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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 thetrust 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, thesources 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 developerto 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 ofwork.

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 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.

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FINANCIAL AND ECONOMICA ELEVATION

Basically financial and economics is dependent upon two important parameters andthese 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 indicatedthat 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 forreplacement 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 verysuitable 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 heremeans 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 anasset, 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. Thismethod 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 m2developed area will beused by the owner and the balance 5,000 m2area will be utilized by the developer to

get back investment and a profit on his investment.

The cost of land is Rs. 10,000/ m2

Developer is going to get 5,000sqmt at the rate of 10,000/ m2, 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 therate of 10000/ m2. Within this area total usable area will be 85%. Thus developer

has to develop the total area is 5000 X 0.85 = 4250 m2.

Generally construction rate is varying with area to area. We can assume the

construction cost at this prime locality is 750 Rs/ ft2i.e. 7000/ m2.

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/ 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 orassignment 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. Henceconsidering 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.