CONSTRUCTION ECONOMIC

2014 Past

11

(a) ROI = (Net Cash Flow/GDV)x100%

Cash
Flow
Year
Year
Year
Year
Year
Year

0
1
2
3
4
5

Project A
(RM000
)
(500)
50
150
350
600
500

Cumulative Cash
Balance (RM000)
Project A
(500)
(450)
(300)
50
650
1,150

Project B
(RM000)
(500)
75
100
150
150
90

Cumulative Cash
Balance (RM000)
Project B
(500)
(425)
(325)
(175)
(25)
65

ROI for Project A= (1,150/500) x100%= 230%

ROI for Project B= (65/500) x100%=13%
(b) NPV=[(CF at n)/(1+i)^n], n=year @ used when it is NET PROFIT
NPV= (PVF x CF)-Investment, PVF=1/ [(1+i) ^n] used when it is
Cash
Flow
Year
Year
Year
Year
Year

1
2
3
4
5

Cumulative Cash
Balance (RM000)
Project A
(450)
(300)
50
650
1,150

Ans:
PV== [-450/(1+0.08)^1] +
[-300/(1+0.08)^2]+ [50/
(1+0.08)^3]+ [650/
(1+0.08)^4]+[1150/(1+0.08)^5] =

Or

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CONSTRUCTION ECONOMIC
Proje
ct
Cash
End

Year 1
Year 2
Year 3
Year 4
Year 5
Total

Cash
Inflows
(RM00
0)
50
150
350
600
500

Project A

11

PVF = 1/
[(1+i)^n
]

PV

Cash
Inflows
(RM000)

PVF = 1/
[(1+i)^n]

PV

0.9259
0.8573
0.7938
0.7350
0.6806

46.29
128.595
277.83
441
340.3
1,234.01
5

75
100
150
150
90

0.9259
0.8573
0.7938
0.7350
0.6806

69.4425
85.73
119.07
110.25
61.254
445.746
5

Project B

Project A
PV=[50/(1+0.08)^1] + [150/(1+0.08)^2]+ [350/(1+0.08)^3]+ 600/
(1+0.08)^4]+[500/(1+0.08)^5]
= 1234.0479
NPV=PV-Initial Investment=1,234.015-500=734.015 (NPV>0, Accept)
Project B
PV=[75/(1+0.08)^1] + [100/(1+0.08)^2]+ [150/(1+0.08)^3]+[150/
(1+0.08)^4]+[90/(1+0.08)^5]
= 445.76
NPV=PV-Initial Investment=445.7465-500= (54.253) (NPV<0, reject)
(c) Project A is chosen, as it shows the highest value in ROI and NPV as
compared to
Project B.

Extra:
Payback Period = A + [(Investment Cost B)/C],
A=LAST Period with ve Cumulative CF,
B=Absolute value of cumulative CF at A,
C=Total CF during the next year of Period of A
Payback Period=2+ [(500-300)/350] =2.57 year
YP = 1/ROR
ROR=NPV inflows/NPV outflows, NPV outflows=Cost/PV at end year
Discount Factor: Discount rate is an interest rate, a central bank charges
depository institution that borrows reserves from it.
Inflation Factor: Inflation rate us the percentage by which prices of g&s
rise beyond their average levels.

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CONSTRUCTION ECONOMIC
11

2014 Past Year

Given: Cost = RM750, 000, ROR=0.2 (20%), inflation rate=4%

* r = discount rate (also referred to as the required rate of return)
* PV=1/[(1+i)^n], i=interest/discount rate, n=number of years
Yea Details
Cash
Cash
Net CF
PV of 1 @ Discounted
r
Outflows
Inflows
(RM00 0.2
Value @ 0.2,
(RM000)
(RM00
0)
= 1/
Net PV
0)
[(1.2)^n]
(RM000)
0
Total
750
(750)
1.00
(750)
Constructi
on Cost
1
Sales Profit
200
200
0.83333
166.666
2
Sales Profit
250
250
0.69444
173.61
3
Sales Profit
300
300
0.57870
173.61
4
Sales Profit
500
500
0.48225
241.125
(750)
1,250
750
Profit
500
Net PV
5.0154
(a) i. DCF = 200/[(1+0.2)^1]+ 250/[(1+0.2)^2]+ 300/[(1+0.2)^3]+ 500/
[(1+0.2)^4] = 755.015
ii. NPV = CF-Initial Cost = 755.015-750=5.0154 (NPV>0, Accept)
iii.PI=PV/Cost = 755.015/750 = 1.006 (PI>1, accept)
(Slide Share)
th
(b) at the 4 year, discounted rate=0.2 and
inflation rate=4% (0.04),
hence, the i=0,24
10m

