Lesson 7: Managing Money II, Time Value of Money, Cash Flow Valuation1. Halpin & Senior, Chapter 10Chapter 10: The Mathematics of Money

10.4 Interest

The degree of investment risk, the inflation rate, and the stability of the market where the money will be used are important factors determining the IR of a loan

Interest the fee that a lender charges for use of their money.

Interest rate the money that $1 dollar earns for each unit of time that it is loaned.

Total interest money earned by charging interest

10.5 simple and compound interest

The total interest, depends on the principal, the time that the money was borrowed, and the interest rate. And whether it is simple or compound

Simple interest

pay interest on the principal, but not on the interest accumulated over previous periods. For simple interest future value Fn = P*(1+i*n)

Compound Interest

interest is owed after each time period is computed by adding the total interest accumulateed from previous periods to the loan principal then multiplying this total by the interest rate.

Fn =P*(1+ i)^n This also works in the opposite way to find P(present value)

10.6 Nominal, and effective rateTo protect customers, congress passed in 1968 the Truth Lending Act, which requires lenders clearly indicate interest rates as an annual % of each receiving dollars.Nominal rate vs effective IR: Annual percentage yueld (APY): effective annual rate that you pay on a loan:

Equivalence and Minimum Attractive Rate of Return

high enough to make an indifference

MARR: Minimum attractive rate of return.

Discount rate when we know the value in the future of a given sum, and want to know its equivalent value now. P = Fn/ (1+i)^n

Discount Rate:

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Discount Rate:Opportunity cost of capital: The cost of an alternative that must be forgone in order to pursue a certain action.

Higher Discount Rates Make Projects Less Attractive (generally), Minimize Long-Term Benefits•Mathematical Means for Establishing Present Value•Establishes Whether Project Is Worthwhile•Should Represent Productivity of Last Increment of Money Available•

Impacts of Discount Rate:

Annuity is a series of equal payments paid out or received in a sequence over a period of time. (paying by a number of equal amounts of money (installments) over a number of time periodss. (There's a present value equation for this)Used to find the price of a merchandise and then to ccompute the montly amount to be paid for the merchandise. FINDING A GIVEN P

Compound amount factor(f/p)a.Present worth factor(p/f)b.Compound amount factor uniform series (F/A)c.Sinking fund factor (A/F)d.Present worth factor uniform series (P/A)e.Capital recovery factor (A/P)f.

1. All payments must be equal, carry the same interest, and take place without interruption throughout a number of periods of the same lenghts.

Conditions for Annuity calculations:

10.16 Worth Analysis Techniques

Present worth of an investment consists of the present value of all the amounts involved in the investment. If this sum, which is the net present worth of the entire investment, is negative, then you would be better off.PW is perfect for knowing if we are paying too much upfront for something that will yield future profit.

Equivalent Annal worth (EAW)

all money is converted into equivalent annuities and these annuities are added up.the EAW of an investment is its value expressed as a uniform dollar amount over a time period. It is the equivalent annuity of an investment.

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10.19 IRR< internal rate of return of an ivnestment is the interest rate at which the investment has a PW of 0The PW of any investment depends on the interest used for the computations, the higher the interest, the lower the investment's PW.

10.20 Limitations: results of PW and IRR methods could be contradicting, and also IRR is not well suited for selecting mutually exclusive options unless their size and time frame is similar.

Worthwhile Investment(Net Present Value):

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Worthwhile Investment(Net Present Value):

Example 8-1•

NPV Analysis To Calculate: Cash flow projections, Discount rate (opportunity cost of capital, MARR)•

NPV = B-C○

○ Estimate service life Estimate cash inflow & outflow each period

○ Determine net cash flow each period Determine a discount rate

○ Calculate NPV

Methodology ○

Decision Rule: Accept investments that have positive net present values

NPV Strengths & Weaknesses•Strengths: focus on quantity of moneyWeaknesses-difficult to use for ranking-selection of DR challenging -difficult to explain

Benefit Cost Ratio: Ratio of discounted benefits to the discounted costs at the same point in time. Used frequently in public sector where non-economic benefits/costs are included.

Internal Rate of Return:IRR is DR for which NPV of project is zeroTo Calculate:Cash flow projectionsDiscount rate not requiredDecision Rule:Accept investments where IRR is greater than opportunity cost of capital

Economic Equivalence: A concept that links different cash flows associated with different alternatives so that comparisons of economic worth can be made.EXAMPLE 7-1EXAMPLE 7-2 to EXAMPLE 7-5_______________________________________________________________________

Lesson 8 – Managing Money II, Project Cash Flow, Project Funding1. Halpin & Senior, Chapters 11 & 12

Chapter 11: Project Cash FlowThe difference between the revenue and expense profiles indicates the need on the part of the contractor to finance part of the construction until such time as he is reimbursed by the owneustoemrs who are rated as relia ble and who represent an extremely small risk of defaultRole of Money in Construction: Borrow to purchase equipmen, to finance operations, to finance project

Project Cash Flow:

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Project Cash Flow:

Effect of Mobilization:

-Mortgage Loan-Construction Loan

Project Financing: Private Owner/Developer

-BondsLarge Corps & Public Agencies

Chapter 12: Project FundingThe four Ms: money, machines, manpower, materials

Short-Term (Construction):provide funds for items such as facility construction land purchases or land development, and is provided by a lending institution

○

-period of construction (1-2 years typ.)

