

Trust +

Qty

Civil Works
Construction of Main

Unit

External Site
Development

0.68

2000000 0.2

1000

1000

0.1

L/s

500000

0.05

L/s

5000000 0.5

L/s

5000000 0.5

TOTAL

TOTAL

10.58

Total construction
cost /sq. Mt ( not taking

105800000

into a/c cost trust


share of bldg)
Calculations
Total land area with developer

SQM

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5000

Total build up area on G.F

SQM

4000

Common area on G.F including foyers ,staircases etc

SQM

750

Total built up area on F.F

SQM

4000

Common area on F.F including foyers, staircases etc

SQM

750

Net area for sale

SQM

6500

Price of land in Pune

SQM

10000

Cost of total land


Undivided share of land /SQM. Of net area for sale

RS

50000000

RS
SQM

50000000
7692

Add for Interest for on year on 60 lacs

RS

900000

Interest per Sq. Mt for net are of sale

RS

138

total cost of land + cost of const + interest /Sq. mt

SQM

24108

Total Selling price /Sq. Mt.

SQM

24246

Total amount from selling of commercial property


Selling price of commercial space on G.F
Total selling amount for G.F

RS
SQM
RS

78800000
24246
78800000

Selling price of commercial space on F.F @ 60% of the


G.F rate
Total selling amount for F.F

SQM

14548

RS
RS

47280000
126080000

trust share of bldg)

RS

105800000

Add for Interest for on year on 60 lacs

RS

900000

Total expenditure

RS
RS
RS
%

106700000
126080000
19380000
18

Total revenue from sales


Total expenditure for Developer
Total construction cost /sq. Mt ( not taking into a/c cost

Total Revenue from sales


Net profit
Profit % age

It is desirable to have a balance between working


capital & cost differentials of various sources of capital
forming part of working capital.

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The Finance executive has to balance various costs in


an effort to keep the total cost of working capital as low as
possible.
These costs may consist of:
1. Cost of having trade credit.
2. Cost of extending liberal credit term to debtors.
3. Cost of letting or allowing cash to remain idle.
4. Cost of managing cash in off periods, and
5. Cost of borrowing money from lenders or lending
institutions.
The Planning of sources of working capital can be:
1. Net gains from operations
2. Sales to fixed assets.
3. Raising long term debt
4. Additional issue of shares.
So we have to calculate the long term interest rate, return
rate and other many useful things which will be helpful in
future control & monitoring the financial planning of working
capital.

TERM LOAN INTEREST AND REPAYMENT SCHEDULE


Term loan
Rate of
Interest
Installment

50

15%
9

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(Nos.) :
Years

Opening
Balance

Quarterly
Installment

50

No.
Ist Year
1

44
38
32

Principal
Amount

(Rs.Lakh)
Closing
Balance

Total
Interest

(Interest)

Amount of
Installment

44

1.88

7.88

2
3

6
6

38
32

1.65
1.43

7.65
7.43

4
2

6
24

26

1.2
6.15

7.2
30.15

Year

26
20

5
6

6
6

20
14

0.98
0.75

6.98
6.75

14
8

7
8

6
6

8
2

0.53
0.3

6.53
6.3

3rd year
9

0.08

2.08

2.63

28.63

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.

FINANCIAL AND ECONOMICS EVALUTION:L.1 INTRODUCTION & BASIC FEATURES OF CAPITAL


BUDGETING:

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Capital Budgeting deals with problems of Capital


Investment and take a long range and futuristic view. It
involves huge investment of capital resources and inherent
risk.
Capital Budgeting refers to the planned and predecided allocation of funds available to the firm so as
achieve the maximum profitability.
A project involves the current outlay (or current and
future outlays) of funds with the expectation of getting
future benefits. While capital expenditure decisions are
extremely important, they also pose difficulties. Capital
expenditure decisions involve substantial investment. Due to
the

inherent

uncertainty,

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, usually 10 to 20 years for
industrial projects and 20 to 50 years for infrastructure
projects. Capital expenditure decisions are irreversible; a
wrong capital investment decision often cannot 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 organization.
Capital budgetary proposals, therefore, demand a conscious
approach in the early stages of the project formulation.
Capital budgeting deals with problems of capital investment
and takes a long range and futuristic view. It involves huge
investment of capital resources and inherent risk.
Characteristics of capital budgeting are enumerated below.
Capital budgeting entails heavy investment of funds

