Construction Management PV, Depriciation Etc

Construction Management Construction Management

Financial ManagementFinancial Management– Basic DefinitionsBasic Definitions– Business TaxesBusiness Taxes– Capital GainsCapital Gains– Financial StatementsFinancial Statements

Income StatementIncome Statement Balance SheetBalance Sheet Statement of Cash FlowStatement of Cash Flow

– DepreciationDepreciation– DepletionDepletion– Time Value of MoneyTime Value of Money

Future ValueFuture Value Present ValuePresent Value

– Net Present Value (NPV)Net Present Value (NPV)– Internal Rate of Return (IRR)Internal Rate of Return (IRR)

FinancialFinancial ManagementManagementDefinitionsDefinitions

Finance Finance – Art and Science of Managing the MoneyArt and Science of Managing the Money

Sole Proprietorship Sole Proprietorship – A business owned by one person and A business owned by one person and

operated for his/her own profitoperated for his/her own profit

Articles of Partnership (AOP)Articles of Partnership (AOP)– The written contract used to formally The written contract used to formally

establish a business partnershipestablish a business partnership

FinancialFinancial ManagementManagement

Private Limited Company Private Limited Company – Business owned by the set of members called as Board Business owned by the set of members called as Board

of Directors. The company has to register from security of Directors. The company has to register from security exchange commission and registrar of companies. exchange commission and registrar of companies. Accounts of company are audited by Charted AccountantAccounts of company are audited by Charted Accountant

– No Shares are floated in the MarketNo Shares are floated in the Market

Public Limited Company Public Limited Company – A business owned by Set of members and investment A business owned by Set of members and investment

made by the general public as well in form of shares in made by the general public as well in form of shares in the financial and stock markets. the financial and stock markets.

State Owned CompaniesState Owned Companies– Owned by the Government or StateOwned by the Government or State

NESPAK, NLC, NTC, etc.NESPAK, NLC, NTC, etc.

FinancialFinancial ManagementManagement

StockholdersStockholders– The owners of a corporation (Public limited Co.)The owners of a corporation (Public limited Co.)– Having companies shares, Common Stock or Having companies shares, Common Stock or

Preferred StocksPreferred Stocks

StakeholdersStakeholders– Group Such as employees, customers, suppliers, Group Such as employees, customers, suppliers,

creditors, owners, and others who have a direct creditors, owners, and others who have a direct economic link to the firm.economic link to the firm.

RiskRisk– The chance that actual outcomes may differ from The chance that actual outcomes may differ from

those expected.those expected.

FinancialFinancial ManagementManagementBusiness TaxesBusiness Taxes

Business TaxesBusiness Taxes– Taxes are a fact of life, and businesses, like Taxes are a fact of life, and businesses, like

individuals must pay taxes on incomeindividuals must pay taxes on income– Income TaxIncome Tax– Corporate TaxCorporate Tax– Wealth TaxWealth Tax– Sales TaxSales Tax– Withholding TaxWithholding Tax– Capital Gain TaxCapital Gain Tax

Ordinary Income & Capital GainOrdinary Income & Capital Gain– Income earned through the sales of a firm’s goods Income earned through the sales of a firm’s goods

and services is ordinary Income While amount by and services is ordinary Income While amount by which the sale price of an asset exceeds the asset’s which the sale price of an asset exceeds the asset’s initial purchase price is capital gain.initial purchase price is capital gain.

ExamplesExamples

Income Tax Income Tax – Yearly Income Yearly Income = Rs. 400,000/-= Rs. 400,000/-– Less Income Tax @ 5% isLess Income Tax @ 5% is = = Rs. Rs.

(20,000/-)(20,000/-)400,000 * 5%400,000 * 5%

– After- Tax IncomeAfter- Tax Income =Rs. 380,000/-=Rs. 380,000/-

Sales Tax Sales Tax – Unit Price of ComputerUnit Price of Computer = Rs. 40,000/-= Rs. 40,000/-– Add Sales Tax @ 16% Add Sales Tax @ 16% = = Rs. 6,400/-Rs. 6,400/-– 40,000 * 16%40,000 * 16%– Net Price Including GSTNet Price Including GST =Rs. 46,400/-=Rs. 46,400/-

FinancialFinancial StatementsStatements

Income StatementIncome Statement– Provides a financial summary of the firm’s operating Provides a financial summary of the firm’s operating

results during a specified period. Like end of month, results during a specified period. Like end of month, 3030thth June, 31 December etc. June, 31 December etc.

