Financial Management & Packaging of Projects

Course- GP CBM Course Title- Financial Management & Packaging of Project Course No. - NCP 29 Assignment no. - 14

Financial Management & Packaging of Project

CONTENTS1. INTRODUCTION 2. SCOPE OF WORKS 3. TECHNICAL STUDIES 4. COST OF CONSTRUCTION 5. THE WORK SCHEDULE 6. FINANCIAL AND ECONOMIC EVALUATION 7. PROPOSED PROJECT FINANCING 8. PROFIT MEASURES 9. REFERENCES

Page No. 03 04 05 06 09 16 19 20 23

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INTRODUCTIONA 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 Contracts Financial 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. Page 3

Financial Management & Packaging of Project

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 WORKAn 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 Page 4

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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 STUDIESThe 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. TECHNOLOGYFor the construction of above project we are going to use following technology1.1. 1.2. 1.3. 1.4. 1.5. R.C.C. Framed Structure Granite- 10% Kota stone- 40% Mosaic cement Tiles- 50% Aluminium sliding Window Page 5

Financial Management & Packaging of Project

1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12. 1.13. 1.14. 1.15. 1.16. 1.17. 1.18. 1.19. 1.20.

P.C.C B.B.M Internal plaster External Plaster Waterproofing Carpentary Fittings Flooring Toilet floor & dado Flat skirting Plumbing Sanitary fixing PVC duct water line PVC duct drainage line Cleaning work

COST OF CONSTRUCTIONThe 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 Page 6

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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. Page 7

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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 Granite Kota stone Mosaic cement Tiles

450 95 40 15 90 6500/flat 6000/flat 54 300 Total

1,12,50,000/2,37,500/4,00,000/1,87,500/22,50,000/1,56,000/1,44,000/13,50,000/1,50,00,000/3,09,75,000/-

Cost of Brick work, plaster etc Cost of Electric work Cost of Plumbing Cost of Finishing
Labour Cost

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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 forerunner 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:
Outline Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 2.1 2.2 2.3 2.4 2.5 2.6 Duratio n 0.00d 0.00d 0.00d 0.00d 0.00d 0.00d 0.00d 15.00d 20.00d 1.00d 5.00d 0.00d 0.00d 0.00d

ID

Name Contracts - Supply Lot Sale Agreement - Supply Construction Agreement - Supply Contract Plans - Supply Contract Specifications - Supply Contract Site Plan - Secure Financing - Construction Loan Settlement Document Review & Revision - Review & Finalize Plans - Review & Finalize Specifications - Review & Finalize Site Plan - Print Construction Drawings - Approve Revised Plans - Approve Revised Specifications

Start 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 02/05/2011 01/05/2011 Thu 6/26/2011 Thu 7/3/2011 Wed 7/9/2011 Wed 7/9/2011 Wed 7/9/2011 Mon 7/28/2011 Thu 7/31/2011 Thu 7/31/2011 Fri 8/1/2011 Mon 8/4/2011 Wed 8/6/2011 Thu 8/7/2011 Thu

Finish 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 01/05/2011 25/06/2011 25/06/2011 26/06/2011 07/09/2011 07/09/2011 07/09/2011 07/0920/11

2.7 - Approve Revised Site Plan 3 Site Work 3.1 3.2 3.3 3.4 - Clear Lot - Strip Topsoil & Stockpile - Stake Lot for Excavation - Rough grade lot

3.00d 1.00d 1.00d 1.00d 2.00d

30/07/2011 31/07/2011 31/07/2011 08/01/2011 Tue 8/5/2011 Wed 8/6/2011 Thu 8/7/2011 Thu

3.5 - Excavate for foundation 4 Foundation 4.1 4.2 4.3 - Layout footings - Dig Footings & Install Reinforcing - Footing Inspection

1.00d 1.00d 0.00d

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8/7/2011 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 4.4 4.5 4.6 4.7 4.8 4.9 4.1 4.1 4.1 4.1 - Pour footings - Pin Footings - Stock Block, Mortar, Sand - Build Block Foundation - Foundation Certification - Draw #1 (Location Survey) - Fill Block Cores w/ Concrete - Steel Delivery - Set Lintels, Bolts, Cap Block - Waterproofing and Drain Tile 1.00d 1.00d 1.00d 15.00d 0.00d 0.00d 1.00d 1.00d 2.00d 1.00d 44.00d 1.00d 4.00d 4.00d 0.00d 2.00d 0.00d 3.00d 2.00d 7.00d 5.00d 2.00d Fri 8/8/2011 Mon 8/11/2011 Tue 8/12/2011 Wed 8/13/2011 Tue 9/2/2011 Tue 9/2/2011 Wed 9/3/2011 Thu 9/4/2011 Fri 9/5/2011 Fri 9/5/2011 Tue 9/9/2011 Tue 9/9/2011 Wed 9/10/2011 Tue 9/16/2011 Fri 9/19/2011 Mon 9/22/2011 Tue 9/23/2011 Wed 9/24/2011 Mon 9/29/2011 Wed 10/1/2011 Fri 10/10/2011 Wed

