Question

After analysing the financial data of Q-Constructions, you notice that they are trending in the right direction. A new 12-month construction proposal has come to the company worth $1,000,000 and an important question is whether it will be financially viable. They want you to analyse the proposal, in particular, the recommended cash flow schedule and to understand the key financial points during the construction project. The following cash flow schedule is summarised below.

To ensure that all upfront and on-going outlay costs are covered in advance, Q-Constructions incur an initial start-up cost of $200,000. The proposal states that they will receive a deposit from the client of 10% of the total project price at the beginning. They then receive four equal instalment payments of 20% of the total project price associated to project milestones from the client at the end of the 2nd, 6th, 8th and 10th month. Finally, they receive the last 10% project milestone on lock-up which occurs at the end of the 12th month. Q-Constructions has ongoing project costs of $20,000 to pay salaries and services at the end of each month. In additional, there are material costs of $100,000 associated for each of the project milestones at the end of the 2nd, 6th, 8th and 10th month. The current cost of capital for company is 8% per annum compounded monthly. You have been tasked with the important objective to determine whether this future project is financially viable. In addition, they want you to determine which milestone is needed to be completed in the project proposal such that it will be financially viable. It’s time to show your Quants knowledge and expertise with Excel to determine the financial viability of this project.
(a)   In a worst-case scenario where the project does not proceed, and the initial outlay is paid. Calculate the amount of interest that would have accrued on an amount of $200,000 at the end of 12 months with an interest rate of 8% p.a compounded monthly. Do not use EXCEL for this calculation.
(b)   Set up a cash inflow and outflow for the 12-month construction project proposal based on the information provided by the company above. By using the current 8% p.a compounded monthly cost of capital, calculate the Net Present Value of this proposal and whether it is financially viable project. Use EXCEL to calculate the net present value of the current situation.

Answer 1

1)

Initial Cost                     = 200000

Cost of capital               = 8% compounded monthly

No of time period       = 12

Total amount at end of 12 months     = P(1+r/n)^nt

Where, P is Principle Amount, r is interest rate, n is no of times interest applied per time period, t is the total no of time period elapsed

  Total amount at end of 12 months          =200000 (1+0.08/12)^1x12

                                                     =216599.90

Amount of Interest at the end of 12 months       = 216599.90 – 200000

                                                                                                = 16599.90