Balance SheetBalance Sheet– Summary Statement of the firm’s financial position at Summary Statement of the firm’s financial position at

a given point in timea given point in time Statement of Cash FlowsStatement of Cash Flows

– Provides the summary of the firm’s operating, Provides the summary of the firm’s operating, investment, and financing cash flows during the investment, and financing cash flows during the specified period.specified period.

FinancialFinancial StatementsStatements

Current AssetsCurrent Assets– Short Term Assets, expected to be Short Term Assets, expected to be

converted in to cash within 1 year or lessconverted in to cash within 1 year or less

Current LiabilitiesCurrent Liabilities– Short Term liabilities, expected to be paid Short Term liabilities, expected to be paid

within 1 year or lesswithin 1 year or less Long Term DebtsLong Term Debts

– Debts for which payment is not due in the Debts for which payment is not due in the current yearcurrent year

DepreciationDepreciation

DepreciationDepreciation– The systematic charging of a portion of the costs of The systematic charging of a portion of the costs of

fixed assets against annual revenues over time.fixed assets against annual revenues over time.

MACRS (Modified accelerated cost recovery MACRS (Modified accelerated cost recovery system)system)– System used to determine the depreciation of assets System used to determine the depreciation of assets

for tax purposesfor tax purposes

Depreciable LifeDepreciable Life– The period over which an asset is depreciatedThe period over which an asset is depreciated

DepreciationDepreciation Table (First Four Classes Under MACRS)Table (First Four Classes Under MACRS)Property ClassProperty Class(Recovery Period) (Recovery Period) DefinitionDefinition

3 Years3 Years Research Equipment and certain special toolsResearch Equipment and certain special tools

5 Years5 Years Computers, typewriters, copiers, duplicating Computers, typewriters, copiers, duplicating equipments, cars, equipments, cars, light duty trucks, tech equipment, light duty trucks, tech equipment, and similarand similar

7 Years7 Years Office furniture, fixtures, most manufacturing Office furniture, fixtures, most manufacturing equipments, equipments, railroad trucks, single purpose railroad trucks, single purpose agricultural & horticultural structureagricultural & horticultural structure

10 Years10 Years Equipment used in petroleum refining or in tobacco Equipment used in petroleum refining or in tobacco products products and certain food productsand certain food products

DepreciationDepreciation Table (Rounded Depreciation Percentages by Table (Rounded Depreciation Percentages by

Recovery Year Using MACRS First Four Classes)Recovery Year Using MACRS First Four Classes)Recovery Recovery YearYear

3 Years3 Years 5 Years5 Years 7 Years7 Years 10 Years10 Years

11 33 %33 % 20 %20 % 14 %14 % 10 %10 %22 4545 3232 2525 181833 1515 1919 1818 141444 77 1212 1212 121255 1212 99 9966 55 99 8877 99 7788 44 6699 661010 661111 44

TotalTotal 100%100% 100 %100 % 100%100% 100%100%

DepreciationDepreciationExampleExample

Company Acquired a machine cost 38,000 and 2,000 were Company Acquired a machine cost 38,000 and 2,000 were paid for the installation cost. Machine having a recovery paid for the installation cost. Machine having a recovery period of 5 years. Calculate depreciation in each yearperiod of 5 years. Calculate depreciation in each year

YearYear CostCost % Age% Age DepreciatioDepreciationn

11 40,0040,0000

20 %20 % 8,0008,000

22 40,0040,0000

3232 12,80012,800

33 40,0040,0000

1919 7,6007,600

44 40,0040,0000

1212 4,8004,800

55 40,0040,0000

1212 4,8004,800

66 40,0040,0000

55 2,0002,000

TotalsTotals 100%100% 40,00040,000

Numeric Models For Project Numeric Models For Project SelectionSelection

A)A) Profitability ModelsProfitability Models1. 1. Payback periodPayback period

Payback period = initial fixed investment/ estimated net cash Payback period = initial fixed investment/ estimated net cash inflowinflow

Project Cost = 10,000,00 Project Cost = 10,000,00 Annual net cash inflow =2,50,000Annual net cash inflow =2,50,000Pay back period = ?Pay back period = ?

