copy of financial management

8/4/2019 Copy of Financial Management

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Course- GP CBM

Course Title- Financial Manageme

Packaging of Project

Course No. - NCP 29

Assignment no. - 14

Financial Management &

Packaging of Projects


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Financial Management & Packaging of Project

Page 2

CONTENTS- Page No.

1. INTRODUCTION 032. SCOPE OF WORKS 043. TECHNICAL STUDIES 054. COST OF CONSTRUCTION 065. THE WORK SCHEDULE 096. FINANCIAL AND ECONOMIC EVALUATION 167. PROPOSED PROJECT FINANCING 198. PROFIT MEASURES 209. REFERENCES 23


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INTRODUCTION-

A Construction Contract is a contract specifically negotiated for the construction of an asset or a

combination of Assets that are closely interrelated or interdependent in terms of their design,

technology and function or their ultimate purpose or use (Construction Contract: IAS 11 1995)

Managing the activities of Construction contract in a productive way produces the concept of

Constructability. Constructability has been defined as the optimum use of construction

knowledge and experience in planning, design, procurement, and field operations to achieve

overall project objectives ("Constructability: A Primer" 1986). As a result of constructability, the

quality of a constructed facility can be improved by better communication among major project

participants such as design engineers and construction professionals. Communication among

these participants reduces the chance of project failure and other related performance problems.

Cost shifting is an accidental or deliberate misstatement in a contractors job cost system that

can have a substantial impact on the contractors balance sheet and income statement. Both

contractors and their auditors should be aware of the potential impact of shifts in job costs from

one contract to another. The contractor should have a reliable job cost system in place to record

contract costs accurately. The auditor should always test contract costs and look for unusual

contract costing trends.

Construction ContractsFinancial Management

When a contract covers a number of assets, the construction of each asset shall be treated as a

separate construction contract when:

a. Separate proposals have been submitted for each asset.


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b. Each asset has been subject to separate negotiation and the contractor and customer have been

able to accept or reject that part of the contract relating to each asset.

c. The cost and revenue of each asset can be identified.

A group of contracts whether with a single customer or with several customers, shall be treated

as a single contract when:

The group of projects are negotiated as a single package

The contracts are so closely interrelated that they are, in effect, part of a single project with

an overall profit margin

The contracts are performed concurrently or in a continuous sequence.

SCOPE OF WORK-

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 the developers as a cost of

development

Cost of Land is Rs. 10,000/- sq.m

Flooring specifications for flooring:

- 10% Granite

- 40% Kota stone

- 50% Mosaic cement tiles

Developers would like to have minimum 18% net profit on their investment. Developer can

invest only Rs. 10 lakhs as his own funds and can raise not more than Rs. 50 lakhs as bank loan


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As in the given project the total area of the plot is 10000 Sq.m. In which we have to developed

5000 sq.m. area for a trust for hosing & health facilities for senior citizens, which will be

occupied by owner. For this development 5000 sq.m. area will be given to the developers (i.e.to

us) as a cost of development.

In this we have to construct a R.C.C. framed structure in which we have to provide aluminium

sliding windows & for flooring we have to use granite, kota stone & cement tiles.

TECHNICAL STUDIES-

The technical study is to determine the needs for material and human means necessary to

achieve the objectives. These take account of the market (availability of raw material, there is a

demand, customer requirement), regulatory and standards-related product and also the financial

(amount to invest and returns expected).

The study focuses on two general areas: study of supply and the study of transformation. To carry

out critical analysis of technical feasibility, there must be enough knowledge of technical,

economic and regulatory environment.