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There is greater uncertainty of the outcome. Every


decision has an element of uncertainty is much more
potent here, since capital budgeting concerns that
future.
There is the anticipation of large benefits spread over
a long period. Investment in fixed assets widens the
base

of

activity

and

increases

the

profit

earning

capacity of the concern.


A capital budget thus looks ahead to a much longer
range in the future than other budgets do.
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. It is a complex
process, as it takes into consideration depreciation, taxes
and cash flow. This appendix outlines the methodology of the
project budgeting. The capital budgeting process involves
the following steps:
a)

Estimate the cash flow.

b)

Establish the cost of capital.

c)

Apply the investment appraisal criterion.

L.2 CASH FLOW:


These components in the product lifecycle costing can
be divided into an initial investment, operating cash flows
and a terminal cash flow.

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Initial Investment: It represents the relevant cash


outflow or the cost of setting up the project.
Initial investment = Cost of capital assets + Installation
costs

Working

operative

capital

margin

Preliminary

and

pre-

expenses - Tax benefit on capital assets, where

applicable.
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 longterm debt Tax rebate.
Terminal Cash Inflow: It is the relevant cash inflow
occurring at the end of the product lifecycle on account
of project liquidation.
Terminal cash inflow = Post -tax proceeds from the sale
of capital assets + Net recovery of working capital
margin + tax adjustment, where applicable.
L.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 firms
position and in evaluation of proposed change necessitating a
change

in

the

firms

capital.

Thus

weighted

average

technique may be used in quasi marginal way to evaluate a

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proposed investment project, such as the construction of a


new building.
L.4

APPLYING

THE

INVESTMENT

APPRAISAL

CRITERION:
After the capital costs and cash flows are computed,
the next step is to analyse the financial worthiness of the
investment proposal. There are many methods for analysing
investment proposals for making financial decisions. The
commonly-used decision criterion can be divided into two
broad

categories,

i.e.,

discounting

criterion

and

non-

discounting criterion.
Discounting criterion. These are based on 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.
NET PRESENT VALUE (NPV ): It is the total of all the cash
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.

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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.
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

NPV=

NCF1 NCF2 NCF3


NCFn

...............
Investment
(1+r) (1+r) 2 (1+r)3
(1+r) h

where NCF1, NCF2, NCF3,

NCFn, are the net cash 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): It is the interest
rate or 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:

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0=

NCF1 NCF2 NCF3


NCFn 5

+
...........
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.
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.
PAYBACK PERIOD: 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. 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
with shorter payback periods is preferred to those with
longer payback periods.
The payback 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 year
(present time), then the payback period ranking conforms to
the results obtained from NPV and IRR methods.

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BENEFIT-COST RATIO: It is the ratio of the present value


of benefits to the initial investment. In other words, 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:
Payback 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


NPV=

NCF1 NCF2 NCF3


NCFn

+ ...........
Investment
2
3
(1+r) (1+r) (1+r)
(1+r) h

INTERNAL RATE OF RETURN (IRR):


The interest rate or discount rate, which gives zero IRR (r),
is calculated using the following formula:
0=

NCF1 NCF2 NCF3


NCFn

+ ...........
Investment
2
3
(1+r) (1+r)
(1+r)
(1+r) h

By trial using statistical table, r = Y

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RECOMMENDATION:
We have done rough schematic planning of the project because
detailed planning is subjected to Preliminary designs & can be done
successfully after it. Feasibility report, Preliminary design/drawings as
well as site survey and market survey is necessary is required for
better Financial Planning

REFERENCE:
Course Material, NICMAR

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