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# Construction Financial Management

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Nguyễn Gia Hào

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Click on the ad for more. Click on the ad for more. Click on the ad for more. An example of the balance sheet of a construction company is shown in Table 1.2 (see next page).

## Working Capital and Current Ratio

In our example, the company's financial health in 2011 was somewhat unsatisfactory, as the current ratio was 1.26, slightly lower than 1.3. However, in 2012 the financial situation became healthier, as the current ratio rose to 1.45, higher than 1.3.

## Under Billing and Over Billing

Over billing means that the construction company is borrowing money from the customer by billing the latter an amount of revenue more than the company actually made. However, the true gross profit (calculated by the Percentage of Completion Method shown earlier) is \$717,600.

## Worked Examples

STUDY AT A TOP RANKED

### Analysis of Financial Statements by Financial Ratios

In financial statement analysis, financial ratios help a lot in indicating the financial health of a construction company. In this chapter, we will first discuss these relationships, and then have a case study to see how we can use them to aid management decisions.

### Five Categories of Financial Ratios

Liquidity ratios show the construction company's ability to pay its obligations on time. Average age of accounts payable = [Accounts Payable / (Materials + Subcontracts)] × 365 d. Average age of accounts payable must be shorter than 45 days) Average age of accounts payable = (Accounts payable / income) × 365 d.

### Nominal Interest Rate and Real Interest Rate

The bank continues to pay 6% interest per year, but the interest payment takes place on a semi-annual basis. If the bank continues to pay 6% interest per year, how much will be in the account at the end of the year if the bank pays interest daily?

### Benefit-Cost Ratio

If NPV is calculated to be positive, NAB must also be calculated to be positive, and vice versa.

### Principal Amortization and Interest Payment of a Loan

How much should the company pay the bank at the end of each year (assuming uniform . payment). Compound Interest, Net Present Value (NPV), Equivalent Annual Costs and Loan Repayment Thus, if at the end of year 3 at the beginning of the 3rd year the company pays the same amount to the bank as calculated in (a), the new uniform payment is:.

### Net Cash Flow (NCF)

As shown in example 3.4 of Chapter 3, we can use the NPV to determine whether a project is viable or not. However, in this chapter we will use a different approach to determine whether a project is viable.

## EXPERIENCE THE POWER OF FULL ENGAGEMENT…

Internal Rate of Return (IRR) and Differences between IRR and NPV Using NAB, as discussed in the latter part of Section 3.2 of Chapter 3, would have a similar classification to NPV. Using the B/C ratio as defined in Section 3.3 of Chapter 3 would have a similar classification to IRR because B/C is a ratio and somehow reflects a sort of 'rate of return', although it is not the same as IRR.

## SETASIGNThis e-book

### Introduction

In Chapters 3 and 4, all discussions are based on the assumption that we live in a world without inflation. In this chapter, we will remove this unrealistic assumption, which means that the first paragraph of Section 3.2 of Chapter 3, that i (the real interest rate) equals i' (the nominal or notional interest rate), is no longer true.

### When Is Inflation Adjustment Considered Or Not Considered?

The cash flows in Table 5.3 (constant base year prices) can be changed to actual transactions as shown in Table 5.2. During these 30 years (life of the project), the annual operation and maintenance costs will increase with the rate of inflation.

### Concluding Remarks

Usually, the effect of inflation on both costs and income cancel each other out in the long run to regain a balance. The following cash flows of a project are the actual transactions in the respective years as indicated.

Introduction

### Variable Costs, Fixed Costs and Break-even Point

Graphical Presentation – Break-even Chart

Mathematical Presentation

Contribution

### Equipment Selection Decision

In the range of 1,000 hours to 2,500 hours in a year, the semi-automatic crane has the lowest total cost. With volumes of more than 2,500 hours of use in a year, the fully automatic crane has the lowest total cost.

### Engineering Scheme Choice Decision

Cost-volume-profit analysis The break-even graph shows that the manually operated crane has the lowest total costs up to a usage volume of 1,000 hours per year. From this break-even chart we see that for pumping time less than 2,784 hours per year, Schedule A is best.

### Concluding Remarks

A contractor is considering whether he can remove an item and replace it with another from his precast concrete patio. What is the most economical range of pumping time per hour/year for each scheme.

### Introduction

Financial Analysis of a Project For an all-equity investment case, there is no loan and therefore no interest to be paid, so the only item that is tax deductible is depreciation. However, Example 7.2 in the same section is an equity-plus-loan case, and of course the analysis will be a bit more complicated.

### A Case Study on Financial Analysis

All figures in Sections 7.3.2 and 7.3.3 were based on the monetary value of the year in which the project was planned. For the balance sheet of this proposed project, it could be created based on the final income statement.

• Introduction
• S-Curve
• Cumulative Interim Payment Graph
• The Two Graphs combined
• A Worked Example

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