1. TECHNOLOGY-For the construction of above project we are going to use following technology-

1.1. R.C.C. Framed Structure

1.2. Granite- 10%

1.3. Kota stone- 40%

1.4. Mosaic cement Tiles- 50%

1.5. Aluminium sliding Window


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1.6. P.C.C

1.7. B.B.M

1.8. Internal plaster

1.9. External Plaster

1.10. Waterproofing1.11. Carpentary1.12. Fittings1.13. Flooring1.14. Toilet floor & dado1.15. Flat skirting1.16. Plumbing1.17. Sanitary fixing1.18. PVC duct water line1.19. PVC duct drainage line1.20. Cleaning work

COST OF CONSTRUCTION-

The cost of construction includes both the initial capital cost and the subsequent operation and

maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the initial

establishment of the facility

Land acquisition, including assembly, holding and improvement


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Planning and feasibility studies Architectural and engineering design Construction, including materials, equipment and labor Field supervision of construction Construction financing Insurance and taxes during construction Equipment and furnishings not included in construction Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the

following expenses:

Land rent, if applicable Operating staff Labor and material for maintenance and repairs Periodic renovations Insurance and taxes Financing costs Utilities

The magnitude of each of these cost components depends on the nature, size and location of

the project as well as the management organization, among many considerations. The owner is

interested in achieving the lowest possible overall project cost that is consistent with its

investment objectives.


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It is important for design professionals and construction managers to realize that while

the construction cost may be the single largest component of the capital cost, othe r cost

components are not insignificant. For example, land acquisition costs are a major expenditure

for building construction in high-density urban areas, and construction financing costs

can reach the same order of magnitude as the construction cost in large projects such as

the construction of nuclear power plants.

Particulars Rs./sq.ft Amount

R.C.C. Framed Structure 4501,12,50,000/-

Granite 952,37,500/-

Kota stone 404,00,000/-

Mosaic cement Tiles 15

1,87,500/-

Cost of Brick work, plaster etc 9022,50,000/-

Cost of Electric work 6500/flat1,56,000/-

Cost of Plumbing 6000/flat1,44,000/-

Cost of Finishing 5413,50,000/-

Labour Cost 3001,50,00,000/-

Total3,09,75,000/-


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Total Cost of Construction- Rs. 3,09,75,000/-

THE WORK SCHEDULE -

Work Schedule represents the necessary framework to permit scheduling of construction

activities, along with estimating the resources required by the individual work tasks, and

any necessary precedences or required sequence among the tasks. The terms work "tasks"

or "activities" are often used interchangeably in construction plans to refer to specific,

defined items of work. The scheduling problem is to determine an appropriate set of activity start

time, resource allocations and completion times that will result in completion of the

project in a timely and efficient fashion. Construction planning is the necessary fore-

runner to scheduling.

In this planning, defining work tasks, technology and construction method is typically

done either simultaneously or in a series of iterations.

The definition of appropriate work scheduling can be a laborious and tedious process,

yet it represents the necessary information for application of formal scheduling procedures.

Since construction projects can involve thousands of individual work tasks, this definition

phase can also be expensive and time consuming. Fortunately, many tasks may be repeated

in different parts of the facility or past facility construction plans can be used as general

models for new projects. For example, the tasks involved in the construction of a

building floor may be repeated with only minor differences for each of the floors in the

building.


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The work schedule on quarterly basis for the project is given below:

IDOutline

Number NameDuratio

n Start Finish

1 1 Contracts

2 1.1 - Supply Lot Sale Agreement 0.00d 01/05/2011 01/05/2011

3 1.2 - Supply Construction Agreement 0.00d 01/05/2011 01/05/2011

4 1.3 - Supply Contract Plans 0.00d 01/05/2011 01/05/2011

5 1.4 - Supply Contract Specifications 0.00d 01/05/2011 01/05/2011

6 1.5 - Supply Contract Site Plan 0.00d 01/05/2011 01/05/2011

7 1.6 - Secure Financing 0.00d 01/05/2011 01/05/2011

8 1.7 - Construction Loan Settlement 0.00d 01/05/2011 01/05/20119 2 Document Review & Revision

