Financial Management for Melbourne Airport Rail Link Project

This report discusses the financial planning and monitoring process for Melbourne Airport Rail Link project, including budget, revenues projections, profitability and financial position projections, key performance indicators, taxation compliance analysis, and accounting records compliance.

Financial Management
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Contents
Financial Management................................................................................................................................1
Introduction.................................................................................................................................................3
Overview of the Project of Airport Rail Link................................................................................................3
Financial Budget of Project..........................................................................................................................4
Capital Expenditure.................................................................................................................................4
Business Capital.......................................................................................................................................5
Revenues Projections..............................................................................................................................6
Profitability and Financial Position Projections........................................................................................6
Key Performance Indicators........................................................................................................................7
Taxation Compliance Analysis and Other Legal Compliance........................................................................9
Accounting Records Compliance.................................................................................................................9
Conclusion.................................................................................................................................................10
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Introduction
Financial planning is the process involves estimating the funds for the project and
forecasting the revenues and expenditures associated with the project. Further, the financial
planning extends to controlling implementation of the plans. Proper monitoring and controlling
of the plans is necessary to ensure the execution of the plans in the right direction and thereby
ensuring achievement of the overall objective of the project (Smith, Smith, Smith, and Bliss,
2011). Here, a report has been prepared showing the important aspects of financial planning in a
project implementation. For this purpose, a real project namely Melbourne Airport rail link has
been chosen.
Overview of the Project of Airport Rail Link
The project to be discussed here is the Melbourne Airport rail link via Sunshine. It is
estimated that by the end of 2038 the number of passengers to use the Melbourne Airport will be
above 67 million. The project to connect the Melbourne Airport to regional and metropolitan rail
lines shall begin by 2022 (Bigbuild, 2018). The construction shall be as per the following design:
Figure 1: Melbourne Airport rail link (Bigbuild, 2018)
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It is expected that the construction of Melbourne Airport link that will be started in 2022 will
cost between $8 billion to $13 billion in total (Bigbuild, 2018). In order to ensure that the public
construction projects are in accordance with the requirements of relevant legislations it is
important to have in-depth knowledge about the appropriate legislations first. Further, it is also
essential to estimate the different elements of the cost to be incurred in the project and means of
finance to be used to arrange funds.
Financial Budget of Project
Capital Expenditure
Capital expenditure signifies the funds to be expensed in purchasing the capital assets
like land, building, plant and equipment and machineries. The capital assets are expected to be
used for more than one accounting period and hence the money spent purchase of these items is
not charged against revenues immediately. Rather, it is charged over the period of time in the
form of depreciation (Jaffe and Randolph Westerfield, 2004). In respect of Melbourne Airport
rail link, following capital expenditure is estimated to be incurred:
Capital expenditure
Resource Amount ($ Million)
Stores and Supplies 500.00
Machinery 4,000.00
Equipments 2,000.00
Land 7,000.00
Total 13,500.00
Note: The figures shown in the above table are based solely on the hypothetical assumptions.
Thus, the total capital expenditure to be incurred in the project is estimate to be around
$13.50 billion. The project would take around 15 years to complete so the capital expenditure of
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$13.50 billion would be incurred over the period of 15 years. For the accounting purpose,
depreciation on the capital expenditure would be charged against revenues each year from the
year when project starts earning revenues.
Business Capital
After estimating the capital expenditure, it is essential to plan for arranging the funds
needed for the capital expenditure. Primarily, there are two sources of financing such as internal
and external. Further, sub categorization of the sources of finance involves equity, mortgage loan
from banks, bond etc. The equity capital signifies owner’s interest in the business and the cost of
equity arises in the form of dividend and bonus paid out to the owners (Jaffe and Randolph
Westerfield, 2004). The cost of loans and bonds is the interest paid out on the amount borrowed
through loan or issue of bond. In the case of Melbourne Airport rail link, the sources finance
have been shown as below:
Sources of Finance:
Equity capital 8,100.00
Bond 2,700.00
Mortgage Loans 2,700.00
Total 13,500.00
It is assumed that the project that 50% of the funds would be financed through equity and
rest of the funds would be arranged through mortgage loan and issue of bonds in the market
equally. The mortgage loan would be arranged from U Bank at 3.59% rate of interest for 10
years (Ratecity, 2018). Further, the bond would be issued to the public at 5% rate of interest
which is slightly costlier than mortgage loan.
