You are on page 1of 18

ASSIGNMENT

NICMAR / CODE OFFICE

1. Name -
2. Reg. No. -
3. Course No. - NCP 29
4. Course Title - Construction Finance Management &
Cost Accounting
5. Assignment No. - 4 (FOUR)

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

Page 1 of 18
Developer can invest only Rs 10 lakhs as his own funds and can raise not more
than Rs 50 lakhs as bank loan.

PROPOSED COMPLEX:

A state of art building consisti ng of Multi fl oors and measuring an area


of approximately 8000 Sq. mts is to be developed on a 10000
Sq. Mts. plot.

Above building will house commercial/concession areas, residenti al


including health faciliti es etc.

The building itself will act like an exhibit, as it will be based on latest
technology of constructi on. The building will be of framed structure,
Structural glazing, external cladding using composite aluminum
secti ons will also be applied. Beside these fi nishes for internal as well
as external will be of the best type prevailing in the industry referring
to Class- a specifi cati ons..

THE OBJECTIVE FOR THIS COMPLEX:

 To uti lize the space provided by Charitable trust for a social &
noble cause.
 To provide a bett er place for senior citi zens.
 To make the society aware about the responsility towards our
elders.

Page 2 of 18
Faciliti es to be provided:

Sr. Public Conveniences & Parti cular / Descripti on


No Faciliti es Provided in the
planning of the Building
CHARITABLE TRUSTS
SHARE
1. Parking facility Enough accommodati on For Four
Wheelers and Two Wheelers.
2. Security & Announcement Will be provided
Booth
3. Landscaping For providing natural green environment
to the area
4. Lighti ng Arrangement For providing necessary Yard and
illuminati on, Luminax per Sq. Ft. will be
160
5 Public Toilets For providing basic public conveniences,
6 Fire Fighti ng System A well equipped fi re fi ghti ng system
7. Cafeteria A state of art canteen for senior citi zen
to be provided
8. Health faciliti es As a facility for the senior citi zens
having general and all required health
faciliti es
9. Elevators. 2 Nos. of elevators for Senior citi zens
convenience.
TYPICAL DETAILS THE BUILDING:

Structure: RCC Column frame structure.

Specifi cati on: using state of art modern technology to conferring to


class-A specifi cati on.

Page 3 of 18
PROJECT IMPLEMENTATION SCHEDULE:

A REASONABLE project implementati on schedule is as stated below:

Sl. OUTPUT No. of days form


No. start date
1. Approval of concept 0
2. Site Survey To be done
3. Preliminary Drawing, Design and To be done
Cost Esti mates
4. Preparati on of detailed 21
drawings and esti mates
5. Tender Noti ce for Constructi on 25
Contracts
6. Award of Contract 45
7. Commencement of 90
Constructi on
8. Completi on of Constructi on 365
9. Completi on of Project 455

Page 4 of 18
EXECUTIVE SUMMARY

Project Estimate Unit Qty Rate Amount InRemarks


S Crs.

A Civil Works
-Construction of Main Building Sq mts 16000 5000 8 Trust +
developers
share
B Services & Utilities 0
- Fire Fighting L/s 1 2500000 0.25
- Elevator Nos 4 1700000 0.68
- Electrification L/s 1 0.3 0.3
- Plumbing L/s 0.2 0.2
C Interiors
- Finishing Items Sq mts 1000 1000 0.1
- Furniture L/s 500000 0.05
- Miscellaneous Items L/s 5000000 0.5
F External Site Development L/s 5000000 0.5

TOTAL TOTAL 10.58


Total construction cost /sq. Mt ( not 105800000
taking into a/c cost trust share of
bldg)

Calculations
Total land area with developer Sq. Mts 5,000.00
Total built up area on G.F Sq. Mts 4,000.00
Common area on G.F including foyersSq. Mts 750.00

Page 5 of 18
,staircases etc

Total built up area on F.F Sq. Mts 4,000.00


Common area on F.F including foyers
,staircases etc Sq. Mts 750.00
Net area for sale Sq. Mts 6,500.00
Price of land in Pune Sq. Mts 10,000.00
Cost of total land 50,000,000.00
Undiveded share of land /Sqmt. Of net
area for sale 50,000,000.00
Sq. Mts 7,692.31

Add for Interest for on year on 60 lacs 900,000.00


Intersest per Sq. Mt for net are of sale 138.46
total cost of land + cost of const +
interest /Sq. mt Sq. Mts 24,107.69
Total Selling price /Sq. Mt. Sq. Mts 24,246.15
Total amount from selling of commercial
property 78,800,000.00