10 2.1 - Review & Finalize Plans 15.00d 02/05/2011 25/06/2011

11 2.2 - Review & Finalize Specifications 20.00d 01/05/2011 25/06/2011

12 2.3 - Review & Finalize Site Plan 1.00d

Thu

6/26/2011 26/06/2011

13 2.4 - Print Construction Drawings 5.00d

Thu

7/3/2011 07/09/2011

14 2.5 - Approve Revised Plans 0.00d

Wed

7/9/2011 07/09/2011

15 2.6 - Approve Revised Specifications 0.00d

Wed

7/9/2011 07/09/2011

16 2.7 - Approve Revised Site Plan 0.00d

Wed

7/9/2011 07/0920/11

17 3 Site Work

18 3.1 - Clear Lot 3.00d

Mon

7/28/2011 30/07/2011

19 3.2 - Strip Topsoil & Stockpile 1.00d

Thu

7/31/2011 31/07/2011

20 3.3 - Stake Lot for Excavation 1.00d

Thu

7/31/2011 31/07/2011

21 3.4 - Rough grade lot 1.00d Fri 8/1/2011 08/01/2011

22 3.5 - Excavate for foundation 2.00dMon8/4/2011

Tue8/5/2011

23 4 Foundation

24 4.1 - Layout footings 1.00d

Wed

8/6/2011

Wed

8/6/2011

25 4.2 - Dig Footings & Install Reinforcing 1.00d

Thu

8/7/2011

Thu

8/7/2011

26 4.3 - Footing Inspection 0.00d Thu Thu


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8/7/2011 8/7/2011

27 4.4 - Pour footings 1.00d Fri 8/8/2011 Fri 8/8/2011

28 4.5 - Pin Footings 1.00d

Mon

8/11/2011

Mon

8/11/2011

29 4.6 - Stock Block, Mortar, Sand 1.00d

Tue

8/12/2011

Tue

8/12/2011

30 4.7 - Build Block Foundation 15.00d

Wed

8/13/2011

Tue

9/2/2011

31 4.8 - Foundation Certification 0.00d

Tue

9/2/2011

Tue

9/2/2011

32 4.9 - Draw #1 (Location Survey) 0.00d

Tue

9/2/2011

Tue

9/2/2011

33 4.1 - Fill Block Cores w/ Concrete 1.00dWed9/3/2011

Wed9/3/2011

34 4.1 - Steel Delivery 1.00d

Thu

9/4/2011

Thu

9/4/2011

35 4.1 - Set Lintels, Bolts, Cap Block 2.00d Fri 9/5/2011

Mon

9/8/2011

36 4.1 - Waterproofing and Drain Tile 1.00d Fri 9/5/2011 Fri 9/5/2011

37 5 Rough Carpentry 44.00d

Tue

9/9/2011

Fri

11/7/2011

38 5.1 - Set Steel 1.00d

Tue

9/9/2011

Tue

9/9/2011

39 5.2 - 1st Floor Deck Framing 4.00dWed9/10/2011

Mon9/15/2011

40 5.3 - 1st Floor Wall Framing 4.00d

Tue

9/16/2011

Fri

9/19/2011

41 5.4 - Draw #2 (First Floor Deck) 0.00d

Fri

9/19/2011

Fri

9/19/2011

42 5.5 - 2nd Floor Deck Framing 2.00d

Mon

9/22/2011

Tue

9/23/2011

43 5.6 - Draw #3 (Second Floor Deck) 0.00d

Tue

9/23/2011

Tue

9/23/2011

44 5.7 - 2nd Floor Wall Framing 3.00d

Wed

9/24/2011

Fri

9/26/2011

45 5.8 - Set Roof Trusses 2.00d

Mon

9/29/2011

Tue

9/30/2011

46 5.9 - Frame Roof 7.00d

Wed

10/1/2011

Thu

10/9/2011

47 5.1 - Install Roof Plywood 5.00d

Fri

10/10/2011

Thu

10/16/2011

48 5.1 - Install Windows & Doors 2.00d Wed Thu


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10/22/2011 10/23/2011

49 5.1 - Frame Basement 3.00dFri10/10/2011

Tue10/14/2011

50 5.1 - Frame Basement Bulkheads 2.00d

Thu

11/6/2011

Fri

11/7/2011

51 6 Concrete Slabs 8.00d

Thu

9/18/2011

Mon

9/29/2011

52 6.1 - Basement Slab Preparation 2.00dThu

9/18/2011Fri

9/19/2011

53 6.2 - Termite Treatment Basment Slab 1.00d

Mon

9/22/2011

Mon

9/22/2011

54 6.3 - Slab Inspection 1.00d

Tue

