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1. 2. 3. 4. 5. Course Number Course Title Assignment Number Date of Dispatch Last Date of receipt of Assignment at CODE Office NCP 29 Construction Finance Management And Cost Accounting 8 11th August, 2012 15th August, 2012
Submitted By: Name : Lalit Mohan Ranga Course : PGP CM Reg Number : 211-09-11-9889-2134
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 5,000 sq.m of area will be used by the trust for housing, health facilities for senior citizens. 5,000 sq.m will be given free to developer as a cost of development. Cost of land is Rs. 10,000/sq.m. Specifications for flooring: 10% Granite 40% Kota stone 50% Mosaic cement tiles R.C.C Framed structure. Aluminum 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. 10lakhs as his own funds and can rise not more than Rs. 50lakhs as bank loan.
FINANCE MANAGEMENT
Financial management is dealing with the procurement of funds to meet financial needs. Finance and capital are seen as a considerable problem for cooperative, the sources being the members and loans from banks or other institutions and individuals. The sources of capital available to any firm are quite numerous but as noted public limited companies have the greatest variety of sources available for their use and the single person enterprise. The capital structure of any firm is related to the form of the enterprise, its objectives, and the cost of capital. The cost of capital is subject to and governed by many variables, which often operate independently of each other. The firm must consider these influence and their effects on the cost of the individual types of capital to determine the most suitable capital structure. Cash budgeting will play an important role in any type of construction project also capital revenue, finance resource mobilization, cost accounting; management accounting will give proper planning of inflow as well as outflow resources in project.
PROJECT SCOPE
To develop a commercial site of 10,000 sqm and in that 5000 sqm developed area will be used by the owner and the balance 5000 sqm area will be utilized by the developer to get investment and a profit of 18% on this investment. Construction should be with RCC framed structure with Aluminum sliding WindowClass A. The flooring details are 10% Granite, 40% Kota stone, and 50% Mosaic cement tiles. The other construction specification is pertaining to Class A type. COST CALCULATION Manpower requirement In general without this, project cannot be run. One should know the requirements of manpower to run the show. Based on the site requirements, project will have the following categories: Management staffs. Professional staffs. Supervising staffs. Workers (skilled, semiskilled and un-skilled). Selection of manpower totally depends up on the nature of work, type of work, scope of work. Based on the scope of work, the organization chart should be prepared. Work distribution should be done according to the organization chart. For workers duration of working hour, cost per hour or day, output can do assessed based on the nature of work. For example, for labours, one labour can do the earthwork excavation up to 2-3 cubic meters for 8-hour upto the lead and lift of about 0.5-1 meter. Based on the above calculation number of manpower for certain activity can be assessed.
Earthwork excavation can be done with manually as well as mechanically. Now days generally this work are carried out by mechanically since the latter will take lot of time to excavate. Moreover compared to manual work is faster and cheaper also Suppose we need to excavate about 5000 cubic meters of earthwork excavation. One labor can do 2 cubic meter of soil. So number of labours required to do this activity is = (5000/2) = 2500 nos. According to priority of the works, within the time frame, it has to complete, suppose assume this has to be done within 25 days. No. of labours to be engaged/day = 2500/25 = 100 labours. Keeping labours such a longer duration for a smaller quantity of work will lead to delay in work and loss to the contractor. But the same activity with the machine, anyone can do within a week times or so. One TATA Ex-200 Excavator can load min 2530 trips/2-hours. No. of trip / day = (8 X 25 / 2) = 100 trips. Assume qty. / trip = 8 m3. Total qty. executed / day = 8 X 100 = 800 m3. Number of days required to excavate = 5000 / 800 = 6.25 days. Say = 7days.
Suppose here if we do the cost analysis: Labours: We have to keep the labours for 25 days to complete this activity. Assume rate of excavation = Rs. 80 per m3. Total amount = (100 X 25 X 80) / 2 = Rs. 100000 m3.
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Machine: But if we do this activity by machine, Assume rate of excavation = Rs. 25 / m3. Total amount = 5000 X 25 = Rs.125000.
