Construction Economics & Financial Management

[CEM-6105]

Adama Science and Technology University

Department of Civil Engineering

Master of Science in Construction Engineering and Management 1

Targeted Students: Instructor:

1st Year CEM Students Dr. Meseret Getnet

January, 2020
 Chapter 6
2

Construction Economics and Finance in Ethiopia

2
 Construction Economics & Finance in Ethiopia
• Financial Institutions
– Ministry of Finance and Economic Development
– Ministry of Revenue
– Banks
• National Bank of Ethiopia
• Commercial Bank of Ethiopia
• Construction Business and Investment Bank
• Private Banks
– Insurances
• Ethiopian Insurance Corporation
• Private Insurances
– Micro Finance Institutions
 Construction Economics & Finance in Ethiopia
• Financial Laws
– ……
– Monetary and Banking (Proc. No. 83 / 1994)
– Licensing and Supervision of Banking Business (Proc. No. 84 /
1994)
– Licensing and Supervision of the business of Micro-Financing
Institutions (Proc. No. 40 / 1996)
– ….
 Construction Economics & Finance in Ethiopia
• Appraisal Methods
– See Processes for Domestic Financing (Government Budget,
Banks, Communities, Private Owners)
– BCR and IRR (> 10)
– Requirements (Banks)
• General
– Healthy financial status, Acceptable Collateral, Smooth Credit
Relationship, Previous work performance,
• Specific
– Contract Details including Scope of works and Resources programming
– Company Profile including Organization and Management Setup,
Purchasing and Inventory System
– Cash flow including Income and expenses schedules
– Payment Channelling
 Construction Economics & Finance in Ethiopia
• Appraisal Methods
• Others
– Financial Statement (Income Statement and Balance Sheet)
– Application
– Legal requirements (Trade License, Investment Certificate, Tax and
VAT- Identification Numbers, etc)
 Construction Economics & Finance in Ethiopia
• Contextual Situations
– Capacity of Construction Companies
• Advance Payment is necessary
• Other Financial Sources are Mandatory
• Final Stage Financial Consumption is very high due to high cost of
Finishing Materials
– Use of Finances
• Recognizing slow and long return on investment nature of
construction business
• Minimize cash crunching and financial siphoning
• Maximize incomes and use of diversified sources of finance
• Develop Project Based financing and accounting systems
– Financial Institutions
• Develop conducive environment fit for the contextual situations of
the construction business
 Exercises
• For a Nursery school; two alternatives were proposed.
– Alternative 1:
• New building with a total cost of 8.4 million Br
• Gross Area of the new building is 614 sq. m.
• Yearly Operation and Maintenance Costs are estimated to be 600 Br per
year
• Periodic Maintenance cost every 10 years are estimated to be 700,000 Br
• The Planned use of the building is estimated as 40 years
• The income per year is 1,020,000 Br per year
– Alternative 2:
• Renovating existing building with a total cost of 5.8 million Br
• Gross Area of the existing building is 620 sq. m.
• Yearly Operation and Maintenance Costs are estimated to be 850 Br per
year
• Periodic Maintenance cost every 8 years are estimated to be 760,000 Br
• The Planned use of the building is estimated as 40 years
• The income per year is 2 % lower than Alternative 1
– Interest Rate is assumed as 6 %
 Exercises
Questions
1. Compare the two alternatives and recommend the best
alternative using:
A. Net Present Value Method
B. Internal Rate of Return Method
2. If a resale value of 2.5 million Br can be raised after a periodic
maintenance of 700,000 Br at 40 years is carried out for Alternative
1 and No Salvage Value is but demolishing cost is assumed to be
500,000 Br. Compare the two alternatives using the LCC (Life
Cycle Cost) Method.
3. If the following three parameters are known to change; namely
the interest rate, the income and the investment costs for the two
alternatives; compare and provide recommendations on the best
alternatives using sensitivity analysis

Refer documents provided and discussions!!!

 Exercises
• The Community of Wonji have discussed a project on a private investor
undertaking to finance, build and maintain a high scholl building for ten
years. The income for the investor is in the form of rent per year covered
by the community. At the end of the Ten years, it is decided to find new
users or sell it. The Analysis was carried out with Microsoft Excel taking
the following considerations:
• Plot Area = 15,000 sq. m with a lease price of 270 Br / sq. m
• Building Area = 3265 sq. m with a price of 12,500 Br / sq. m
• Depreciation can be 2 % per year and alternatively 4 %
• Operating and Maintenance costs = 327 Br / sq. m
• Real rate of interest rate per year = 6 % (NB: MoFED nowadays
recommends 4 % per year)
• Inflation rate also can be 2 % per year and alternatively 4 %
• Salvage value of the building after ten years = 35 % of Building cost and
alternatively 30 %
• Loan = 40 million Br and alternatively 39 million
• Installements and Incomes (6.3 million Br / year and alternatively 6.7
million Br / year) are as given in the Excel sheets
 Exercises
Questions
1. Explain the profitability of the investor based on the detail analysis
taking into considerations the changes in depreciation, loan,
inflation, income and investment options indicated above and
considered in the Excel computations
2. Analyse and explain the net cash flow of the different options
3. What will be your recommendation to the Private Investor
NB: The depreciation was computed using the declining balance method {Dep
= P*r*(1 – r)^n-1}
The interest used for computation was Combined interest to cater for
both the real and inflation rates; that is, Ic = {Ir + If + (Ir * If)}
12