9/23/2011

Tue

9/23/2011

55 6.4 - Pour Basement Slab 1.00d

Wed

9/24/2011

Wed

9/24/2011

56 6.5 - Prep Garage Slab 1.00d

Thu

9/25/2011

Thu

9/25/2011

57 6.6 - Termite Treatment Garage Slab 1.00d

Fri

9/26/2011

Fri

9/26/2011

58 6.7 - Pour Garage Slab 1.00d

Mon

9/29/2011

Mon

9/29/2011

59 7 Plumbing Rough-in 37.00d

Tue

9/16/2011

Wed

11/5/2011

60 7.1 - Plumbing Sub-slab 2.00d Tue9/16/2011 Wed9/17/2011

61 7.2 - Plumbing Layout 1.00dWed

10/29/2011Wed

10/29/2011

62 7.3 - Plumbing rough-in 5.00d

Thu

10/30/2011

Wed

11/5/2011

63 8 Electric Rough-in 19.00d

Fri

10/24/2011

Wed

11/19/2011

64 8.1 - Set Electric Boxes 2.00d

Fri

10/24/2011

Mon

10/27/2011

65 8.2 - Install Electric Service Panel 2.00d

Tue

10/28/2011

Wed

10/29/2011

66 8.3 - Electrical Walk-through 1.00d

Thu

10/30/2011

Thu

10/30/2011

67 8.4 - Electrical Rough-wire 14.00d

Fri

10/31/2011

Wed

11/19/2011

68 9 Specialty Rough-ins 5.00dThu

11/20/2011Wed

11/26/2011

69 9.1 - Central Vacuum Rough-in 5.00d Thu Wed


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11/20/2011 11/26/2011

70 9.2 - Alarm System Rough-in 5.00dThu11/20/2011

Wed11/26/2011

71 9.3 - Telephone System Rough-in 5.00d

Thu

11/20/2011

Wed

11/26/2011

72 9.4 - Television System Rough-in 5.00d

Thu

11/20/2011

Wed

11/26/2011

73 10 County Electrical inspection 0.00dWed

11/26/2011Wed

11/26/2011

74 11 Draw #5 (Rough-ins complete) 0.00d

Wed

11/26/2011

Wed

11/26/2011

75 12 County Framing Inspection 0.00d

Thu

11/27/2011

Thu

11/27/2011

76 13 Roofing 68.00d

Fri

10/17/2011

Tue

1/20/2012

77 13.1 - Roofing Paper Installed 3.00d

Fri

10/17/2011

Tue

10/21/2011

78 13.2 - Draw #4 (Roof, windows, doors) 0.00d

Thu

10/23/2011

Thu

10/23/2011

79 13.3 - Stock Roof Shingles 1.00d

Fri

10/24/2011

Fri

10/24/2011

80 13.4 - Install Roof Shingles 7.00d

Mon

1/12/2012

Tue

1/20/2012

81 14 Exterior Finishes 56.00d Fri10/24/2011 Fri 1/9/2012

82 14.1 - Siding 3.00dFri

10/24/2011Tue

10/28/2011

83 14.2 - Exterior Trim 7.00d

Wed

10/29/2011

Thu

11/6/2011

84 14.3 - Brick Arch Forms 1.00d

Fri

11/7/2011

Fri

11/7/2011

85 14.4 - Brick Veneer 45.00d

Mon

11/10/2011 Fri 1/9/2012

86 15 Insulation 5.00d

Fri

11/28/2011

Thu

12/4/2011

87 15.1 - Caulk & Air Seal 1.00d

Fri

11/28/2011

Fri

11/28/2011

88 15.2 - Draft & Fire Stop 1.00d

Mon

12/1/2011

Mon

12/1/2011

89 15.3 - Batt Insulation 3.00dTue

12/2/2011Thu

12/4/2011

90 16 Floor Finishes 76.00d Tue Tue


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1/13/2012 4/28/2012

91 16.1 - Ceramic Tile 15.00dTue1/13/2012

Mon2/2/2012

92 16.2 - Install Hardwood Floor 4.00d

Fri

3/27/2012

Wed

4/1/2012

93 16.3 - Sand, Stain, Seal Hardwood 5.00d

Thu

4/16/2012

Wed

4/22/2012

94 16.4 - Install Carpet 4.00dThu

4/23/2012Tue

4/28/2012

95 16.5 - Final Coat Hardwood 2.00d

Thu

4/16/2012

Fri

4/17/2012

96 17 Paint 59.00d

Wed

1/7/2012

Mon

3/30/2012

97 17.1 - Prep Drywall for Prime Coat 2.00d

Wed