NPV= [200/[(1+0.2)^1]+ 250/[(1+0.2)^2]+ 300/[(1+0.2)^3]+

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DCF

CONSTRUCTION ECONOMIC
500/[(1+0.24)^4]] 750 = 725.375
11 750 = (24.62)
(NPV < 0, reject project)
PI=PV/Cost=723.375/750=0.9645 (PI<1, reject)

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CONSTRUCTION ECONOMIC
Past Year December 2012/Jan2013,
11 and June 2013

(a)THREE methods for the initial price for the housing project
(15m)
Estimating during preliminary design, estimating unit = element
(UNIT METHOD)
Estimating during developed design, estimating unit=sub-element
(ELEMENT ESTIMATE)
Estimating during construction drawing phase, estimating
unit=schedule of quantity unit (APPROXIMATE QUANTITIES)
Method
Unit

When it is
used
Inception,
Feasibility

Element
estimate

Developed
Design

Approxim
ate
Quantities

Detailed
Design

Floor Area

Outline
Proposal

Note
Appropriate for projects that
have a standard unit of
accommodation. It is commonly
used to establish the cost limit
for public sector project.
This is not an actual estimating
method. Preparation of cost is
based on element to ease the
process of cost control. This
method closely related to cost
planning.
Popular method used especially
for unique or difficult project &
when the duration to prepare
the estimate is long.
Still used extensively. A popular
method & can be used for
almost all type of building.

Unit of
measurement
Cost/student
Cost/classroom
Cost/bed
Cost/chair
More towards cost per
unit (m, m2, m3)

Depends on the
method employed for
calculating composite
items
Cost/m2

1. Unit Method,
- Used to estimate building cost where the size depends on the
population unit such as total number of students in a school, total
number of beds ina hostel/hospital.
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CONSTRUCTION ECONOMIC
- The easiet method as estimate can
11 be done by not referring to the
drawings because it is sufficient to know the number of
accommodation, but the most unrefined.
- Only suitable in initial stage of project.
- Example:
Building
Categor
y
Health &
Welfare

Building Type

Hospital
Clinic

Unit
Evaluat
ion
Bed
Unit

Range (RM)

Average
(RM)

69,000-75,000
6,100,0007,200,000

72,000
6,650,000

2. Element Estimate
- Used as the basis in the Element Cost Planning.
- Used to calculate the reasonable expenditure for a particular project.
- Require expertise to distribute the cost to smaller breakdowns.
3. Approximate Quantities (its look like the BQ)
- Involves dimensional calculation.
- Need to otain more detailed description of the project because the
cost plan is prepared in the early process of design by utlising only
sketces and specification notes.
- Best used when there are new requirements that cannot be
calculated via the proportion method from the cost analysis.
4. 2012 Q1 (a) Describe Gross Floor Area (GFA) technique (5m)
- The most often sued method to make preliminary estimate, as most
of the cost data are kept or available in this form.
- Only building uses this GFA method.
- Calculate building area (m2) with this formula:
Total Cost=Area x Cost/m2 GFA
Where:
Area Calculate the area of building, the measurement method differs
according
to practices
Cost/m2 GFA From similar building type & function
(b)Approximate Quantities is the best method to prepare estimate.
(10m)
i.
this is because this method uses a short cut process as in the
prepearation and pricing of the BQ.
ii.
it is accurate and all the information can be used for the purpose of
cost checks at the design stage.
iii.
It is the best method with condition that most information can be
obtained.
iv.
Since estimate is divided into elements or composite item, hence it
can assist the arhictect at the design stage.
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CONSTRUCTION ECONOMIC
v.
vi.

Easy to make adjustments on11

estimates if there are changes to the
quantity / quality of materials involved.
Adjustments to estimate can be done to take into account changes
to design & specificaiton.

