Construction Project Analysis: Cost Management, Funding, Implementation and Winding Up

This report analyzes the viability of a construction project undertaken by ADCO Construction and the capital budgeting of Myer Company. It covers project selection, cost management, funding, implementation, and winding up. The report also provides recommendations and insights on the net present value of the project.

Construction project analysis
Project analysis

Table of Contents
Part-A..........................................................................................................................................................2
Executive Summary.................................................................................................................................2
Project selection......................................................................................................................................2
Cost management-...................................................................................................................................2
Funding...................................................................................................................................................3
Implementation and winding up..............................................................................................................3
Recommendation.....................................................................................................................................4
Part-B..........................................................................................................................................................5
Introduction.............................................................................................................................................5
Answer to question no-1..........................................................................................................................5
Answer to question no-2..........................................................................................................................6
Computing the Net present value of Mayer Company............................................................................7
Canadian dollar depreciates against the AUD $.......................................................................................8
Decision making based on the changed exchange rate...........................................................................9
Based on the analysis you did in questions i-iv what would your advice be to the Myer board about
this project? Why?...................................................................................................................................9
Conclusion.................................................................................................................................................10
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Part-A
Executive Summary
There are several negative and positive factors which affect the viability of the project
and its acceptance degree to company. It is analyzed that while selecting particular project,
company needs to assess the available resources, finance, manpower and operational strategic
planning which company needs to take for the effective running of business. In this report,
company indulged in taking construction project has been analyzed. ADCO Construction
undertook the construction project of the 100 flats within the availability of 100 square fit in the
middle of the Australia. This report reveals the problems and strategic planning which should
have taken by company before undertaking the particular construction business.
Project selection
The project selection process is very critical step which required utmost care and strategic
planning if company wants to create value in its undertaken project. However, capital budgeting,
top down analysis and trend analysis are some of the tools which could be used by company to
analysis the project options available to it. It is analyzed that the selection of the construction
project is highly appreciated due to the increased growth rate of the real estate business in
Australia.
Cost management-
There are several cost management tools which could be used by company to control its
cost and reduce the un-necessary expenses of the business. It is analyzed that company could
use ABC model costing, life cycle costing mold and absorption costing model to bifurcate h
project cost in the different work process department. It will also reduce the total cost of the
business in effective manner. This cost management tool determines the cost incurred on the
business projects and identify whether the incurred cost would be in the control of the business
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or not. Due to the increased complexity of the construction project, it might be hard for the
management of ADCO Construction to determine the operating and fixed cost associated with
the project. Therefore, by using the proper cost management tool, ADCO Construction could
determine the cost of its projects.
Funding
In order to finance the project selected, ADCO Construction needs to use the financial
management technique. ADCO Construction could raise funds by using the equity capital, debt
funding, and creation charge on its assets and plugging back funds in business. In this case,
Company used equity funding to raise funds for the selected project. It was analyze that due to
the less financial Leverage, ADCO Construction used high debt funding which eventually reduce
the overall cost of capital and increased the return on capital employed of business.
However, below is the bifurcation of the sources of funding used to finance the new
selected projects.
Types of funding % of the portion used to raise the capital
Equity funding 15%
Debt capital 40%
Promoters investment 20%
Retained earning 25%
Implementation and winding up
Winding up is the procedure to end the particular project due to negative factors or
project is not viable in the market. In this case, ADCO Construction selected construction project
to create value on its investment. However, there were several reasons which resulted to failure
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of the project undertaken such as less efficient capital management, no strategic planning, less
availability of experienced staff or employed and increased cost of the construction. These are
some of the major issues which had been faced by ADCO Construction and had to indulge in
winding up of undertaken project. However, in some of the cases, if ADCO Construction meets
its objective after undertaking the project also results to winding up of that project.
These all above given projects were the reasons of failure of the project and resulted to
the winding up.
After analyzing the business factors, it could be inferred that ADCO Construction did not
face any environmental issues due to the positive work environment in Australia. The climate
factor may have affected if ADCO Construction completed its project by 75% as it would be the
ending stage in which constructed flats would need to be secured from the rain and heavy dust in
the area.
Recommendation
 Proper strategic planning and cost control method should have been adopted by
ADCO Construction to lower down its cost of capital.
 Financial management tools and experienced staff members would add value to
the undertaken construction project.
 ADCO Construction should adopt proactive business planning to prepare the
company active for its upcoming business losses and risk.
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Part-B
Introduction
It is evaluated that Myer Company has increased its brand image by expanding its business on
international level. However, in this report, viability of the new project would be assessed by
using the capital budgeting tool.
Answer to question no-1
Myer Company issued AUD $ 5 million equity capital in 2013 after that in 2016
company again issued share capital of AUD $ 212 million in 2016 to its shareholders.
Reason to raise capital by using equity capital
There are several reasons which have resulted to raising funds by using the equity share capital.
Myer Holding was having high financial leverage in its business so company cannot increase its
debt portion to raise funds.
Issue of equity capital increases the equity portions which eventually lower down the financial
leverage and manage the capital structure less risky in market.
Issue of capital is also the one of the best tool to increase the brand image on international level.
The below give table reflects the decrease in the equity capital of Myer in 2017.
Year 2014 2015 2016 2017
Common stock
(AUD $ in
million)
525 525 739 (Increased) 739 (Stable
Other Equity
(AUD $ in
million)
(5) 5 (7) (Increased
loss)
(5)
Retained
earnings (AUD
$ in million)
379 335 (Decreased) 379 (Increased) 342
Accumulated
other comp...
(AUD $ in
million)
(1) (3) (4) (3)
Total equity
(AUD $ in
893 863 1108 1073
5