By seeing the above comparison, machine oriented work can be done fast and economically in term of days and with less manpower. Now a days world is very fast, ones do not have time to do this type of work for longer duration. If the project duration increases, we have the following deficiencies: Profit will decrease. Manpower will be blocked. Further planning hampered. Slow work more overheads.
Design adequacy The considerations given while designing and checked with alternative design were also checked. Provide weather and sun protection, such as overhangs, awnings, canopies, and etc. to mitigate climate and solar conditions. The buildings, not the parking lots has been designed to establish the image and character for the development along street frontages. Short-term parking has been provided in close proximity to office check in area. Delivery and loading areas should be screened to minimize adverse visual and noised impacts to adjacent uses. Recreational facilities should be designed to offer privacy to facility users. The scale of buildings should be compatible with the surrounding development patterns. Walkway, stairway and balcony railings and other similar details are stylistically. Consistent with the building design minimize impacts on adjacent uses. Air conditioning units are not visible from
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public streets. Structures have been incorporated for interior access to guestrooms. Room entrances directly adjacent to parking lots or exterior walkways were not provided. Articulate fades to provide a visual effect that is consistent with the communitys character and scale. Free standing accessory structure Enclosed service areas and covered parking should be designed to be an integral part of the building architecture. The forms, colors, textures and materials used on the main building should be applied to all sides of these structures generally visible to the public.
ENVIORNMENT SENSITYVITY
While not specifically guideline items, the following measures that promote environmental sensitivity are offered for consideration by the development community: Orient and design new structures and addition for minimum solar gain, reflectivity and glare. Shelter entries and windows and use architectural shading devices and landscaping to minimize cooling losses. Use energy efficient materials in doors and windows. Use energy efficient lighting. Mitigate urban heat island effects. Reference national programs for environmentally sensitive development methods such as Leadership in Energy and Environmental Design (LEED), Energy Conservation Code (IECC) and Energy Star Labeled.
Sale of fixed assets. Raising long-term debt. Additional issue of shares. Net profits constitute a potential permanent source of working capital funds from current operations since funds accruing to the depreciation are usually expected to be reinvested at some later date in replacements and additions of fixed assets. This is the most desirable source of working capital, as it does not burden the business with external obligations. All other sources of funds are irregular and temporary Capital borrowing is a source of working capital that can be planned with certainty but these funds eventually have to be returned to the creditors and the only source of funds for replacement is working capital. Funds raised from the sale of shares may be a potential and permanent source of working capital in addition to net profit. These share issues may not add to interest burdens like long term debt but they exert a potential demand for dividends and the use of this source implies sharing of ownership in the business with new investors. When depreciation deductions from earnings are not balanced by new investment in fixed assets there may be an increase in working capital provided such funds are not used to pay back loans or to distribute dividends.
OPERATING EXPENCES
The actual costs associated with operating a property including maintenance, repairs, management, utilities, taxes and insurance. A landlords definition of operating expenses is likely to be quite broad, covering most aspects of operating the building. The following are some of the strategies that can make buildings healthy, comfortable and productive and reducing the operating expenses. Day lighting Properly commissioned and maintained HVAC systems Narrow floor plans to optimize natural daylight High benefit lighting upgrades Under floor air distribution and displacement ventilation Occupant control of heat, light and air Operable windows and mixed mode HVAC
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Buildings consume 40 percent of the worlds total energy, 25 percent of wood harvest and 16 percent of water consumption, according to the US Department of Energys Center of Excellence for Sustainable Development.
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PAY BACK OF INVESTMENT This is widely used technique of assessing proposals on capital expenditure. This method, also known as pay-of-method, tends to ascertain the period in which the cost incurred on a capital project and there from is equated. It determines the period in
which the investment is recovered. The period of repayment is popularly known as pay-back period. Earnings here means profits, arising out of the use of assets before deducting depreciation but after deducting income tax. Only then the cost generated to pay-off the cost of the asset can be known. Thus, Earnings = Sale of the products its cost of production Income Tax payable. In case of annual earnings are fairly uniform, the payback is determined as: Pay - back period = cost of asset i.e. investment = No of years Earnings or Net cash flow per year If there are alternatives proposals of investment in different models or makes of an asset, say machines, the choice would fall on the model that pays for itself the earliest of all i.e. with the shortest pay-back period to quote Keller and Ferrara. Those proposals with shortest pay-back periods, would considered the most desirable and those with the longest pay-back periods would be considered least desirable cash flow.