1/7/2012

Thu

1/8/2012

98 17.2 - Prime Paint Drywall 2.00d Fri 1/9/2012

Mon

1/12/2012

99 17.3 - Prep Trim for Prime Coat 2.00d

Wed

1/21/2012

Thu

1/22/2012

100 17.4 - Prime Trim 2.00d

Fri

1/23/2012

Mon

1/26/2012

101 17.5 - Finish Coat Trim 10.00d

Mon

2/23/2012 Fri 3/6/2012

102 17.6 - Finish Coat Drywall 14.00d Mon3/9/2012 Thu3/26/2012

103 17.7 - Caulk Exterior Windows & Doors 1.00dFri

3/27/2012Fri

3/27/2012

104 17.8 - Finish Coat Exterior Trim & Siding 1.00d

Mon

3/30/2012

Mon

3/30/2012

105 18 Interior Trim 29.00d

Tue

1/13/2012

Fri

2/20/2012

106 18.1 - Interior Trim Delivery 1.00d

Tue

1/13/2012

Tue

1/13/2012

107 18.2 - Install Interior Doors 5.00d

Wed

1/14/2012

Tue

1/20/2012

108 18.3 - Install Interior Trim 15.00d

Wed

1/21/2012

Tue

2/10/2012

109 18.4 - Install Cabinetry 5.00d

Wed

2/11/2012

Tue

2/17/2012

110 18.5 - Install Appliances 1.00dWed

2/18/2012Wed

2/18/2012

111 19 Exterior Landscaping 32.00d Mon Tue


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1/12/2012 2/24/2012

112 19.1 - Rough Final Grade 1.00dMon1/12/2012

Mon1/12/2012

113 19.3 - Porches 5.00d

Thu

1/22/2012

Wed

1/28/2012

114 19.4 - Sidewalks 7.00d

Thu

1/29/2012 Fri 2/6/2012

115 19.5 - Decks 7.00dMon

2/9/2012Tue

2/17/2012

116 19.6 - Driveways 2.00d

Wed

2/18/2012

Thu

2/19/2012

117 19.7 - Final Grade and Seed 3.00d

Fri

2/20/2012

Tue

2/24/2012

118 20 Electrical Final Trim 160.00d

Thu

6/5/2011

Wed

1/14/2012

119 20.1 - Switch & Plug 2.00d

Tue

1/13/2012

Wed

1/14/2012

120 20.2 - Install Fixtures 1.00d

Thu

6/5/2011

Thu

6/5/2011

121 20.3 - Connect Appliances 1.00d

Thu

6/5/2011

Thu

6/5/2011

122 21 Hardware 12.00d

Fri

3/27/2012

Mon

4/13/2012

123 21.1 - Door Hardware 2.00d Fri3/27/2012 Mon3/30/2012

124 21.2 - Bath Hardware 2.00dFri

3/27/2012Mon

3/30/2012

125 21.3 - Mirrors 5.00d

Tue

3/31/2012

Mon

4/6/2012

126 21.4 - Shower Doors 10.00d

Tue

3/31/2012

Mon

4/13/2012

127 22 Cleaning 14.00d

Fri

3/27/2012

Wed

4/15/2012

128 22.1 - Windows 3.00d

Fri

3/27/2012

Tue

3/31/2012

129 22.2 - Rough Clean 3.00d

Wed

4/1/2012 Fri 4/3/2012

130 22.3 - Final Clean 2.00d

Tue

4/14/2012

Wed

4/15/2012

131 23 Final Walk-through 0.00dWed

4/15/2012Wed

4/15/2012

132 24 Move-in 0.00d Thu Thu


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4/16/2012 4/16/2012

FINANCIAL AND ECONOMIC EVALUATION-

Capital

- Business requires capital. The term capital is used differently in different contexts. It is

used in the sense of means of production, usually the assets held by the firm. It is also used

in the sense of finance obtained by a firm. In accounting, capital is used in the second

sense. A part of the finance obtained by a firm is in the form of interest free credit,

such as credit allowed by suppliers of materials or services and advance payment received by

customers. The interest free credit is settled in the normal operating cycle of the business and is

not included in the capital.