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Revenues Projections
The project is expected to complete by the end of 2038. The project would start earning
revenues from the year 2039. The estimation of revenues of this project are given as below:
Melbourne Airport rail link: Sales Forecast
Year 1 Year 2 Year 3
Passenger transport
No of passengers
(Million) 67 80.4 112.56
Miles of per passenger 300 330 363
Passenger miles 20100 26532 40859.28
Rate per mile per
passenger 0.5 0.55 0.605
Total ($ Million)
$
10,050.00
$
14,592.60
$
24,719.86
Other revenues
$
2,010.00
$
2,918.52
$
4,943.97
Total revenues ($
Million)
$
12,060.00
$
17,511.12
$
29,663.84
In estimating the revenues it is assumed that the number of passengers would increase by
20% and 40% in the second and third year respectively. Further, it is assumed that the average
miles travelled by a passenger would increase by 10% each year. The rate per passenger mile is
assumed to increase by 10% each year. Based on these assumptions, the revenues from the
passenger transport are expected to be $10 billion in the first year of operations and $ 14 and $
25 billion in the next two years respectively.
Profitability and Financial Position Projections
It is estimated that the profit after paying taxes on the income would be $2.70 Billion in
the first year. The profit is expected to increase to $4.8 Billion in the second year of operations
and further to $8.61 Billion in the third year. The detailed projections regarding financial
performance and position are presented in the appendix.
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Key Performance Indicators
The key performance indicators (KPIs) are set by the management to control and improve
the performance by matching actual results with the KPIs. There are various theories and
concepts which can be applied by the management in setting the key performance indicators.
Now a days, balanced score card approach is used by various organizations to evaluate the
performance of the business. In respect of Melbourne Airport rail link, the Key performance
indicators have been set as below:
Performance Area Criteria KPI
Profitability Net margin ratio To be kept more than 20%
Liquidity Current ratio To be kept in 1:2
Solvency risk Debt equity ratio To be kept below 40%
Customer satisfaction Customer
satisfaction score
To be kept above 95%
Labor turnover Attrition rate To be kept below industry
average
Market share % of revenues in
industry revenue
To be targeted for 10%
Monitoring Financial Performance and Appropriate Actions/ Alternatives
The next step after preparing the budget and estimations is to formulate policy for
appropriate monitoring of the plans. The monitoring and controlling is essential to ensure that the
plans are implemented in the right direction (Sharpe, 2002). In respect of Melbourne Airport rail
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link, the monitoring of key performance indicators is essential. In this regards following
monitoring program has been drawn:
KPI Monitoring
Authority
Time Action Plan
Net Margin Ratio Chief Financial
Officer
Monthly and
Quarterly Reporting.
If net margin ratio goes
below the set KPI,
Management would
consider need to either
reduce cost or improve
quality of service.
Liquidity and
Solvency
Credit Manager Daily monitoring and
quarterly reporting
If liquidity or solvency ratio
rises higher than the set
KPI, the manager needs to
revise the financing
patterns.
Market Share and
Customer
Satisfaction
Director Sales Quarterly review If the customer satisfaction
or market share goes below
the set KPI, the director
sales need to revise the sales
and marketing strategy.
Labor turnover
and allied matters
Manager Human
Resource
Regular monitoring
and quarterly
reporting
If attrition rate goes beyond
the set KPI, the manager
operations need to redesign
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the human resource policies.
Taxation Compliance Analysis and Other Legal Compliance
There are various direct and indirect taxes the compliance of which would be required to
be ensured by the management in respect of Melbourne Airport rail link project. The goods and
service tax would be applicable at the rate of 10% on the transportation services provided by the
firm. Therefore, the firm would be required to get registered for goods and service tax with the
Australian Taxation Office (ATO, 2018). Further, the firm is also liable to pay income tax on the
profits earned by it. The rate of income tax for a company is 30%; however, the rate is reduced to
27.50% in case of a small business company (PWC, 2018). A separate registration for income
tax would also be required with Australian Taxation Office. The firm would be required to file
quarterly returns with respect to GST and annual return of income for income tax purposes.