2. 2. Average Rate of ReturnAverage Rate of Return

Avg.Rate of Return = Avg. Annual Profits / Avg.Rate of Return = Avg. Annual Profits / initial or initial or

average investmentaverage investmentIf Average Annual profits If Average Annual profits = 15,000= 15,000Initial Investment is Initial Investment is = 100,000= 100,000Average Rate of Return = ? Average Rate of Return = ?

3. 3. Discounted cash flowDiscounted cash flow Time value of moneyTime value of money Future Value Future Value Present valuePresent value CompoundingCompounding DiscountingDiscounting

Time Value of MoneyTime Value of Money

Time value of money is one of the most Time value of money is one of the most important concept in finance. Money that the important concept in finance. Money that the firm has in its possession today is more firm has in its possession today is more valuable than future payments because it can valuable than future payments because it can be invested and can earn positive returns. be invested and can earn positive returns.

Compound InterestCompound Interest– Interest that is earned on a given deposit and has Interest that is earned on a given deposit and has

become part of the principal at the end of a specified become part of the principal at the end of a specified period.period.

Principal Principal – The amount of money on which interest is paidThe amount of money on which interest is paid

Future ValueFuture ValueThe value of the present amount at a future date, The value of the present amount at a future date, found by compounding interest over a specified found by compounding interest over a specified period of timeperiod of time

ExampleExampleAccount 100 in saving paying 8 % interest Account 100 in saving paying 8 % interest

compounded annually compounded annually F V at the end of 1F V at the end of 1stst Year = 100+ (8/100)* 100 Year = 100+ (8/100)* 100 =108 =108 F V at the end of 2F V at the end of 2ndnd Year = 108 + (8/100) *100 Year = 108 + (8/100) *100 = 116.64 = 116.64 F V at the end of 3F V at the end of 3rdrd Year = 116.64 + (8/100) * 100 Year = 116.64 + (8/100) * 100 = 125.97= 125.97

Future Value/ Future Value/ CompoundingCompounding Eqn. for F V of Money Eqn. for F V of Money F VF Vnn = P V (1+ i ) = P V (1+ i ) n n or P V * FV I F i,nor P V * FV I F i,n

Example Example P V = Rs. 800P V = Rs. 800 i = 6 %i = 6 %F V end of 5 yearsF V end of 5 years

F V F V 5 5 = 800 (1+ 0.06)= 800 (1+ 0.06)55

= Rs. 1070.40 = Rs. 1070.40

Present Value/DiscountingPresent Value/Discounting

The current value of the future amountThe current value of the future amount Discounting cash flow = the process of finding the Discounting cash flow = the process of finding the

present valuespresent values P V Eqn.P V Eqn.P V= F VP V= F Vnn * 1/(1+i) * 1/(1+i)n n or P V = F V or P V = F V nn * P V I F * P V I F i,ni,n

ExampleExampleF VF V88 = Rs. 1700 = Rs. 1700i= 8 % (discounting rate, opportunity cost)i= 8 % (discounting rate, opportunity cost)PV= 1700/(1+0.08)PV= 1700/(1+0.08)88

= Rs. 918.45= Rs. 918.45

AnnuityAnnuity

A stream of equal periodic cash flows, over a A stream of equal periodic cash flows, over a specified period of time. These cash flows specified period of time. These cash flows can be inflows of returns earned on can be inflows of returns earned on investment or out flows of funds invested to investment or out flows of funds invested to earn future returnsearn future returns

Ordinary AnnuityOrdinary Annuity– An annuity for which the cash flows occur An annuity for which the cash flows occur

at the end of each periodat the end of each period Annuity DueAnnuity Due

– An annuity for which the cash flow occurs An annuity for which the cash flow occurs at the beginning of each period at the beginning of each period