Selling price of commercial space on G.F Sq. Mts 24,246.15


Total selling amount for G.F 78,800,000.00
Selling price of commercial space on F.F @
60% of the G.F rate Sq. Mts 14,547.69
Total selling amount for F.F 47,280,000.00
Total revenue from sales 126,080,000.00

Total expenditure for Developer


Total construction cost /sq. Mt ( not taking
into a/c cost trust share of bldg) 105,800,000.00
Add for Interest for on year on 60 lacs 900,000.00
Total expenditure 106,700,000.00
Total Revenue from sales 126,080,000.00
Net profit 19,380,000.00
Profit % age 18.16

Page 6 of 18
TERM LOAN INTEREST
AND REPAYMENT
SCHEDULE

Term loan : 50.00


Rate of Interest : 15%
Installment (Nos.) : 9
(Rs.Lakh)
Years Opening Quaterly Principal Closing Interest Total
Instalment Balance Amount of
Balance No. Amount (nterest) Instalment
1 Ist Year
50.00 1 6.00 44.00 1.88 7.88
44.00 2 6.00 38.00 1.65 7.65
38.00 3 6.00 32.00 1.43 7.43
32.00 4 6.00 26.00 1.20 7.20
2 2 Year 24.00 6.15 30.15
26.00 5 6.00 20.00 0.98 6.98
20.00 6 6.00 14.00 0.75 6.75
14.00 7 6.00 8.00 0.53 6.53
8.00 8 6.00 2.00 0.30 6.30
3 3rd year
2.00 9 2.00 0.00 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

Page 7 of 18
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.

3 Financial and economics evaluati on:

L.1 Introducti on and Scope

A project involves the current outlay (or current and future outlays) of
funds with the expectati on of getti ng future benefi ts. While capital
expenditure decisions are extremely important, they also pose
diffi culti es. Capital expenditure decisions involve substanti al
investment. Due to the inherent uncertainty, future predicti ons
become diffi cult. It is diffi cult to identi fy and measure the costs and
benefi ts of a capital expenditure since they are spread out over a long
period of ti me, 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 oft en cannot be
reversed without incurring a substanti al loss. Capital loss increases
with advances in technology. Capital investment decisions have an
enormous bearing on the future of an organizati on. Capital budgetary
proposals, therefore, demand a conscious approach in the early stages
of the project formulati on.

Capital budgeti ng is the process of analysing the fi nancial benefi ts of


acquiring a capital asset with a view to determine the viability of the
project. It is a complex process, as it takes into considerati on
depreciati on, taxes and cash fl ow. This appendix outlines the

Page 8 of 18
methodology of the project budgeti ng. The capital budgeti ng process
involves the following steps:

a) Esti mate the cash fl ow.


b) Establish the cost of capital.
c) Apply the investment appraisal criterion.

L.2 Esti mati ng Cash Flow

L.2.1 Cash Flow Components

These components in the product lifecycle costi ng can be divided into


an initi al investment, operati ng cash fl ows and a terminal cash fl ow.

 Initi al investment. It represents the relevant cash outf low or the


cost of setti ng up the project.

Initi al investment = Cost of capital assets + Installati on costs +


Working capital margin +Preliminary and pre-operati ve expenses –
Tax benefi t on capital assets, where applicable.

 Operati ng Cash Flows. These are the relevant cash infl ows and
outf lows resulti ng from the operati on of the project during its
economic life.

Page 9 of 18
Operati ng cash infl ow in a given year= Profi t aft er tax +
Depreciati on + Other non-cash charges + Interest on long-term debt
– Tax rebate

 Terminal Cash Infl ow. It is the relevant cash infl ow occurring at


the end of the product lifecycle on account of project
liquidati on.

Terminal cash infl ow = Post -tax proceeds from the sale of capital
assets + Net recovery of working capital margin + tax adjustment,
where applicable.

L.2.2 Time Period Considered for Analysis. It is the minimum of the


following:

 Physical life of the project or plant. It refers to the number of


years the project or plant would perform the functi on for which
it has been acquired.

 Technological life of the project or plant. It refers to the period


aft er which the present project or plant would become
obsolete.

 Product market life. It refers to the period for which the


product of the project or plant enjoys a reasonably sati sfactory
market.

Page 10 of 18
 Investment planning horizon of the fi rm. It is the ti me period
which a fi rm wishes to consider for the investment analysis. It
varies with the complexity and size of the investment. For small
investments (say, the installati on of a pumping set), it may be
fi ve years; for medium sized investments (say, purchasing a bull
dozer or installing a readymix concrete plant), it may be ten
years, and for large–sized investments (say, setti ng up of a new
pre–cast concrete factory), it may be fi ft een years.