million)
Reason of decrease in tis overall equity capital
Company had loss in its business which was set off with the retained earnings of last years.
The common stock portion also went down by 20% as compared to last year which resulted to
decreased equity capital.
Answer to question no-2
Computation of the free cash flow of the undertaken project
Computation of Free cash flow of Myer
Company (AUD $ in million)
Data Year Year Year Year Year
Particular 1 2 3 4 5
Total sales $
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs $
2.20
$
2.24
$
2.29
$
2.33
$
2.38
Contribution $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost $
-
$
-
$
-
$
-
$
-
Net Profit $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation $
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Net Profit before
Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40% $
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax $
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation $
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Cash Inflows $
2.18
$
2.22
$
2.26
$
2.30
$
2.34
(+) Salvage Value 9
Working Capital 2
Free Cash Flows in
Australian Dollars
2.18 2.22 2.26 2.30 13.34
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Myer Holding would have total AUD $ 13.34 million free cash flow in its business.
Computing the Net present value of Mayer Company
Cost of capital= 5%
Computation of Free cash flow of Myer
Company (AUD $ in million)
Data Year Year Year Year Year
Particular 1 2 3 4 5
Total sales $
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs $
2.20
$
2.24
$
2.29
$
2.33
$
2.38
Contribution $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost $
-
$
-
$
-
$
-
$
-
Net Profit $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation $
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Net Profit before
Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40% $
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax $
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation $
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Cash Inflows $
2.18
$
2.22
$
2.26
$
2.30
$
2.34
(+) Salvage Value 9
Working Capital 2
Free Cash Flows in
Australian Dollars
2.18 2.22 2.26 2.30 13.34
*Present value
factor @5%
0.952 0.907 0.864 0.823 0.784
Present Value $
2.08
$
2.01
$
1.95
$
1.89
$
10.45
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Total Present
values(A)
$
18.39
(-)Cash Outflows
Initial investment $
10.00
Working capital
investment
$
2.00
(+)Cost Of
equipment
$
12.00
Total(B) $
12.00
Net Present
Value(A-B)
$
6.39
Canadian dollar depreciates against the AUD $
Canadian dollar depreciates against the AUD $ resulted to Canadian Dollar= AUD $= .95
million.
Computation of Net present value of
Myer Company (AUD $ in million)
Data Year Year Year Year Year
Particular 1 2 3 4 5
Total sales $
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs $
2.20
$
2.24
$
2.29
$
2.33
$
2.38
Contribution $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost $
-
$
-
$
-
$
-
$
-
Net Profit $
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation $
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Net Profit before
Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40% $
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax $
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation $ $ $ $ $
8

0.50 0.50 0.50 0.50 0.50
Cash Inflows $
2.18
$
2.22
$
2.26
$
2.30
$
2.34
(+) Salvage Value 9
Working Capital 2
Free Cash Flows in
Australian Dollars
2.18 2.22 2.26 2.30 13.34
*Present value
factor @5%
0.952 0.907 0.864 0.823 0.784
Present Value $
2.08
$
2.01
$
1.95
$
1.89
$
10.45
Total Present
values(A)
$
18.39
Canadian dollar to
AUD
0.95
Total present cash
inflow
$
17.47
(-)Cash Outflows
Initial investment $
10.00
Working capital
investment
$
2.00
(+)Cost Of
equipment
$
12.00
Total(B) $
12.00
Canadian dollar to
AUD
$
11.40
Net Present
Value(A-B)
$
6.07
In this case, net present value will be changed to AUD $ 6.07 million.
It will impact the cash inflow as the cash outflow of the company is too high but it is less than
the cash inflow so the changes in currency value will negatively impact the NPV.
Decision making based on the changed exchange rate
It might impact the investment decision but due to the high net present value, it will give high %
of acceptance level to Myer to accept this particular project.
Based on the analysis you did in questions i-iv what would your advice be to the
Myer board about this project? Why?
This could be inferred that if Myer Holding undertakes this project then it will be benefited by at
least AUD $ 6.07 million within five years even after deducting the losses arise due to present
9

value factor. It is analyzed that Myer should accept this project if he is certain that there will be
no more fluctuation in the exchange rate as given.
Conclusion
After analyzing all the detail, it could be inferred that Myer Company should accept this project
to expand its business. However, if the Australian dollar strengthens over the Canadian dollar
then it might negatively impact the NPV of company.
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