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CONSTRUCTION ECONOMIC
Past Year 2010 (No English)

11

S3 (a) (i) There are three classifications of general category of

Feasibility Study that based on:
1. National Studies / economic Factor
- bigger scope involved
- more of macro-scale in characteristics but similar in procedure to a
micro-scale study of types two and three
2. In-house studies on individual projecrs / specific problem areas
- In construction industry, this study conducted by companies who
have sufficient expertise.
- construction scope be not too disimiliar with the project that has been
carried out bu the company.
3. Studies on individual projects / specific problem areas
undertaken by external agencies
- Studies conducted by external agencies, normally appointed by
consultant
- not necessarily on new areas
S3 (a) (ii) 3 Types of feasibility study (6m)
1. Marketing Feasibility Study
- This includes analysis of supply, demand & price.
2. Financial Feasibility Study
- It covers studies relating to cost & return, profit on cost, development
return, investment assessemnt, etc
3. Site/Location Feasibility Study
- It includes description of site/location, basic facilities, planning
permission & surrounding development.
4. Technical Feasibility Study
- Details on how to deliver a product / service (i.e., materials, labor,
transportation, where business will be located, technology needed, etc)
5. Economics Feasibility Study

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CONSTRUCTION ECONOMIC
- It encompasses studies pertaining
11 to trends of employment, income
and population.
S3 (b) 5 Criteria for project that is feasible (10m)
i.
Feasibility study shows that the necessary construction technology
is available
ii.
There exists competant contractors familiar with technology and
location .
iii.
There are adequate human, physical, and financial resources.
iv.
There is a confidence level towards the results of study proves that
it can be implemented.
v.
The expected economic condition meet the clients criteria.
- Economic situation changes all the time, hence a 2 years pay-back
period might be
appropriate for big projects.
- Discounted Cash Flow Return (DCFR) of 20% to 25% and NPV is
maximised.
vi.
Other criteria: like client may minimise the use of manpower (at
locations with low density & low population scale) or vice versa.

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CONSTRUCTION ECONOMIC
Past Year 2010 (No English)

11

(a)Types of Approaches (Value approach) (6m)

*There are mainly five methods of value property valuation which are the
investment method, residual method, comparative method, contractors
test and profits method.
1. Comparative Method
- use comparative method to compare capital / rental values from the
market.
- links directly to evidence of current market transactions.

VALU

COS

A valuers always prefer to use comparative method for assessing market

value/rent, the other methods are used if and only if when comparative
method cannot be used with full confidence as there is little or no,
evidence if comparable market transactions.
2. Investment Method
- seeks to derive the market value of a freehold or leasehold interest in
property form its potential to generate future income.
- determine the GDV of a proposed commercial development.
3. Residual Method
- Valuation of a site which has development potential.
- development potential exist when a property can be improved or
developed so that its market value increase by more than development
costs, including an adequate profit for developer.
4. Profits Method
- valuation based on the profits of an enterprise.
- method that recognize that property is capable of helping an
enterprise earn a profit.
- Used to determine the GDV, depending on the type of property.
- illustrates that the rental value of all land & property is derived from
its earning capacity or productivity.
5. Contractors Test(Cost-Based Method)
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CONSTRUCTION ECONOMIC
- Valuation based on the cost of construction
11
rather than value.
- It is a cost method of valuation, used to value property for its current
use when the comparative, profirs or investment methods cannot be
used because there is no active market for the property being valued &
there is no evidence of sales or letting transactions due to specialized
nature of the property.
- Cost calculated for building works are a form of contractors test.
Method

Capital Value
Rental Value
(market Value)
Comparison
Yes
Yes
Profits
No
Yes
Residual
Yes
No
Contractors
yes
No
*investment method allows rental value turned into capital values and vice
versa.
Extra
i.
Sales Comparison Approach
- use data on current sales of comparable properties.
ii.
Cost Approach
- Relies on the appraisers estimate of the amount required to buy
vacant land and the cost to construct the existing or proposed
buildings or structures on it.
iii.
Income approach
- analyzes the income-producing capability of rental investment
property to indicate its market value.
- used to appraise commercial, industrial and residential-income
properties according to their ability to produce net income.
iv.
Account Approach
(b)i. Operation of Sales Comparison Approach (10m)
(4 Steps) :
1.Research Recent Sales, 2.Analysed Sales, 3. Adjust Sales for difference
between sales & subject property 4.Arrive at Value Estimate

Step 1: Research Recent Sales,

Involve 3 steps:
(a) Selecting comparable sales,
(b) Collecting Appropriate Sales Information,
(c) Check for reliability
(a) Selecting Comparable Sales
*must meet 3 criteria below, So that the sale is considered a valid
comparable
i.
the sale is competitive property
- the substitute sale property had a potential purchaser looking at the
subject property
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CONSTRUCTION ECONOMIC
ii.

iii.