Future Value/ Compounding Future Value/ Compounding for Annuityfor Annuity Eqn. for F V of Money Eqn. for F V of Money P V * FV I F i,n P V * FV I F i,n

Example Example P V = Rs. 1000P V = Rs. 1000 i = 5 %i = 5 %F V end of 7 yearsF V end of 7 years (FV I F (FV I F 5,75,7= 5.751) = 5.751) from from

TableTable

F V F V 5 5 = 1000* 5.571= 1000* 5.571 = Rs. 5,751 = Rs. 5,751

Present Value/Discounting for Present Value/Discounting for AnnuityAnnuity P V Eqn.P V Eqn.P V = F V P V = F V nn * P V I F * P V I F i,ni,n

ExampleExampleF VF V88 = Rs. 700 (P V I F = Rs. 700 (P V I F 8,5 8,5 =3.993) =3.993) from tablefrom table i= 8 % (discounting rate, opportunity cost)i= 8 % (discounting rate, opportunity cost)N= 5 YearsN= 5 YearsPV= 700*3.993PV= 700*3.993 = Rs. 2794.90= Rs. 2794.90

Future Value/ Compounding for Future Value/ Compounding for Mixed StreamMixed Stream

Mixed StreamMixed Stream – A stream of unequal periodic cash A stream of unequal periodic cash

flows that reflect no particular flows that reflect no particular patternpattern

11,500 14,000 12,900 16,000

0

18,000

1 2 3 4 5

Future Value/ Compounding for Future Value/ Compounding for Mixed StreamMixed Stream

YearYear Cash FlowCash Flow Number of Number of Years earning Years earning InterestInterest

FVIF 8%,nFVIF 8%,n Future Future ValueValue

11 11,50011,500 5-1=45-1=4 1.3601.360 15,64015,640

22 14,00014,000 5-2=35-2=3 1.2601.260 17,64017,640

33 12,90012,900 5-3=25-3=2 1.1661.166 15,041.4015,041.40

44 16,00016,000 5-4=15-4=1 1.0801.080 17,28017,280

55 18,00018,000 5-5=05-5=0 1.0001.000 18,00018,000

TotalTotal 83,601.4083,601.40

Present Value for Mixed StreamPresent Value for Mixed Stream

YearYear Cash FlowCash Flow PVIF 9%,nPVIF 9%,n Future Future ValueValue

11 400400 0.9170.917 366.80366.80

22 800800 0.8420.842 673.60673.60

33 500500 0.7720.772 386.00386.00

44 400400 0.7080.708 283.20283.20

55 300300 0.6500.650 195.00195.00

TotalTotal 1904.601904.60

Net Present Value Net Present Value (NPV)(NPV) A sophisticated capital budgeting A sophisticated capital budgeting

technique found by subtracting project’s technique found by subtracting project’s initial investment from the present value initial investment from the present value of its cash inflowsof its cash inflows

NPV = present values of cash in flows NPV = present values of cash in flows

(Minus) - Initial Investment(Minus) - Initial InvestmentIf NPV is greater than 0 accept the projectIf NPV is greater than 0 accept the projectIf NPV is less than 0 reject the projectIf NPV is less than 0 reject the project

ExampleExample Cost of Capital 10 %Cost of Capital 10 % Project A Project A

14000- 42000

14000 14000 14000 14000

0 1 2 3 4 5

PV = 53,071, NPV =11,071

- 45000

28000 12000 10000 10000

0

•Project BProject B

10000

1 2 3 4 5

PV = 55,924 NPV =10,924

IRR (Internal Rate of IRR (Internal Rate of Return)Return) The discount rate that equates the NPV of The discount rate that equates the NPV of

investment opportunity with “0” zeroinvestment opportunity with “0” zero If IRR is greater than the cost of capital If IRR is greater than the cost of capital

accept the project otherwise rejectaccept the project otherwise reject

NPV = Sum FVNPV = Sum FVnn/(1+i)/(1+i)nn – initial Investment – initial Investment

IRR = putting NPV=0 = Sum FVIRR = putting NPV=0 = Sum FVnn/ (1+i)/ (1+i)nn

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