Apart from the above, the company would also be required to comply with the guidelines
issued by Australian Securities and Investment Commission (ASIC) as it wishes to issue equity
shares and bonds to the public. Further, there is national construction code in Australia which
provides for various rules and regulations in regards to construction design and performance. The
firm would also need to comply with this code (Australia.gov.au, 2018).
Accounting Records Compliance
For accounting purposes, the firm will have to comply with the Accounting Standard
issued by the Australian Accounting Standard Board. Further, the corporation act 2001 contains
provisions with respect to maintenance of books of accounts by a company. In compliance with
those provisions, the company will have to prepare the accounting records on accrual basis
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following double entry accounting system. The company will have to maintain books and
records with respect to all moneys spent and received, all assets purchased, and liabilities
incurred. Further, the company will also have to file its financial statement annually with the
federal registrar. The financial statements of shall comprise an income statement, balance sheet,
and a cash flow statement (Asic.gov.au, 2018).
Conclusion
The report presented here provides an overview of the financial planning and monitoring
process with respect to Melbourne Airport rail link project. From the discussion in the report, it
could be asserted that the financial planning is essential to ensure that the project is implemented
hassle free. Further, regular monitoring of the financial plans is also important to ensure that the
right direction is kept while implementing the plans.
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References
Asic.gov.au. 2018. What books and records should my company keep? [Online]. Available at:
https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/what-books-
and-records-should-my-company-keep/ [Accessed on: 25 November 2018].
ATO. 2018. Goods and Service Tax. [Online]. Available at:
https://www.ato.gov.au/Business/GST/ [Accessed on: 25 November 2018].
Australia.gov.au. 2018. Building and construction industry. [Online]. Available at:
https://www.australia.gov.au/information-and-services/business-and-industry/building-and-
construction-industry [Accessed on: 25 November 2018].
Bigbuild. 2018. Melbourne Airport rail link. [Online]. Available at:
https://bigbuild.vic.gov.au/projects/airport-rail-link [Accessed on: 25 November 2018].
Jaffe, J. and Randolph Westerfield, R., 2004. Corporate finance. Tata McGraw-Hill Education.
PWC. 2018. Australia- Corporate taxes on corporate income. [Online]. Available at:
http://taxsummaries.pwc.com/ID/Australia-Corporate-Taxes-on-corporate-income [Accessed on:
25 November 2018].
Ratecity. 2018. Compare the best home loan rates in Australia. [Online]. Available at:
https://www.ratecity.com.au/home-loans/best-mortgage [Accessed on: 25 November 2018].
Sharpe, W.F., 2002. Budgeting and monitoring pension fund risk. Financial analysts journal,
pp.74-86.
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Smith, J., Smith, R.L., Smith, R. and Bliss, R., 2011. Entrepreneurial finance: strategy,
valuation, and deal structure. Stanford University Press.
Appendix: Financial Performance and Position
Melbourne Airport rail link
Profit & Loss Statement
Amount ($ Million)
Year 1 Year 2 Year 3
Sales $12,060 $17,511 $29,664
Miscellaneous income $0 $0 $0
A. Total $12,060 $17,511 $29,664
B. Cost of Sales $7,236 $9,631 $16,315
C. Gross Profit (A-B) $4,824 $7,880 $13,349
D. Operating Expenses
Salary $121 $127 $133
Rent $2 $2 $2
Utilities $1 $1 $1
Insurance $1 $1 $1
Depreciation $600 $630 $662
Marketing $10 $11 $11
Maintenance & Repairs $1 $1 $1
Other $1 $1 $1
Total $736 $772 $811
Operating profit $4,088 $7,108 $12,538
Less: Interest $232 $232 $232
Profit before tax $3,856 $6,876 $12,306
Less: Tax @ 30% $1,157 $2,063 $3,692
Net Profit AT $2,700 $4,813 $8,614
Melbourne Airport rail link
Balance Sheet
Amount ($ Million)
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Assets 2016 2017 2018
Current $10 $12 $14
Fixed $13,000 $13,000 $13,000
Other assets $10 $10 $10
Total Assets $13,020 $13,022 $13,024
Liabilities
Current $12 $14 $17
Non-Current (Borrowings) $5,400 $5,400 $5,400
Total Liabilities $5,412 $5,414 $5,417
Equity $7,608 $7,608 $7,607
Total Liabilities & Equity $13,020 $13,022 $13,024
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