Construction Financial Management (D31CG)

Mock Examination
10 April 2014

Answer: Q1
a.

Year

Cost ()
o
1
2
3
4
5
6
7

3,000,000
100,000
100,000
100,000
130,000
160,000
190,000
220,000

Calculating the EAI of Option 1

Income
Resale
Net Income
o
900,000
900,000
900,000
850,000
800,000
750,000
700,000

1,000,000

1
PW factor

- 3,000,000
1
800,000
0.917
800,000
0.842
800,000
0.772
720,000
0.708
640,000
0.650
560,000
0.596
1,480,000
0.547
Total PW of Net Income
Capital Recovery Factor
Equivalent Annual Income

1
PW of Net Income
-

3,000,000
733,600
673,600
617,600
509,760
416,000
333,760
809,560
1,093,880
0.199
1,093,880 x 0.199
217,682

Answer: Q1
a.

Year

Cost
o

1
2
3

3,500,000
45,000
45,000
45,000
45,000

Calculating the EAI of Option 2

Income
Resale
Net Income
o
1,000,000
1,000,000
1,000,000
1,000,000

2,000,000

PW factor

- 3,500,000
1
955,000
0.917
955,000
0.842
955,000
0.772
2,955,000
0.708
Total PW of Net Income
Capital Recovery Factor
Equivalent Annual Income

Therefore, option 2 should be adopted

1
PW of Net Income
-

3,500,000
875,735
804,110
737,260
2,092,140
1,009,245
0.309
1,009,245 x 0.309
311,857

Answer: Q1
b.
In order to change the recommendation, the EAI of Option 1 should be at least
311,857. 5
Total PW of Net Income x 0.199 = 311,857
Total PW of Net Income = 1,567,121

3
13

If the resale value is Y:

(Y+700,000-220,000) x 0.547 = 1,567,121-284,320
Y = 1,865,157.22

Minimum resale value needed is 1,865,157.22

Answer: Q2
a.

Capital Employed/Shares
Loan

8,000,000

Interest (0.09x Loan)

360,000

Debtors (Work certified less Cash Received)

Work in Progress(Value less Certified)
Creditors (Cost less Cash paid)

4,000,000

1,000,000

Profit (value less Cost)

1,000,000
3,000,000
2,000,000

Depreciation
Building (4M/50)

Plant, Furniture & Cars (2M/5)

Total Depreciation

80,000

400,000
480,000

Answer: Q2
a.
Profit and Loss Account

Turnover

35,000,000

Cost

33,000,000

Overheads

Depreciation

200,000

480,000

Profit before interest

1,320,000

Interest

360,000

Profit before tax

Tax (15% of Profit after interest)

Retained Profit

960,000

816,000

144,000

Profit after tax

Dividends (1p per share of 8M)

80,000

736,000

10

Answer: Q2
a.

Balance Sheet
Fixed Assets
Buildings
Plant, Furniture & Cars
Less Depreciation

4,000,000
2,000,000
-480,000

Current Assets
Debtors
Work in Progress
Cash

1,000,000
1,000,000
8,800,000 10,800,000

Total Assets
Current Liabilities
Creditors
Tax
Dividends

5,520,000

16,320,000

3,000,000
144,000
80,000
3,224,000

Long term liabilities

Loan
Interest

4,000,000
360,000

2
1

Total Liabilities
Total Assets - Total Liabilities
Ordinary Shares
Retained Profit
Shareholders' Fund
Shareholders' funds = Total assets- Total
Liabilities
8736000 = TA-7,584,000
TA = 16,320,000
Cash = 16,320,000 - 7,520,000
Cash = 8,800,000

8,000,000
736,000
8,736,000

4,360,000
7,584,000
8,736,000

8,736,000

10

Answer: Q2
b.
Performance
Profit margin = profit before tax/turnover=3%
Financial standing
Curent ratio = Curent assets/Curent liabilities =

