STRATEGIC PLANNING

1. Explain the difference of cost and value of the above residential building of 200m² GIA.

Important facts for Cost of a building

Small details in the design of a home can make a big difference in the price. To save on costs, begin estimating construction expenses before you select your final blueprints. Here are important factors to consider:

Ø Size of Home

When building a home, it's best to work with even numbers. Have your home size rounded up or down to increments of two feet. This reduces wasted materials. Also, it's most economical to build a home which is no deeper than 32 feet. If the depth exceeds 32 feet, then your roof trusses may need to be specially designed and will be more expensive.

Total living area of the house

Larger buildings cost more than smaller buildings but larger buildings generally cost less per square foot than smaller buildings. Exclude from the living area any garage, basement or attic. In addition, exclude any porch that's not under the main roof. Costs for these will be figured separately.

Include in the total living area square footage:

1. Everything inside the exterior walls of the main building.
2. Inset areas such as vestibules, entrances or porches outside the exterior wall but under the main roof.
3. Enclosed additions, annexes or lean-tos

Ø Shape of Home

Homes that have a rectangular or box shape cost less to build. Having more angles and corners in the shape of your home can increase the amount of labor and materials needed to build a home. Dome shaped homes also make efficient use of materials and tend to cost less than other shapes.

Number of corners of the house

The shape of the outside perimeter is an important consideration in estimating the total construction cost. Generally, the more complex the shape, the more expensive the structure per square foot of floor area. The shape classification of multiple story or split-level homes is based on the outline formed by the outer most exterior walls, including the garage area, regardless of the varying level. Most structures have 4, 6, 8 or 10 corners, as illustrated in the example. Small insets not requiring a change in the roof shape can be ignored when determining the shape.

Ø Site Preparation

Preparing a site for construction can have a big impact on the cost of a home. Building on a flat lot will usually cost less. If you have to haul in lots of dirt, do a lot of grading, clear trees, or blast through large rocks, then site preparations can become more expensive.

Ø Cost Overruns

Usually the finished cost of a home is more than the original bid price. Cost overruns occur from overspending the allowances, making changes, and encountering unforeseen problems. Proper planning can greatly reduce cost overruns. In general, it is a good idea to allow an additional 10% to cover unexpected costs.

Ø Inflation and Market Conditions

Usually the cost of building a home increases around 3% to 6% per year. If it will be several years before you begin construction, remember to include inflation into the cost estimate for your home. When using other homes to compare prices, try to use homes that have been built within the last six months.

Value of a building

The market value of an interest in landed property will be the amount of money which can be obtained from a willing purchaser at a specific point in time, and is generally determined by the interaction of the forces of supply and demand.

The demand for any particular type of landed property is influenced by number of facts, such as:

Ø Population changes;

Ø Changes in the standard of living or in taste or fashion;

Ø Changes in society;

Ø Population movement;

Ø Changes in social services (Shops, School, Cinemas, etc.)

Ø Changes in communications;

Ø Changes in statutory requirements, such as the Town and Country Planning Acts.

Each property is unique, with its own specific location and characteristics and no one property is a perfect substitute for another. It is these factors which make the valuation of landed properties so difficult.

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2. Explain two methods of calculating value of the building.

Methods of Valuation

Ø Comparative Method

Ø Contractor’s Method

Ø Residual Method

Ø Profits Method

Ø Investment Method

Comparative Method

This method is a popular valuation technique & consists of making a direct comparison with the prices paid in the open market for other similar properties, where reasonably close substitutes are available and transactions occur quite frequently. Its prime use is for residential properties where there is likely to be a greater similarity between different properties. Difficulties do, however, frequently arise in the use of this method as it is unusual to find to entirely similar type properties-difference occur in size, amount of accommodation quality and extent of finishing and fittings, condition of property and its situation. For instance, the price paid for one block of offices may not be a very good indicator of the value of an adjacent office building which may differ considerably in room sizes, internal layout, and type of finishes and in many other ways. Furthermore, Prices may vary appreciably over relatively short periods of time and so the value must also have regard to current trends.

The value generally finds find it helpful to break down the property into suitable unites for comparison purpose. Land can conveniently be priced per hectare or possibly per meter of frontage in the case of building land, and building might be reduced to the price per square meter of total floor area. It is also advisable to have regarded to the underlying economic factors influencing the prices as well as the prices the prices themselves.

Residual Method

This is valuation method which is sometime used where the value of the property can be increased by carrying out certain works. A large house could, for instance, be profitably converted into flats when its potential will be exploited to the full. The building could be valued by taking its value after conversion and deducting the cost of conversion plus an allowance for developer’s risk and profit. The residual figure will indicate the value of the property in its existing state but with a potential for development.

Profits Method

This is sometimes described as the accounts method and is used where the value is largely dependent upon the earning capacity of the property, as is the case with hotels, cinemas and dance hall. The usual approach is to estimate the gross earnings and to deduct from them the working expenses, interest on capital and tenant’s remuneration. The balance represents that is available for the payment of rent. It is an exceedingly indirect approach and is best checked by some other method, such as the value per seat. It has, however, been found useful in rating valuations for the classes of property previously described.

3. What are the constraints in cost benefit analysis?

Ø Physical constraints – Project size, timing external physical restraints.

Ø Legal constraints - Right of access and time needed for public inquiries.

Ø Administrative - Size of the project.

Ø Uncertainties - Unreliability of estimates on future trends.

Ø Distributional and budgetary constraints – For instance, tolls on a motorway will affect the volume of traffic and many influence the width of the carriageway.

Task 2 (M28) – Financial Accounting

1. Prepare a format of a profit and loss account and balance sheet for a business of selling building materials.

Profit and Loss account for the year ended 30 April 2010

	2009	2010
Sales (Rs./Million)	9.575	10.650
Add other income	0.067	0.078
	9.642	10.728
Less Expenses	8.850	8.645
Profit before taxation	0.792	2.083
Taxation	(0.432)	(0.897)
	0.360	1.186
Other	0.065	-
Dividends	(0.575)	(0.674)
Retained profit/loss	(0.150)	0.512

Balance sheet at 30 April 2010

2. What is the break-even volume of a business operation?

Break-even analysis and techniques are the tools that finally tell the business owner or manager when he/she is making a profit. Break-even charts and analysis will be part of every budget the business owner put out. They enable he/she to gauge the business' production rate accurately. They will tell whether an increase or a slowdown in production is called for. They are a vital part of the business owner's life.

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

Task 2 (M29) – Manage Accounts

1. Prepare a cash flow graph assuming figures for a contract of 6 months.