8/7/2011 Fri 8/8/2011 Mon 8/11/2011 Tue 8/12/2011 Tue 9/2/2011 Tue 9/2/2011 Tue 9/2/2011 Wed 9/3/2011 Thu 9/4/2011 Mon 9/8/2011 Fri 9/5/2011 Fri 11/7/2011 Tue 9/9/2011 Mon 9/15/2011 Fri 9/19/2011 Fri 9/19/2011 Tue 9/23/2011 Tue 9/23/2011 Fri 9/26/2011 Tue 9/30/2011 Thu 10/9/2011 Thu 10/16/2011 Thu

5 Rough Carpentry 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.1 5.1 - Set Steel - 1st Floor Deck Framing - 1st Floor Wall Framing - Draw #2 (First Floor Deck) - 2nd Floor Deck Framing - Draw #3 (Second Floor Deck) - 2nd Floor Wall Framing - Set Roof Trusses - Frame Roof - Install Roof Plywood - Install Windows & Doors

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49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69

5.1 5.1

- Frame Basement - Frame Basement Bulkheads

3.00d 2.00d 8.00d 2.00d 1.00d 1.00d 1.00d 1.00d 1.00d 1.00d 37.00d 2.00d 1.00d 5.00d 19.00d 2.00d 2.00d 1.00d 14.00d 5.00d 5.00d

6 Concrete Slabs 6.1 6.2 6.3 6.4 6.5 6.6 6.7 - Basement Slab Preparation - Termite Treatment Basment Slab - Slab Inspection - Pour Basement Slab - Prep Garage Slab - Termite Treatment Garage Slab - Pour Garage Slab

7 Plumbing Rough-in 7.1 7.2 7.3 - Plumbing Sub-slab - Plumbing Layout - Plumbing rough-in

8 Electric Rough-in 8.1 8.2 8.3 8.4 - Set Electric Boxes - Install Electric Service Panel - Electrical Walk-through - Electrical Rough-wire

9 Specialty Rough-ins 9.1 - Central Vacuum Rough-in

10/22/2011 Fri 10/10/2011 Thu 11/6/2011 Thu 9/18/2011 Thu 9/18/2011 Mon 9/22/2011 Tue 9/23/2011 Wed 9/24/2011 Thu 9/25/2011 Fri 9/26/2011 Mon 9/29/2011 Tue 9/16/2011 Tue 9/16/2011 Wed 10/29/2011 Thu 10/30/2011 Fri 10/24/2011 Fri 10/24/2011 Tue 10/28/2011 Thu 10/30/2011 Fri 10/31/2011 Thu 11/20/2011 Thu

10/23/2011 Tue 10/14/2011 Fri 11/7/2011 Mon 9/29/2011 Fri 9/19/2011 Mon 9/22/2011 Tue 9/23/2011 Wed 9/24/2011 Thu 9/25/2011 Fri 9/26/2011 Mon 9/29/2011 Wed 11/5/2011 Wed 9/17/2011 Wed 10/29/2011 Wed 11/5/2011 Wed 11/19/2011 Mon 10/27/2011 Wed 10/29/2011 Thu 10/30/2011 Wed 11/19/2011 Wed 11/26/2011 Wed

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70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

9.2 9.3 9.4

- Alarm System Rough-in - Telephone System Rough-in - Television System Rough-in

5.00d 5.00d 5.00d 0.00d 0.00d 0.00d 68.00d 3.00d 0.00d 1.00d 7.00d 56.00d 3.00d 7.00d 1.00d 45.00d 5.00d 1.00d 1.00d 3.00d 76.00d

10 County Electrical inspection 11 Draw #5 (Rough-ins complete) 12 County Framing Inspection 13 Roofing 13.1 13.2 13.3 13.4 - Roofing Paper Installed - Draw #4 (Roof, windows, doors) - Stock Roof Shingles - Install Roof Shingles

14 Exterior Finishes 14.1 14.2 14.3 14.4 - Siding - Exterior Trim - Brick Arch Forms - Brick Veneer

15 Insulation 15.1 15.2 - Caulk & Air Seal - Draft & Fire Stop

15.3 - Batt Insulation 16 Floor Finishes

11/20/2011 Thu 11/20/2011 Thu 11/20/2011 Thu 11/20/2011 Wed 11/26/2011 Wed 11/26/2011 Thu 11/27/2011 Fri 10/17/2011 Fri 10/17/2011 Thu 10/23/2011 Fri 10/24/2011 Mon 1/12/2012 Fri 10/24/2011 Fri 10/24/2011 Wed 10/29/2011 Fri 11/7/2011 Mon 11/10/2011 Fri 11/28/2011 Fri 11/28/2011 Mon 12/1/2011 Tue 12/2/2011 Tue

11/26/2011 Wed 11/26/2011 Wed 11/26/2011 Wed 11/26/2011 Wed 11/26/2011 Wed 11/26/2011 Thu 11/27/2011 Tue 1/20/2012 Tue 10/21/2011 Thu 10/23/2011 Fri 10/24/2011 Tue 1/20/2012 Fri 1/9/2012 Tue 10/28/2011 Thu 11/6/2011 Fri 11/7/2011 Fri 1/9/2012 Thu 12/4/2011 Fri 11/28/2011 Mon 12/1/2011 Thu 12/4/2011 Tue