Quick ratio = (Current assets-stocks)/Current

liabilities =

Gearing ratio= Interest bearing

debts/shareholders' funds=

0.5

Company has high current ratio(5) and hence the company is not using its
resources to its full benefit. In particular the money is tied up as cash (8.8M) in
the bank and lying idle.
Gearing ratio 0.5, indicates a moderate financial risk.
Profit margin 3% indicates a vulnerable business position

Answer: Q3
a.
Month

Cost

Cum. Cost

2
Value

Cum. Value

2
Cum.
Retention

Cum. C/in

Cum. Lab Cum. M & P

C/out
C/out

Total Cum.
C/out

2
Cash Flow

400,000

400,000

440,000

440,000

22,000

240,000

240,000 - 240,000

400,000

800,000

440,000

880,000

44,000

418,000

480,000

160,000

640,000 - 222,000

1,000,000

1,800,000

1,100,000

1,980,000

99,000

836,000 1,080,000

320,000

1,400,000 - 564,000

1,900,000

3,700,000

2,090,000

4,070,000

203,500

1,881,000 2,220,000

720,000

2,940,000 - 1,059,000

1,500,000

5,200,000

1,650,000

5,720,000

286,000

3,866,500 3,120,000 1,480,000

4,600,000 - 733,500

1,100,000

6,300,000

1,210,000

6,930,000

346,500

5,434,000 3,780,000 2,080,000

5,860,000 - 426,000

6,930,000 3,780,000 2,520,000

6,300,000

18

630,000

Answer: Q3
b.
Month

Cost

Cum. Cost

Value

Cum. Value

Cum.
Retention

Cum. C/in

1
Cum. Lab Cum. M & P
C/out
C/out

Total Cum.
C/out

2
Cash Flow

400,000

400,000

460,000

460,000

23,000

240,000

240,000 - 240,000

400,000

800,000

460,000

920,000

46,000

437,000

480,000

160,000

640,000 - 203,000

1,000,000

1,800,000

1,150,000

2,070,000

103,500

874,000 1,080,000

320,000

1,400,000 - 526,000

1,900,000

3,700,000

1,995,000

4,065,000

203,250

1,966,500 2,220,000

720,000

2,940,000 - 973,500

1,500,000

5,200,000

1,575,000

5,640,000

282,000

3,861,750 3,120,000 1,480,000

4,600,000 - 738,250

1,100,000

6,300,000

1,155,000

6,795,000

339,750

5,358,000 3,780,000 2,080,000

5,860,000 - 502,000

6,795,000 3,780,000 2,520,000

6,300,000

10

495,000

Answer: Q3
b.
Profit of a=

630,000

0.09

9%

Profit of b=

495,000

0.07

7%

The alternative has not improved the contractor's cash flow. Furthermore, it has reduced the
contractors profit (Students should justify this by more explanation and the implications).
.

Answer: Q4
a.
Contract A

Val/Dur * Mths in 2014

9,000,000

Contract B

Val/Dur * Mths in 2014

10,000,000

Contract C

Val/Dur * Mths in 2014

6,428,571

Contract D

Val/Dur * Mths in 2014

7,333,333

2014 Turnover

32,761,905

10

Answer: Q4
b.
Loan
Holiday trip
Retained Profit
Commitments

Turnover Reqd= Turnover/profit margin

Shortfall turnover
X/16 =
59,238,095/6 2
Tot val of contracts = (59,238,095x16)/6

3,000,000
100,000
1,500,000
4,600,000

3 92,000,000
2 59,238,095
2

157,968,254
12

59,238,095.24
x

22

12

Answer: Q4
c.
Contract A

Val/Dur * Mths in 2013

9,000,000

Contract B

Val/Dur * Mths in 2013

6,000,000

Contract C

Val/Dur * Mths in 2013

Contract D

Val/Dur * Mths in 2013

3,571,429
666,667

Turnover for 2013

2013 market output (TO/Mkt Share)

Expected Mkt output 2014
Market Share to achieve profit target
in 4b = 2014 Turnover/2014 Mkt Share

19,238,095

2 192,380,952
2 221,238,095

0.415841584
42%

11

Answer: Q5
Students are expected to use the recent pronouncements
of the Bank of England and the Chancellor of Exchequer to
discuss what it means for the UK construction industry .
33