Project

Financing & Evaluation

Part I
BAA3032:Project Management in Construction
SEM II 1011

outcomes

The end of this class, students are able to:

Differentiate the type of project financing
Determine a project that economically feasible

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1. Feasibility Phases
Project Concept
Land Purchase & Sale Review
Evaluation (scope, size, etc.)
Constraint survey Constraint survey

Site constraints
Cost models
Site infrastructural issues
Permit requirements

Summary
Decision to proceed
Regulatory process (obtain permits, etc)
Design Phase

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2. Project Financing

Type of Project Financing

Owner
Contractor

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2. Project Financing
Project Financing - Owner
Critical Role of Financing

Makes project possible

Has major impact on:
Riskiness of construction
Claims
Prices offer by the contractors

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2. Project Financing

Project Financing Owner

There are two way that owner could financing a
project
Public
In many areas, local governments will help local
companies with major new ventures

Private
a loan is obtained from a bank or other financial
institution to finance the cost of construction
this financing plan would involve both short and long
term borrowing

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2. Project Financing

Project Financing Owner

Private
arranging financing may involve a lengthy period of
negotiation and review
Activities
Analysis of financial
alternatives
Preparation of legal documents

Duration
4 weeks
16 weeks

Preparation of disclosure
documents

17-18 weeks

Forecasts of costs and revenues

16-17weeks

Bond Ratings

3 weeks

Bond Marketing

3 weeks

Bond Closing and Receipt of

Funds

3-4 weeks

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2. Project Financing

Project Financing Contractor

Build, Lease, Transfer (BLT)
Build, Own, Operate, Transfer (BOOT)

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2. Project Financing

Project Financing Contractor

build, lease, transfer (BLT)
Financing arrangement in which a developer (1) designs and builds a
complete project or facility (such as an airport, power plant, seaport), (2)
sells it to the government or a joint venture partner, (3) simultaneously
leases it back (usually for 10 to 30 years) to operate it as a business
and, after the expiry of the lease, (4) transfers it to the government or
partner at a previously agreed upon or market price.
build, own, operate, transfer (BOOT)
Financing arrangement in which a developer (1) designs and builds a
complete project or facility (such as an airport, power plant, seaport) at
little or no cost to the government or a joint venture partner, (2) owns
and operates the facility as a business for a specified period (usually 10
to 30 years) after which (3) transfers it to the government or partner at
a previously agreed-upon or market-price.

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2. Project Financing

The financing problem

Why?

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2. Project Financing

The financing problem

the project finance problem is to obtain funds to
bridge the time between making expenditures
and obtaining revenues
cash flow will involve expenditures in early
periods
contractor also may have a negative cash balance
due to delays in payment and retain-age of profits
or cost reimbursements on the part of the owner

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2. Project Financing

The financing problem

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2. Project Financing

The financing problem

Retention Fund
the amount of money retained by the owner from every
invoice, before a payment is made to the contractor
to ensure that the contractor will continue the work and that
no problems will arise after completion
ranges from 5% to 10% from contract value

Advance Payment
amount of money paid to the contractor for mobilization
purposes
improves the contractor cash flow and prevents him/her from
loading the prices at the beginning of the contract
however, may be used only in projects that require expensive
site preparation, temporary facilities on site, and storage of
expensive materials at the beginning of the project

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3. Economic Feasibility
Study

Project Financing Owner

Regardless of its size or type, a project must be
economically feasible
In general there are two ways to determine
economic feasibility, depending on whether the
owner is in the private sector or government
sector
For private project the economic feasibility can be
determined by an economic analysis of the
monetary return on the investment
For government project usually determined by a
benefit/cost ratio
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3. Economic Feasibility
Study

Project Financing Owner; Private Project

Commonly method that always used are:
Preliminaries Detail Abstract (PDA) & Project forecast
unit cost
Project Cash Flow
Profit
Maximum Capital
Payback Period

Present Value (Present Worth)

Net Present Value (NPV)
Internal Rate of Return (IRR)

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3. Economic Feasibility
Study

PDA & Project forecast unit cost

PDA (Preliminaries Detail Abstract) to estimate the
project cost based on previous similar projects to
estimate cost per square foot is very popular
Some will used forecast unit cost:
UC = (A + 4B + C) / 6
Where:
UC = forecast unit cost
A = minimum unit cost of previous projects
B = average unit cost of previous projects
C = maximum unit cost of previous project

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3. Economic Feasibility
Study

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3. Economic Feasibility
Study

Project forecast unit cost

Cost information from 8 previously completed
parking garage projects is given. Your company
will construct a garage that will accommodate
135 cars. Estimate the cost of the project.
UC = (A + 4B + C) / 6
Where:
UC = forecast unit cost
A = minimum unit cost of previous projects
B = average unit cost of previous projects
C = maximum unit cost of previous project

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3. Economic Feasibility
Study
Project