Revenue

Revenue is the income that arises from exchange transactions with customers in the

course of ordinary activities of an enterprise. An entity s revenue earning activities

include selling of goods, rende ring of services, and allowing others to use entity s

resources yielding interest, royalties and dividends. Revenue increases the equity of the

enterprise. As a general principle, an enterprise recognizes revenue when it receives cash,

receivables or other consideration in its own account. For example, in an agency relationship,

the agent recognizes the commission as revenue.

Finance Resource mobilization


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Resource mobilization can facilitate the flow of resources from various sources and

catalyze the flow of additional resources from official and private institutions. For projects

and programs that are too large to be handled by one funding agency, mobilizing co financing

from various funding sources can help meet these large resource requirements. Resources

can be in any form such as finances, technology, manpower both skilled and labor,

knowledge, information, etc

Financial accounting

- Financial accounting consists of recording, classifying and analyzing the business

transactions so as to facilitate the preparation of Profit and loss account for a period and also

the position statement (i.e. Balance Sheet) as on a particular day. Thus, the emphasis of

financial accounting is on the ascertainment of profit and loss of the concern and not on the

more important aspects of the business i.e. planning, control and decision-making.

Cost accounting

- Cost accounting analyses the transactions in an objective manner for the purposes of

planning, control and decision making. Cost accountancy is the application of costing and

Cost accounting principle, methods and techniques to the science, art and practice of cost

control and the ascertainment of profitability. It includes the presentation of information

derived there from for the purpose of managerial decision making. Cost accounting is also

defined as the process of accounting for cost from the point at which expenditure is

incurred or committed to the establishment of its ultimate relationship with cost centers

and cost units.


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Management accounting

- Management accounting is another aspect of accounting which has developed in recent

years and is being employed in many concerns as an informative mechanism to aid the

management in decision making by providing various information they need for the

purpose. Both cost and management accounting working together can keep the management

well informed about what is going on in the business and what changes, if any, is required to

be given effect to.

Capital budgeting or investment appraisal is the planning process used to determine whether a

firm's long term investments such as new machinery, replacement machinery, new plants, new

products, and research development projects are worth pursuing. It is budget for major capital,

or investment, expenditures. Many formal methods are used in capital budgeting, including

the techniques such as Accounting rate of return, Net present value, Profitability index,

Internal rate of return, Modified internal rate of return, Equivalent annuity etc. These

methods use the incremental cash flows from each potential investment, or project Techniques

based on accounting earnings and accounting rules are sometimes used - though economists

consider this to be improper - such as the accounting rate of return, and "return on

investment." Simplified and hybrid methods are used as well, such as payback period and

discounted payback period.

Cash flow forecasting is in a corporate finance sense, the modeling of a company or

assets future financial liquidity over a specific time frame. Cash usually refers to the

company s total bank balances, but often what is forecast is treasury position which is


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cash plus short-term investments minus short-term debt. Cash flow is the change in cash or

treasury position from one period to the next; in the context of the entrepreneur or manager,

forecasting what cash will come into the business or business unit in order to e nsure that

outgoing can be managed to as to avoid them exceeding cash flow coming in. If there is one

thing entrepreneurs learn fast, it is to become very good at cash flow forecasting.

PROPOSED PROJECT FINANCING-

Capital structure refers to the way a corporation finances its assets through some combination

of equity, debt, or hybrid securities. A firm's capital structure is then the composition or

'structure' of its liabilities. The proposed capital structure for the project is as below:

Capital Structure

Asset 50,00,000.00

Equity 1,00,000.00

Debt 40,00,000.00

The debt raised by the promoter is Rs 40 lacs. The total debt would not be taken all at

once rather it would be disbursed in 4 equal quarterly installments. This debt will carry a

fixed interest expense as follows:

Month Amount Int. Payable Int. Payable Closing Loan bal.