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91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111

16.1 16.2 16.3 16.4 16.5

- Ceramic Tile - Install Hardwood Floor - Sand, Stain, Seal Hardwood - Install Carpet - Final Coat Hardwood

15.00d 4.00d 5.00d 4.00d 2.00d 59.00d 2.00d 2.00d 2.00d 2.00d 10.00d 14.00d 1.00d 1.00d 29.00d 1.00d 5.00d 15.00d 5.00d 1.00d 32.00d

17 Paint 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 - Prep Drywall for Prime Coat - Prime Paint Drywall - Prep Trim for Prime Coat - Prime Trim - Finish Coat Trim - Finish Coat Drywall - Caulk Exterior Windows & Doors - Finish Coat Exterior Trim & Siding

1/13/2012 Tue 1/13/2012 Fri 3/27/2012 Thu 4/16/2012 Thu 4/23/2012 Thu 4/16/2012 Wed 1/7/2012 Wed 1/7/2012 Fri 1/9/2012 Wed 1/21/2012 Fri 1/23/2012 Mon 2/23/2012 Mon 3/9/2012 Fri 3/27/2012 Mon 3/30/2012 Tue 1/13/2012 Tue 1/13/2012 Wed 1/14/2012 Wed 1/21/2012 Wed 2/11/2012 Wed 2/18/2012 Mon

4/28/2012 Mon 2/2/2012 Wed 4/1/2012 Wed 4/22/2012 Tue 4/28/2012 Fri 4/17/2012 Mon 3/30/2012 Thu 1/8/2012 Mon 1/12/2012 Thu 1/22/2012 Mon 1/26/2012 Fri 3/6/2012 Thu 3/26/2012 Fri 3/27/2012 Mon 3/30/2012 Fri 2/20/2012 Tue 1/13/2012 Tue 1/20/2012 Tue 2/10/2012 Tue 2/17/2012 Wed 2/18/2012 Tue

18 Interior Trim 18.1 18.2 18.3 18.4 - Interior Trim Delivery - Install Interior Doors - Install Interior Trim - Install Cabinetry

18.5 - Install Appliances 19 Exterior Landscaping

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112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132

19.1 19.3 19.4 19.5 19.6 19.7

- Rough Final Grade - Porches - Sidewalks - Decks - Driveways - Final Grade and Seed

1.00d 5.00d 7.00d 7.00d 2.00d 3.00d 160.00d 2.00d 1.00d 1.00d 12.00d 2.00d 2.00d 5.00d 10.00d 14.00d 3.00d 3.00d 2.00d 0.00d 0.00d

20 Electrical Final Trim 20.1 20.2 20.3 - Switch & Plug - Install Fixtures - Connect Appliances

21 Hardware 21.1 21.2 21.3 21.4 - Door Hardware - Bath Hardware - Mirrors - Shower Doors

22 Cleaning 22.1 22.2 22.3 - Windows - Rough Clean - Final Clean

23 Final Walk-through 24 Move-in

1/12/2012 Mon 1/12/2012 Thu 1/22/2012 Thu 1/29/2012 Mon 2/9/2012 Wed 2/18/2012 Fri 2/20/2012 Thu 6/5/2011 Tue 1/13/2012 Thu 6/5/2011 Thu 6/5/2011 Fri 3/27/2012 Fri 3/27/2012 Fri 3/27/2012 Tue 3/31/2012 Tue 3/31/2012 Fri 3/27/2012 Fri 3/27/2012 Wed 4/1/2012 Tue 4/14/2012 Wed 4/15/2012 Thu

2/24/2012 Mon 1/12/2012 Wed 1/28/2012 Fri 2/6/2012 Tue 2/17/2012 Thu 2/19/2012 Tue 2/24/2012 Wed 1/14/2012 Wed 1/14/2012 Thu 6/5/2011 Thu 6/5/2011 Mon 4/13/2012 Mon 3/30/2012 Mon 3/30/2012 Mon 4/6/2012 Mon 4/13/2012 Wed 4/15/2012 Tue 3/31/2012 Fri 4/3/2012 Wed 4/15/2012 Wed 4/15/2012 Thu

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4/16/2012

4/16/2012

FINANCIAL AND ECONOMIC EVALUATIONCapital - 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 FINANCINGCapital 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 50,00,000.00 1,00,000.00 40,00,000.00

Asset Equity Debt

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.
Month Amount (Rs.) Int.Payble Monthly 11000 11000 11000 30000 Int.Payble Quarterly Closing Loan Balance

Apr-11 May-11 Jun-11

1100000

1100000 1100000 1100000 Page 19

Financial Management & Packaging of Project

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

1100000

20000 20000 20000 60000

1100000

30000 30000 30000 90000

1100000

40000 40000 40000 120000

2000000 2000000 2000000 3000000 3000000 3000000 4000000 4000000 4000000

* Loan disbursed in 4 equal quarterly installments **Assuming interest @ 12% p.a.

PROFIT MEASURESA 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.

REFERANCESText book of NICMAR on Financial management.

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