Total Cost

1,387,500

896,000

No. Cars
150

Unit Cost
9,250

80

11,200

1,797,000

120

14,975

1,107,000

90

14,975

590,400

60

12,300

1,903,000

889,000

1,615,500
Total
Average cost per car

220
70
180

8,650

C = Highest Value

A = Lowest Value

12,700
8,975
79,034
9,879

B = Average
Value

Total cost project : 135 cars x 10,524 =

1,420,673
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3. Economic Feasibility
Study

Project cash flow

Cash flow = Cash in Cash out (Income
Expense)
The project cash flow deal with the whole life of
project not only the construction period
The project will experience negative cash flow

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3. Economic Feasibility
Study

Project cash flow

The cumulative cash flow provides indicators for:
Payback period
Profit
Maximum capital

These indicators called the project profitability

indicators

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3. Economic Feasibility
Study

Project Profitability Indicators

Profit
It is the difference between total payments and total
revenue without the effect of time on the value of
money
When comparing alternatives, the project with the
maximum profit is ranked the best

Maximum Capital
It is the maximum demand of money, i.e., the
summation of all negative cash (expenditures).
The project with minimum capital required is ranked
the best

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3. Economic Feasibility
Study

Project Profitability Indicators

Payback period
It is the length of time that it takes for a capital
budgeting project to recover its initial cost
When comparing alternatives, the project with the
shortest payback period is ranked the best.

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3. Economic Feasibility
Study

Project Profitability Indicators

Present Value (Present Worth)
Present value describes the process of determining
what a cash flow to be received in the future is worth
in today's dollar.
Therefore, the Present Value of a future cash flow
represents the amount of money today which, if
invested at a particular interest rate, will grow to the
amount of the future cash flow at that time in the
future

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3. Economic Feasibility
Study

Project Profitability Indicators

Net Present Value
Net present value (NPV) is the summation of all PV of
cash flows of the project, where expenses are
considered negative and incomes are considered
positive.
A project will be considered profitable and
acceptable if it gives a positive NPV.
When comparing projects, the project with the
largest (positive) NPV should be selected.

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3. Economic Feasibility
Study

Project Profitability Indicators

Internal rate of return (irr)
The internal rate of return (irr) of a capital budgeting
project is the discount rate (i) at which the NPV of a
project equals zero.
The IRR decision rule specifies that a project with an
IRR greater than the minimum return on capital should
be accepted.
When choosing among alternative projects, the project
with the highest IRR should be selected (as long as the
IRR is greater than the minimum acceptable return of
capital).
The IRR is assumed to be constant over the project life.

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3. Economic Feasibility
Study

Project Profitability Indicators

Engineering economic analysis is the process of
evaluating alternatives. The basic variable time
value analysis for economic feasibility are:
P = present worth amount (the value of money
today)
F = compound amount (the future value of money
after n period of time at i interest)
A = equal payment series
i @ irr = interest rate per interest period (usually
one year)
n = number of period of time (usually in years)

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3. Economic Feasibility
Study

Project Profitability Indicators

The basic variable time value analysis for
economic feasibility can be used in two situation
Single Payment Series
F = P [(1+i)n] ------ eq 1
P = F / [(1+i)n] ----- eq 2

Equal Payment Series

F = A [((1+i)n 1)/i] ----- eq 3
P = A [((1+i)n 1)/i(1+i)n] ----- eq 4
A = P [i(1+i)n/((1+i)n 1)] ----- eq 5

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3. Economic Feasibility
Study
Single Payment Series vs Equal Payment Series

A
1

A
2

A
3

A
A
(n-2) (n-1)

F
A
n

A project investment worth RM18.0M (P), a net annual

profit will of RM3.5M (A) will be gain with 15% interest.
A project investment worth RM1.05M is being considered
5-years with net profit as shown below.
End of Year

Net Profit

-350k

-120k

420k

735k

680k

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Fi-n : Fi-1

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3. Economic Feasibility
Study
Project Profitability Indicators
Exercise 1:

Your company invested for a project worth

RM18.0M. A net annual profit is RM3.5M. 15% is
the rate of return on the investment, what is the
payback period for the project?
Answer = 10.5 years

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3. Economic Feasibility
Study
Project Profitability Indicators
Exercise 2:

Your company project is worth RM7.0M with an

expected operation life of 12 years. Annual
maintenance and operating expenses are forecast
as RM560K per year. Using 10% interest rate,
what net annual income must be received to
recover the capital investment of the project?
Answer : RM1.588M per year

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3. Economic Feasibility
Study
Project Profitability Indicators
Exercise 3:

You as a project manager to decide which project

is feasible to carried out based on data given by
the quantity surveyor. The data as below:
Establish the ranking of the projects in order of
attractiveness to the company using:
Maximum capital needed, profit and payback period
Year

Project
A

-10K

-40K

-30K

20

60

20

15

30

Project
B

-30K

-80K

30

50

10

20

40

40

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