MonthAmount Int.Payble Int.Payble Closing Loan

(Rs.) Monthly Quarterly Balance

Apr-11 1100000 11000 1100000

May-11 11000 1100000

Jun-11 11000 30000 1100000


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Jul-11 1100000 20000 2000000

Aug-11 20000 2000000

Sep-11 20000 60000 2000000

Oct-11 1100000 30000 3000000

Nov-11 30000 3000000

Dec-11 30000 90000 3000000

Jan-12 1100000 40000 4000000

Feb-12 40000 4000000

Mar-12 40000 120000 4000000

* Loan disbursed in 4 equal quarterly installments

**Assuming interest @ 12% p.a.

PROFIT MEASURES-

A profit measure is defined as an indicator of the desirability of a project from the standpoint of

a decision maker. A profit measure may or may not be used as the basis for project

selection. Since various profit measures are used by decision makers for different

purposes, the advantages and restrictions for using these profit measures should be fully

understood..There are several profit measures that are commonly used by decision makers in

both private corporations and public construction projects. Each of these measures is

intended to be an indicator of profit or net benefit for a project under consideration.

Some of these measures indicate the size of the profit at a specific point in time; others give the

rate of return per period when the capital is in use or when reinvestments of the early profits are

also include d. Some of the most frequently used profit measures are as follows:

1. Net Future Value and Net Present Value


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When an organization makes an investment, the decision maker looks forward to the gain

over a planning horizon, against what might be gained if the money were invested elsewhere. A

minimum attractive rate of return (MARR) is adopted to reflect this opportunity cost of

capital. The MARR is used for compounding the estimated cash flows to the end of the

planning horizon, or for discounting the cash flow to the present.

The profitability is measured by the net future value (NFV) which is the net return at the end of

the planning horizon above what might have been gained by investing elsewhere at the MARR.

The net present value (NPV) of the estimated cash flows over the planning horizon is

the discounted value of the NFV to the present. A positive NPV for a project indicates the

present value of the net gain corresponding to the project cash flows.

2. Internal Rate of Return

The internal rate of return (IRR) is defined as the discount rate which sets the net present value

of a series of cash flows over the planning horizon equal to zero. It is used as a profit measure

since it has been identified as the "marginal efficiency of capital" or the "rate of return

over cost". The IRR gives the return of an investment when the capital is in use as if the

investment consists of a single outlay at the beginning and generates a stream of net benefits

afterwards. However, the IRR does not take into consideration the reinvestment

opportunities related to the timing and intensity of the outlays and returns at the intermediate

points over the planning horizon. For cash flows with two or more sign reversals of the

cash flows in any period, there may exist multiple values of IRR; in such cases, the

multiple values are subject to various interpretations.


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3.If the financing and reinvestment policies are incorporated into the evaluation of a project,

an adjusted internal rate of return (AIRR) which reflects such policies may be a useful

indicator of profitability under restricted circumstances. Because of the

complexity of financing and reinvestment policies used by an organization over the life

of a project, the AIRR seldom can reflect the reality of actual cash flows. However, it

offers an approximate value of the yield on an investment for which two or more sign

reversals in the cash flows would result in multiple values of IRR. The adjusted internal rate of

return is usually calculated as the internal rate of return on the project cash flow modified so

that all costs are discounted to the present and all benefits are compounded to the end of the

planning horizon.

4. Return on Investment

When an accountant reports income in each year of a multi-year project, the stream of cash

flows must be broken up into annual rates of return for those years.

The return on investment (ROI) as used by accountants usually means the accountant's rate

of return for each year of the project duration based on the ratio of the income (revenue

less depreciation) for each year and the un-depreciated asset value (investment) for that same

year. Hence, the ROI is different from year to year, with a very low value at the early years and a

high value in the later years of the project.

5. Payback Period

The payback period (PBP) re fers to the length of time within which the benefits received

from an investment can repay the costs incurred during the time in question while ignoring the


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remaining time periods in the planning horizon. Even the discounted payback period indicating

the "capital recovery period" does not reflect the magnitude or direction of the cash flows

in the remaining pe riods. However, if a project is found to be profitable by other measures, the

payback period can be used as a secondary measure of the financing requirements for a

project.

REFERANCES-

Text book of NICMAR on Financial management.

copy of financial management

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