L.3 Establishing the Cost of Capital

It involves determinati on of the present value of the cash fl ow


projecti ons occurring at diff erent points of ti me and making
adjustments for the ti me value of money.

L.4 Applying the Investment Appraisal Criterion

Aft er the capital costs and cash fl ows are computed, the next step is to
analyse the fi nancial worthiness of the investment proposal. There are
many methods for analysing investment proposals for making fi nancial
decisions. The commonly-used decision criterion can be divided into
two broad categories, i.e., discounti ng criterion and non-discounti ng
criterion.

Page 11 of 18
 Discounti ng criterion. These are based on net present
value, internal rate of return techniques and cost-benefi t
analysis.

 Non-discounti ng criterion. In this category, pay–back


period is the commonly-used technique.

Net Present Value (NPV). It is the total of all the cash fl ows, out and
in, over the product / plant lifecycle. The Net Present Value (NPV) is
calculated as follows:

NPV = PV of cash fl ows – Investment

Note.
1) The expected future net cash fl ows (Infl ows – outf lows) are
discounted at the cost of capital (r) to the base year (present ti me) to
obtain the present value (PV) of these fl ows. Therefore, it is assumed
that all future proceeds can be invested by the organizati on at the cost
of capital.

2) The initi al cost of the investment (1) is subtracted from the present
value (PV) to obtain the net present value (NPV) of the investment.

Page 12 of 18
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) Calculati on of the Net Present Value (NPV) is accomplished using


the following formula:

t n
NPV   NCF /(1  r) n  Investment
t 1

NCF1 NCF2 NCF3 NCFn


NPV=    ...............  Investment
(1+r) (1+r) 2 (1+r)3 (1+r) h

where NCF1, NCF2, NCF3, …… NCFn, are the net cash fl ows (NCF) for
the respecti ve years, r is the cost of capital and n is the expected life
of the project.

An organizati on should accept projects with a positi ve NPV and reject


projects with a negati ve 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:

Page 13 of 18
NCF1 NCF2 NCF3 NCFn 5
0=  2
 3
+ ........... h
 Investment
(1+r) (1+r) (1+r) (1+r) 2

where all the terms have the same defi niti ons 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 organizati on 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.

CASH FLOW FORECAST STAT EMENT:


Table: Cash Flow Forecast
Rs. (In Lakhs)
Years 0 1
A. Building and 105
preliminaries

B. Plant and equipment

Page 14 of 18
C. Working capital margin 10

D. Revenue 126.0
E. Annual operating costs 105

F. Depreciation
G. Interest on short–term 9.0
bank
Borrowings

H. General administrative 1.6


cost
I. Total cost of sale (E+F+G+ 115.6
H)
J. Profit before tax (D-I) 10.4

K. Tax (Assessed) 0.0


L. Net profit after tax 10.4

M. Sale value of plant &


equipment
after four years
N.Net recovery working
capital
Margin

O. Initial investment 115


(A+B+C)
P. Operating cash inflows 10.4
(L+F)

Page 15 of 18
Q. Terminal cash flow
(M+N)
R. Net cash flow (O+P+Q) -115 10.4

Pay–back Period. It is the ti me (in years) that a project / plant takes


to pay back the initi al cost of investment from the expected future net
cash fl ows resulti ng from the investment. In other words, it is the ti me
during which the cumulati ve cash infl ows equal to the original cash
outf low. 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 pay–back periods.

The pay–back period method does not take into considerati on the ti me
value of money and as such, can lead to incorrect results. If the
expected future net cash fl ows can be discounted at the cost of capital
to the base year (present ti me), then the payback period ranking
conforms to the results obtained from NPV and IRR methods.

Page 16 of 18
Benefi t-Cost Rati o. It is the rati o of the present value of benefi ts to
the initi al investment. In other words, it measures the NPV per rupee
of outlay.

BCR = Present Value of benefi ts / Initi al 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

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 Infl ow on Investment

NCF1 NCF2 NCF3 NCFn


NPV=  2
 3
+ ...........  Investment
(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:

Page 17 of 18
NCF1 NCF2 NCF3 NCFn
0=  2
 3
+ ...........  Investment
(1+r) (1+r) (1+r) (1+r) h
By trial using stati sti cal table, r = Y

Pay–back Period. It is the ti me (in years) that a project/plant takes to


pay back the initi al cost of the investment from the expected future
net cash fl ows resulti ng from the investment.
Pay–back Period = First year + Second year + Third Year + X of Forth
year
= N years.

Benefi t-Cost Rati o = Present Value of benefi ts / Initi al investment

Recommendati ons:
These are a rough schemati c planning of the project. Detailed planning
can be done aft er preliminary design as well site survey and
market survey is done.

Reference:

NICMAR Course Material

Page 18 of 18