- it is similar enough to the subject

11 property in size, shape & features.
- same group of buyers, family size, age and or economic status.
be an open-market transaction
- adequate exposure to a number of prospective buyers is essential to
establish a market-determined price.
Date of Sales
- dates of sales (date which the parties were committed to the
contract) must relatively close to the date value.
- This is because; the value of property can change rapidly and the
sales price is sometimes established by an option or other agreement
by the parties well before the actual recording of the sale. (property
value vary from time to time)

Once the sales investigation done and had decide which are comparable
to the property appraised, next is to collect pertinent data.
(c) Collecting Appropriate Sales Information (Locating the
appropriate sales information)
Collecting the necessary information about the sales transactions,
physical characteristics, legal status and its location (in short,
collecting sales data) through the public records, private sources and or
internet.
i.
Sales transaction: date of sale, buyers & Sellers motives
(transfer? Tenant purchase? Sacrifice sale?)
ii.
Physicals characteristics of the sale:
- Land Size,shape, topography
iii.
Its legal status
- investigate zoning category
- Property taxes
iv.
Its location

Then, decide whether the data are reliable via either inspecting or
cross-checking with another source.

(c) Check for Reliability

Decide whether data are reliable.
Inspecting sales to ensure data is reliable.
Cross-checking data with another source.
Steps 2: Analyze Sales
* To Identify & compare the differences between the sales & the subject
property.
* Appraiser goals: To identify the differences that cause significant
variations in the prices paid in the specific market.
Compare Process. Compare and analysis of the 4 elements of
comparison (critical characteristics of both the sales transaction
and the property involved in the sale):
i.
Terms & Conditions of Sales
- Terms of Sales: can influence price (legal standards)

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CONSTRUCTION ECONOMIC
- For example, in federally related
11 appraisal, legal standards require
that appraisals be based on conventional financing at current rates
& terms, such as seller financing, assumed financing, & or sellerpaid financing.
- Conditions of Sales: Property right conveyed, motives of parties,
personal property
ii.
Times of Sales
- dates of sales (date which the parties were committed to the
contract) must relatively close to the date value.
- This is because; the value of property can change rapidly and the
sales price is sometimes established by an option or other
agreement by the parties well before the actual recording of the
sale.
iii.
Location Elements
- Compare neighborhood around the sale property with the
neighborhood around the subject property, to see if there are
differences that would significantly effect of prospective buyers.
- such as condition & quality of nearby properties, availability of
utilities & transportation, and the proximity of nuisances/hazards,
effects of social, economic & political forces.
iv.
Physical Elements
- Identify the characteristics that are important to the marker being
studied.
- Such as (i) Land size, shape, topography, soil, etc; (ii) Size &
nature / age / condition of structures, design and construction; (iii)
Available utilities
These 4 elements is 1st analyzed in order to establish which differences
may have caused the variation in prices.

Step 3: Adjustment Sales for Differences between Sales & the

subject properties
*Purpose: To adjust sales prices in order to account for the
differences found

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CONSTRUCTION ECONOMIC
11

Each of the sales is then adjusted as according to the rule which is:
1. Adjust the sales to be more like the subject property.
2. Use market derived adjustments Reasonable, Are consistent
among the sales, explain the price differences between the sales &
subject.
3. Make adjustment in proper sequences. Start from the
(i) terms & conditions of sales,
(ii) time and market condition,
(iii) location, and
(iv) physical features
And make adjustment by choosing one from three types:
1. Percentage adjustment adjust difference between comparable
sale & the subject.
2. Unit of comparison, (either three)
(i) total property Price of similar sale, may involve ranking the
sales
(ii)
physical Unit any significant physical characteristics of the
sales that varies (eg: Price/sq ft, price/ acre, price/room)
(iii)
economic units of comparison an economic measure of
the property & its value (eg: Gross Income multipliers,
price/developable building area)
3. Lump-sum dollar adjustment adjust each sales for any
property differences.
4. Using sales analysis Grid
5. Independently or in combination from (1) to (3)

