Assignment no.

4
Construction finance management
Registration no.

ASSIGNMENT
NICMAR / CODE OFFICE
1. Name

2. Reg. No.

3. Course No.

NCP-29

4. Course Title

Construction Finance Management

5. Assignment No.

Four

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

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Assignment no. 4
Construction finance management
Registration no.
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 10 lakhs as his own funds and
can raise not more than Rs 50 lakhs as bank loan.

INTRODUCTION:Financial Management is 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. It is concerned with
management of money matter.
Financial Management deals with procurement of funds and
their effective utilization in the business.
Finance Management as an analytical way of looking into the
financial problem of the firm & consider financial management.
as a part of Overall Management. The emphasis is on the
managerial financial problem from rising of funds to the efficient
& effective use of funds, efficient allocation etc.
The Capital investment relates to allocation of Capital &
involves the decision to commit funds to long term assets, which
would yield benefits in future but future benefits are difficult to
measure & cannot be predicted with certainty. Because of its
uncertain nature, capital investment decision involves risk.

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Assignment no. 4
Construction finance management
Registration no.
The Financing decision involves decision on when, where and
where and how to acquire funds to meet the firms investment
needs. The central issue is to meet the firms investment need.
The central issue is to determine the proportion of equity capital
and debt capital. The time should strive for the best financing
mix or optimum capital structure for the firm.
Objectives of financial Management are:
1. PROFIT

MANAGEMENT:-

Profit

cannot be sole objective of a company.

maximization
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

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Assignment no. 4
Construction finance management
Registration no.
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:

OBJECTIVE : To utilize the space provided by charitable trust for a social

& noble cause.
To provide a better place for senior citizens.
To make the society aware about the responsibly towards
our elders.

FACILITIES TO BE PROVIDED: Charitable Trust Share.

Parking Facility should have enough space for four
wheelers & two wheelers.
Security Announcement Booth will be provided.
Landscaping for providing natural green environment to
the area.
Lighting Arrangement for providing necessary yard and
illumination, luminax per sq. ft. will be 160.
Public Toilets for providing basic public convenience.

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Assignment no. 4
Construction finance management
Registration no.
Fire Fighting system.
Cafeteria
Health facilities.
Elevators
Then we have to finalize the Schedule for the Project .

PROJECT IMPLEMENTATION SCHEDULE: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.

No. of days form

start date

1
2
3

0
To be done
To be done

5
6
7

Approval of concept
Site Survey
Preliminary Drawing, Design and Cost
Estimates
Preparation of detailed drawings and
estimates
Tender Notice for Construction Contracts
Award of Contract
Commencement of Construction

Completion of Construction

365

Completion of Project

460

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25
27
50
92

Assignment no. 4
Construction finance management
Registration no.

EXECUTIVE SUMMARY:SL
Project Estimate
No.
A

Unit

Qty

Rate

Amount
Remarks
in Crs.

Civil Works
Construction of Main
Building

SQM 16000 5000

Services & Utilities

L/s
Nos
L/s
L/s

- Fire Fighting
- Elevator
- Electrification
- Plumbing
Interiors

- Finishing Items

Trust +
developers
share

0
1
4
1

2500000
1700000
3000000
2000000

0.25
0.68
0.3
0.2

SQM 1000

1000

0.1

- Furniture

L/s

500000

0.05

- Miscellaneous Items

L/s

5000000 0.5

External Site
Development

L/s

5000000 0.5

TOTAL

TOTAL

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

10.58

105800000

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Assignment no. 4
Construction finance management
Registration no.

Calculations
Total land area with developer
Total build up area on G.F
Common area on G.F including foyers ,staircases etc
Total built up area on F.F
Common area on F.F including foyers, staircases etc
Net area for sale
Price of land in Pune
Cost of total land
Undivided share of land /SQM. Of net area for sale
Add for Interest for on year on 60 lacs

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SQM
SQM
SQM
SQM
SQM
SQM
SQM
RS
RS
SQM
RS

5000
4000
750
4000
750
6500
10000
50000000
50000000
7692
900000

Assignment no. 4
Construction finance management
Registration no.
Interest per Sq. Mt for net are of sale
total cost of land + cost of const + interest /Sq. mt
Total Selling price /Sq. Mt.
Total amount from selling of commercial property
Selling price of commercial space on G.F
Total selling amount for G.F
Selling price of commercial space on F.F @ 60% of the
G.F rate
Total selling amount for F.F
Total revenue from sales
Total expenditure for Developer
Total construction cost /sq. Mt ( not taking into a/c cost
trust share of bldg)
Add for Interest for on year on 60 lacs
Total expenditure
Total Revenue from sales
Net profit
Profit % age

RS
SQM
SQM
RS
SQM
RS

138
24108
24246
78800000
24246
78800000

SQM
RS
RS

14548
47280000
126080000

RS
RS
RS
RS
RS
%

105800000
900000
106700000
126080000
19380000
18

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.

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Assignment no. 4
Construction finance management
Registration no.
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.

TERM LOAN INTEREST AND REPAYMENT SCHEDULE

Term loan
Rate of
Interest
Installment
(Nos.) :
Years
1

50

15%
9

Opening Quarterly
Installment
Balance No.
Ist Year
50
1
44
2
38
3

Amount

(Rs.Lakh)
Closing
Balance
(Interest)

Total
Interest Amount of
Installment

6
6
6

44
38
32

1.88
1.65
1.43

Principal

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7.88
7.65
7.43

Assignment no. 4
Construction finance management
Registration no.
32
2
26
20
14
8
2

4
2 Year
5
6
7
8
3rd year
9

6
24
6
6
6
6

26

20
14
8
2

1.2
6.15
0.98
0.75
0.53
0.3

7.2
30.15
6.98
6.75
6.53
6.3

0.08
2.63

2.08
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.

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.

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Assignment no. 4
Construction finance management
Registration no.
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 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

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Assignment no. 4
Construction finance management
Registration no.
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.

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.

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Assignment no. 4
Construction finance management
Registration no.
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.

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

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Assignment no. 4
Construction finance management
Registration no.
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 anew 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

criterion

can

be

decisions.
divided

The

into

two

commonly-used
broad

decision

categories,

i.e.,

discounting criterion and non-discounting criterion.

Discounting criterion. These are based on net present
value, internal rate of return techniques and costbenefit analysis.
Non-discounting criterion. In this category, payback
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
Note.
1) The expected future net cash flows (Inflows outflows) are
discounted at the cost of capital (r) to the base year (present

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Assignment no. 4
Construction finance management
Registration no.
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

NPV=

NCF1 NCF2 NCF3

NCFn

...............
Investment
2
3
(1+r) (1+r) (1+r)
(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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Assignment no. 4
Construction finance management
Registration no.

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:

0=

NCF1 NCF2 NCF3

NCFn 5

+
...........
Investment
2
3
h
(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.

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.

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Assignment no. 4
Construction finance management
Registration no.
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
FACTORS ACCEPTANCE CRITERION:Payback 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 Inflow on Investment

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Assignment no. 4
Construction finance management
Registration no.

NPV=

NCF1 NCF2 NCF3

NCFn

+ ...........
Investment
2
3
(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:

0=

NCF1 NCF2 NCF3

NCFn

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

By trial using statistical table, r = Y

RECOMMENDATION:-

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Assignment no. 4
Construction finance management
Registration no.
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.

REFERENCE:Course Material, NICMAR

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