ASSIGNMENT

National Institute of Construction Management and Research

SODE OFFICE

NAME - Punyadeep Roy

REG. No. - 216-01-11-50558-2172

Course No. - PGCM 24

Course Title - Construction Finance Management &

Cost Accounting
Assignment No. - 4

Date of Dispatch -

Last date of receipt -

Of Assignment at SODE office

ASSIGNMENT

An offer has been given by a Charitable Trust to develop and build a

facility on a 10,000 sq.m. of plot in a prime locality of Pune where 5000

Reg no-216-01-11-50558-2172
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 sq.m. of area will be used by the trust for housing, health facilities for senior
citizens . 5000 sq.m. will be given free to developer as a cost of
development.

Cost of land is Rs. 10,000/ sq.m.

Specifications of 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% of 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.

1. INTRODUCTION
Financial Management is mainly 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. Mainly it deals with
procurement of funds and its effective utilization.

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In recent times in India, many companies have raised long term finance by offering various
instruments to public like deep discover bonds, fully convertible debentures etc. These new
instruments have characteristics of both equity and debt and it is difficult to categorize them
either as debt or equity.
Sources of funds available to an enterprise must be instituted to achieve its prime objective.
Such a mechanism is required to evaluate risk, time and cost of each and every source of
fund.
Cash management involves managing cash resources of the firm in order to attain maximum
cash availability at any point of time, and maximum interest income on the idle funds.
Cash is one of the most important resources for the operating of the business.
The function of cash management starts when a customer pays cheque or money on its
Accounts receivable, and ends when payment is made to a creditor, government or the
employees against their respective dues.
All activities between these two points fall within the realm of cash management.
Cash is a resource, which the firm can dispense immediately without any restriction and,
therefore, it is termed as the life blood of every business entity.
The term cash will include coins, currency, bank balance and item, which can be, converted
into cast at short notice e.g. time deposits in the banks, marketable securities, etc..
Cash management involves managing cash resources of the firm in order to attain maximum
cash availability at any point of time, and maximum interest income on the idle funds.
Cash is one of the most important resources for the operating of the business.
The function of cash management starts when a customer pays cheque or money on its
Accounts receivable, and ends when payment is made to a creditor, government or the
employees against their respective dues.
All activities between these two points fall within the realm of cash management.
Cash is a resource, which the firm can dispense immediately without any restriction and,
therefore, it is termed as the life blood of every business entity.
The term cash will include coins, currency, bank balance and item which can be converted
into cast at short notice e.g. time deposits in the banks, marketable securities, etc.

*In our case the bank deposits and the fund availability with the contractor is not
enough to complete the project on his own so different strategies are required to solve
this problem

2. OBJECTIVE
Objectives of financial Management are:

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 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 a firm is represented by

the market price of the companys common stock. The market price
serves as a performance index or report card of the 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:

3. PROJECT IMPLEMENTATION SCHEDULE:-

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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

No form start
. date
1 Approval of concept 0
2 Site Survey To be done
3 Preliminary Drawing, Design and To be done
Cost Estimates
4 Preparation of detailed drawings 25
and estimates
5 Tender Notice for Construction 27
Contracts
6 Award of Contract 50
7 Commencement of Construction 92
8 Completion of Construction 365
9 Completion of Project 460

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4. EXECUTIVE SUMMARY:-
SL Amou
Project Uni
N Qty Rate nt in Remarks
Estimate t
o. Crs.

A Civil Works
Trust +
Construction of SQ 160
5000 8 develope
Main Building M 00
rs share
Services &
B 0
Utilities
25000
- Fire Fighting L/s 1 0.25
00
17000
- Elevator Nos 4 0.68
00
30000
- Electrification L/s 1 0.3
00
20000
- Plumbing L/s 0.2
00
C Interiors
SQ 100
D - Finishing Items 1000 0.1
M 0
50000
- Furniture L/s 0.05
0
- Miscellaneous 50000
E L/s 0.5
Items 00
External Site 50000
F L/s 0.5
Development 00
TOTAL TOTAL 10.58

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 Calculations

Total land area with developer SQM 5000

Total Total
construction
build up area on G.F SQM 1058000
4000
cost /sq. Mt ( not 00
Common area
taking into a/con G.F including foyers
SQM 750
,staircases
cost trust share of etc
bldg)
Total built up area on F.F SQM 4000

Common area on F.F including foyers,

SQM 750
staircases etc

Net area for sale SQM 6500

Price of land in Pune SQM 10000

500000
Cost of total land RS
00
Undivided share of land /SQM. Of net area 500000
RS
for sale 00

SQM 7692

Add for Interest for one 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

SQM 24108
/Sq. mt

Total Selling price /Sq. Mt. SQM 24246

Total amount from selling of commercial 788000

RS
property 00

Selling price of commercial space on G.F SQM 24246

788000
Total selling amount for G.F RS
00
Selling price of commercial space on F.F @
SQM 14548
60% of the G.F rate
Reg no-216-01-11-50558-2172 472800
Total selling amount
Page 7 of 19 for F.F RS
00
It is desirable to have a balance between working capital & cost differentials
of various sources of capital forming part of working capital.

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.

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 TERM LOAN INTEREST AND REPAYMENT SCHEDULE

Term
: 50
loan

Rate of
: 15%
Interest

Installme
nt 9
(Nos.) :

(Rs.Lak
h)

Openi Princip Total

Years Closing
ng Quarterly al Amount
Balance Intere
Installme of
Balanc Amoun (Interes st
nt No. Installme
e t t)
nt

1 Ist Year

50 1 6 44 1.88 7.88

44 2 6 38 1.65 7.65

38 3 6 32 1.43 7.43

32 4 6 26 1.2 7.2

2 2 Year 24 6.15 30.15

26 5 6 20 0.98 6.98

20 6 6 14 0.75 6.75

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 14 7 6 8 0.53 6.53

8 8 6 2 0.3 6.3

3 3rd year

2 9 2 0 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.

5. FINANCIAL AND ECONOMICS EVALUTION:-

L.1 INTRODUCTION & BASIC FEATURES OF CAPITAL

BUDGETING:-

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 pre-decided 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

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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

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.

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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.

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
capital margin + Preliminary and pre-operative 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 long-term 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.

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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 a weighted average
technique may be used in quasi marginal way to evaluate a 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-benefi t 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

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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.

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

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 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.

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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:

NCF1 NCF2 NCF3 NCFn 5

0= 2
3
+ ........... h
Investment
a. (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.

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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.

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

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FACTORS ACCEPTANCE CRITERION:-

Payback Period (PBP) < Target period

Net Present Value (NPV) > 0

Internal Rate of Return (IRR) > Cost of capital

Benefi t-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

IERNAL RATE OF RETURN (IRR):-

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

NCF1 NCF2 NCF3 NCFn

0= 2
3
+ ........... Investment
(1+r) (1+r) (1+r) (1+r) h

By trial using statistical table, r = Y

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6. 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.
Particularly during periods of economic recession construction firms are
exceedingly conscious of the problem of survival and seek to predict, monitor
and control costs and revenues with diligence far surpassing that employed
during more buy-ant time. Hence considering real estate value is going up it is
recommended to take up the project financial term in the project.

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7. Bibliography / Readings

1. Property Dealers article from Times of India

2. Comparing this project with the other surrounding projects.

3. G. Jagannathan, How to get more at low cost A Value Engineering

Approach

Books

1. Projects Planning Analysis Selection Implementation & Review by Prasanna

Chandra

2. Construction Finance Management a lesson Book by NICMAR.

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