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ASSIGNMENT
NICMAR/CODE OFFICE


1. Course Number NCP 29
2. Course Title Construction Finance Management And
Cost Accounting
3. Assignment Number 8
4. Date of Dispatch 11
th
August, 2012
5. Last Date of receipt of
Assignment at CODE Office
15
th
August, 2012















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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.







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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.











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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 Window-
Class 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.

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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 m
3
.
Total qty. executed / day = 8 X 100 = 800 m
3
.
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 m
3
.
Total amount = (100 X 25 X 80) / 2 = Rs. 100000 m
3
.

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Machine:
But if we do this activity by machine,
Assume rate of excavation = Rs. 25 / m
3
.
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.


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FINANCIAL AND ECONOMICA ELEVATION
Basically financial and economics is dependent upon two important parameters and
these are:
PROPSED CAPITAL STRUCTURE AND FINANCE PLAN
The net approach suggests that each asset would be offset with a financial instrument
of the same approximate maturity i.e. short term or seasonal variations in Current
Assets would be financed with short-term debt. On the other hand permanent
component of current assets would be financed with long-term funds. It is indicated
that a profitable firm may not be in a position to meet its costs obligations if funds
borrowed on a short-term basis have become tied up in permanent assets.
Larger the percentage of funds obtained, from long-term sources, the more
conservative the firms working capital policy. There are three primary factors
determining the use of long-term versus short-term funds for financing current assets
flexibility, cost and risk. It is desirable to have a balance between working capital and
the cost differentials of various sources of capital forming part of working capital. The
financial 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:
Cost of having trade credit.
Cost of extending liberal credit terms to debtors.
Cost of letting or allowing cash to remain idle.
Cost of managing cash in off periods, and
Cost of borrowing money from lenders or lending institutions.
The planning of sources of working capital can be:
Net gains from operations.

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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.
FINANCE WORKING CAPITAL
The net approach suggests that each asset would be offset with a financial instrument
of the same approximate maturity i.e. short term or seasonal variation in Current Asset
would be financed with the short-term debt. On the other hand permanent component
of current assets would be financed with long- term funds. It is indicated that a
profitable firm may not be in a position to meet its costs obligations if funds borrowed
on a short- term basis have become tied up in permanent assets.
Larger the percentage of funds obtained from long term sources, the more conservative
the firms working capital policy. There are three primary factors determining the use
of long term versus short-term funds for financing current assets, flexibility, cost and
risk.

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THE BANK OVERDRAFTS
A bank overdraft is a process whereby a customer of a commercial bank is permitted to
overdraw on that account up to an agreed limit for a prescribed period. This is rather
similar to a bank loan expected that interest is payable on the amount overdrawn only
for the period it remains overdrawn and the account is usually repayable on demand or
upon the termination of the overdraft period. Overdraft facilities are, however,
commonly renewable and so, in practice, ma constitute a continual source of short-
term capital or liquidity insurance facility.
An overdraft is a relatively cheap from of finance due to its being a short- term facility
and with interest payable only on the loan actually taken up. Overdrafts are thus very
suitable for firms with a fluctuating financial requirement, such as building contractors.
It is a widely held belief that almost all building firms operate on an overdraft. The real
estate industry, all financing grouped into two generic categories debts and equity. All
financing follows this formula, by which equity must make up the gap between total
project costs and the amount of loan money that can be raised.
Equity + debt = total financing
Total financing = total development cost
In real estate development projects, conventional leaders will lend up to a maximum of
only 60 to 70 percent of the projects market value. Thus, in bigger projects massive
amounts of equity investments may be required.
In ordinary partnerships, all partners share income and risks in proportion to their
investments. If the project goes sour, every partner could lose their original
investment, or in the worst case, may even have to make up further losses.
In special kind of partnership called syndication, a general partner plans and oversees
the project and is fully liable for all financial obligations. Limited partners buy shares of
a projects ownership much as stock certificates are sold. As with stocks, the investors
liability is limited to the amount of the investment. But unlike stocks, syndications pass
through tax losses and tax credits to the investors.

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LOAN BORROWINGS PLANNED
Short-term capital provision and management is vital to the firm. It is this type of
capital, which is required for the day-to-day activities. The sources of short-term
capital are both internal and external, the main internal sources being accrued
expenses and tax provisions and the main external sources being trade creditors, bank
overdrafts, and short-term loans. It is short term finance, which provides the
circulating capitals for the firm and assists with overcoming potential cash flow
problems due to market fluctuation notable the most important source for construction
firms is that of bank overdraft.

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.

FINANCIAL EVALUATION BASED ON THE ESTIMATES
Several methods are available for evaluation of the proposal on expenditure. These
methods ascertain the profitability of capital projects and are invaluable aids to the
management in the process of making decisions about capital expenditure. All these
methods or techniques claim to have certain merits but they have certain limitations
too. The choice of a method should be carefully made. Various techniques have been
introduced, observe Brown and Howard, to help management take decisions, but the
choice still remains. It is the responsibility of the management accountant to see that
management is presented with useful information about each project, so that decisions
are based not on guesswork but on reasoned calculations.
PROFITABILITY
Profit is defined as the return rightly accruing to the entrepreneur for enterprise and
use of funds. It is also useful to consider the accountants concepts of profit.
Gross profit = sales revenue - production and sales expenses.
Net profit = gross profit - depreciation and interest on loans.
Profit after tax = net profit - tax payable on that profit.
Thus profit represents the earnings available as a surplus, which may be used as a
source of capital or may be distributed among owners.
The basic profit (or less) = Revenues in terms of sale proceeds and rental income
Expenses in terms of hard land and construction costs and other soft costs such
as professional fees and interest payments.


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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.

FINANCIAL AND ECNOMIC EVALUATION
Generally the construction project depends on the financial activities i.e. capital input
capital output of the project. There are certain types of projects depending probability
and productivity.


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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.

AREA STATEMENT AND PROJECT DETAILS
To develop a commercial site 10,000sqmt and in that 5,000 m
2
developed area will be
used by the owner and the balance 5,000 m
2
area will be utilized by the developer to
get back investment and a profit on his investment.
The cost of land is Rs. 10,000/ m
2

Developer is going to get 5,000sqmt at the rate of 10,000/ m
2
, which will give
him an asset of 5000 x 10000 = 50000000 (Rs 5 crore)
Developer will get the area to develop for the trust is 5000 square meter at the
rate of 10000/ m
2
. Within this area total usable area will be 85%. Thus developer
has to develop the total area is 5000 X 0.85 = 4250 m
2
.
Generally construction rate is varying with area to area. We can assume the
construction cost at this prime locality is 750 Rs/ ft
2
i.e. 7000/ m
2
.
Thus total cost of construction will be 4250X7000=29750000 Rs. (say Rs 3 crore)
Developer is going to generate the amount of 1000000 Rs on his own and 5000000Rs
from the bank. This total 6000000 Rs is not at all sufficient to develop the proposed
development therefore he is going to use the land which he got as a development cost
for generate the amount.



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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/ m
2
/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.