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CONSTRUCTION ECONOMIC
11
The amount of adjustment can be calculated through:
> Direct market method (matched pairs) use direct analysis of sales
to calc. adjustment
Sales: Similar, except different in size
Adjustment: Search for sales differing only in size
Steps:
i.
Identify at least 2 similar sales in all respects except of
differences that want to examine such as age, size and price.
ii.
Compare matched pair sales price to see differences (either in $
/ % / age)
iii.
Adjust the comparable sales price to make them look more like
subject property.
> Depreciated cost method using indirect market information: cost &
depreciation
Steps:
i.
Select particular feature or difference between the properties
that is to be adjusted.
ii.
Estimate the additional cost to include that feature when
building a new house.
(Estimate new building, construction cost)
iii.
Calculating depreciation
iv.
Adjust sale price of comparable sale by adding / subtracting the
depreciated cost amount.
Steps 4: Arrive at a value estimate
4 Steps to arrive at a conclusion.
a) Review the entire approach
- Consider and try to account for the limitation of chosen method.
b) Review the sales data Consider the overall reliability of the sales
data.
c) Estimate value range identify lower & upper limit value.
d) Select final value ultimately select a single value after completing
above steps.

ii. 3 Limitation of Comparison Approach (9m)

1. Simplicity,
- All of the sales transactions date of sales, and the property
features should relatively similar to the property being appraised.
2. Intuitive Ability

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CONSTRUCTION ECONOMIC
-Highly reliable on the appraiser
11 intuitive ability to judge which sales
property is more attractive to buyers.

3. Comparability
- It was only reliable when used to appraise property that is
commonly bought and sold.
- If there are no comparable sales, the approach cannot be applied.
- Hence, the more unique, specialized, or rare the property being
appraised, the less useful the sales comparison approach will be.
4. Activity Levels
- During a period when no sales are occurring, the sales comparison
approach may not be reliable as the real estate sales activity is vary
from time to time.
- This is because the comparable are few & far between and may
require large adjustments for time & location.
5. Adjustment Accuracy
- Almost every comparable needs to be adjusted for some
differences as no two properties are identical, and so, the final
appraisal is only reliable after adjustment.
- However sales comparison approach may not reliable if there is a
significant large amount of adjustment cannot be based on
convincing market evidence.
6. Statistical Limits
- Could possible make a serious technical flows especially when
using linear & multiple regression.
7. Lagging the Market
- Appraiser must use sales that occurred prior to the date of the
appraisal.
- This is because, all of the sales have a built-in lag, if the market
is changing,
8. Motivation
- Sales comparison approach assumes that the price is the result of
vigorous, arms length bargaining by knowledgeable buyers and
sellers.
- As we know, actual sales price are not always reached in this way
and so, need try to understand the motives behind the sales.
Extra
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CONSTRUCTION ECONOMIC
Key Concept of Sales Comparison Approaches
11
/ Strength of Comparison
Approach
1. Principle of substitution,
Any property tends to be worth the cost of, or price to acquire, an
equally desirable substitute property.
- If Well-informed buyers are interested in a particular property, he /
she will generally pay no more than cost of acquiring another
property that is satisfactory substitute. . (In short, he/she will no pay
more extra money to purchase another similar property as he/she is
very interested to that particular property)
2. Simplicity,
- It is simpler, fewer calculation, more direct and easiest to explain
to client.
- Can produce more reliable value conclusion.
3. Statistical Connections,
- able to help appraiser discover the central tendency (which
means the numeric value that is suggested as typical, with regard
to size, price or other variable among studied).
- The measure of central tendency includes mean, median, mode,
range & standard deviation as well as linear and multiple
regression.
4. Adjustments,
- Enable ones to specifically identify property differences that are
important in a given market or neighborhood.
- Able to indicate how much to adjust prices for any particular
differences.
- Able to identify smaller adjustments that might have missed
before.
5. Use of Market Data in Other Approaches
- Collection & use of market data is essential to each of the value
approaches.

2013 Q4 (a) Define the concept of Life Cycle Cost (LCC). (5 marks)
- The term LCC is sometimes referred to as the ultimate cost or the total
cost.
- it is the process of economic analysis to assess the total cost of
ownership of a product including its cost of installation, operation,
maintenance, conversion and/or decommission.
- This is a technique where the construction cost & related cost including
the yearly running cost and building maintenance or part of the building
can be reduced to a common measurement.
- This is a single sum, which is, the annual equivalent cost or the present
value of all costs over building life span.
- Therefore, the LCC approach emphasis the future cost flow and the
advantages that are gained during the life span of the building.
- The future costs and advantages are changed to present values using
discounting technique & with this method an economic evaluation of a
proposal can be made.
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CONSTRUCTION ECONOMIC
11
2012 Q2
Project complexity, technological requirements, project information, and
project team Requirement, contract requirements, project duration, and
market requirement affect the Total building cost of a project
Discuss the above statement (25m)

Extra
1. GDV

Teoh Chai Teng | AP120331