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Those projects, which have been found feasible, have to be ranked from two points Liquidity Profitability The different methods of capital investment proposals we need top management accords its approval or notes its rejection. For the accepted projects, necessary sanction is accorded for its financial outlay and orders are passed for their execution. Following are some methods: PAY-BACK METHOD This is widely used technique of assessing proposals on capital expenditure. This method is also known as pay-off-method, tends to ascertain the period in which the cost incurred on capital project and earnings there from are equated. It determines the period in which the investment is recovered. The period of repayment is popularly known as pay-back method. If there are alternative proposals of investment in different models or makes of an asset, say machines, the choice would fall on the model that pays itself the earliest of all i.e. with the shortest pay-back method. Those proposals with shortest pay-back periods would be considered the most desirable and those with the longest pay-back periods would be considered least desirable. Pay-back method = cost of asset i.e. investment /earnings or net cash flow per year = no of years
AVERAGE RATE OF RETURN Rate of return is the ratio of investment. Basically there are two principal variations in approach Original investment approach : It refers the total cost of the project till its commissioning minus any salvage value divided.
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Average investment approach : It means the original cost divided by 2, and where there is some salvage value recoverable at the end of the life the asset, it would be (original cost salvage value) + salvage value. The average investment approach is more realistic than the original investment. Approach, since the investment gradually decreases over the number of years.
Average annual earnings after Rate of Return = average depreciation and taxes average investment 100
Discounted cash flows techniques Net present value method (NPV) The net present value of the project is equal to the some of the present value of the all cash flows associated with the project. NPV = (CF1 / (1+K) )+ (CF2 /(1+K)*2) + (CFN /(1+K)*N-L) - CFN = cash after occurring at the end of year N - L = initial investment - K = cost capital - N = life of the project Internal Rate of return (IIR) IRR of a project is the discount rate, which notes its net present value equal to zero. It is value of K in the equation. L = (CF1 / (1+K)) + (CF2 /(1+K)*2) +(CFm /(1+K)*m)
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IRR method also takes into account the time value of money. It makes sense to businessmen who want to think in terms of rate of return and not in terms of absolute quantity such as net present value. Payback period This is the period by which initial investment is entirely recovered.
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Thus developer can generate the amount by giving this land for rents to private authorities. Developer is going to get the rent of 400Rs/ m2/mount, which will generate the amount for the year as 400 X 5000 X 12 = 24000000 Rs. Developer is going to generate the total amount of 30000000 Rs. We can say the amount generated from bank is having the rate of interest 14% i.e. at the end of the year we have to return total amount of 5000000 X 1.14 = 57000000 Rs. Thus the total investment of the developer will be 30700000 Rs. within the year.
NET PRESENT VALUE METHOD (NPV) NPV = (CF1/(1+K)) + (CF2/(1+K) * 2) + (CFN/(1+K) * N L) Life of the project is one year NPV = 50000000 / (1+0.14) - 30700000 = 13159649 Thus the investment is most beneficial to developer
INTERNAL RATE OF RETURN (IIR) L = (CF1/(1+K)) + (CF2/(1+K)*2) + (CFm/(1+K)*m) 30700000 = 50000000/(1+K)*1 K = 0.628 i.e. 62% Thus the investment is most beneficial to developer because he is getting net profit more than 18% i.e. developer is getting 62% net profit on his investment
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PAYBACK PERIOD This is the period by which initial investment is entirely recovered. Developer is going to invest the total amount for development within one year is 30700000Rs. at the same time he is going to make an asset of 50000000 Rs. in terms as a land property, this shows the developer is going to recover his investments made in the development within a year. Ideally, this choice should be clear well in advance so they have sufficient warning and details can be agreed. Detailed planning and resourcing for the following phase should be performed well in advance. Where team members will be leaving, their next role or assignment should be identified.
RECOMMENDATION
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.
Bibliography
1. Text Books from NICMAR. 2. Financial Management, Second Edition, Oxford Publication by Srivastava Misra.
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