-10 to 30 years (typ)

Long-Term (Mortgage)○

Two-Step Process•

First secure long-term commitment, Firm Financial Statements, Personal financial statements (principals),Title,Preliminary drawings & cost estimates, Market study, Pro forma statements

•

Pro Forma Example:

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Pro Forma Example:

Long term Pro forma:Leverage: when the developer tries to expand a small initial asset input into a large amount of usable money. The amount of the mortgage loan should be a happy medium between too much and too littleThe amount the lender is willing to lend as long term funding is derived from two concepts:the economic value of the project(measure of the project's ability to earn money) and the cap rate. Lender will attempt to establish a rate that is conservative but attractive.

Once the long term financing commitment has been obtained the netoiation of a cosntruction loan is possible. Commercial banks often make construction loans because they have some guarantee that the loan will be repaid from the long term financing

Large corporations and public institutions commonly use the procedure of issuing bonds to raise money for construction projects. A bond is a kind of formal promise issued by that a future point in time.E borrower promising to pay back a sum of money Discounting the loan: for public offferings that are particularly attractive, banks bid for the opportunity to handle the placement of the bonds. The banks recover their expenses and profit by offering to provide a sum of money slightly less than the amount to be repaid. The bank that offers the lowest effective rate is normally selected, this represents the basic cost incurred for te use of the money.Prime rate: interest rate charged preferred csInsert picEconomic Value:Measure of the Project’s Ability to Earn MoneyEconomic Value = Expected Net Income/Cap RateCap Rate-rate of return on an investment propertyMortgage Loan tied to Economic Value

Construction Loan:

-review designer & contractor-require contractor bonds

Due Diligence

-release of funds in defined mannerDraw Schedule

-General Obligation, Revenue, Project Public Financing: Current Revenues Grants Debt (Bonds)

Benefits future generationsHigh initial costs a deterrentTax-rate instabilityBonds:

Debt vs. Pay as you go:

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Bonds:Security Issued in Connection with a Borrowing ArrangementIssuer Typically Makes Semi-annual Payments (Coupon Payments) and Repays Par (Face) Value at Maturity Bond Value = Present Value of Coupons + Present Value of Principal (Par Value)

Interest Rate Fluctuations Are Main Source of RiskDefault Risk Measured by Moody’s, S&P, Fitch________________________________________________________________________________________

Lesson 10 – Construction Equipment,Equipment Costs, Equipment Productivity, Earthmoving Equipment,1. Halpin & Senior, Chapters 13 & 14.1-14.42. Tatum, C.B et. al. (2006. “Systems Analysis of Technical Advancesin Earthmoving Equipment”

Chapter13: Equipment Ownership

Pavers,haulers, loaders, rollers, entrechersa.

Productive equipment describes units that alone or in combination lead to an end product that is recognized as a unit for payment

1.

Support equipment: required for operations related to the placement of construction such as movement of personnel and materials and activities that influence the placement environments: hoists, scaffolds.

2.

These are fixed costs because they are time dependent and can be caulculated based on a fixed formular.

i.

Operating/variable costs occur only during the operation periodii.Operating costs are variable in total amount, being a function of the number of operating hours.iii.Ownership costs: composed of ane stimate for depreciation on the cost of using the euipment itself, and estimates of allowance for interest, insurance and taxes(fuel, oils, filters, maintenance).

iv.

Certain costs(depreciation, insurance, and interest charges) acrue wether the piece of equipment is in a productive state or not.

a.

Three types of materials:excavating, material handling, placing and finishingb.

The ‘hybrid’ of the Hydraulic Excavator and the Front-End Loader.

The most versatile piece of equipment which has become a ‘standard’ requirement on most construction projects.

Used for minor excavations, loading, material handling, minor grading & finishing works.

Most popular manufacturers include Caterpillar, JCB, Case.

Wide range of attachments for handling, auguring, pneumatic applications (demolition hammers, etc)

Construction equipment costs:3.

13.3 Depreciation of equipmenet

Assumes uniformitya.Straight line:1.

When applied to new equipment of a usesful life of at least 3 yeara.the effective rate at which the balance is reduced may be twice the striaght line rate. b.In this method it is the rate that is important because it remains constant throughtout the calculations.c.

Declining balance- accelerated methods that allow alrger amounts of depreciation to be taken in the early years of the life of the assetto calculate and ensures that the depreciation is availale from the asset

2.

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d.

Production method: based on usage If the contractor tries to claim depreciation on a given unit of equipment at the same time th equipment is generating profit to reduce the tax that might otherweise be payable . *popular with smaller contractors since it is easy

3.

a. Initial cost or basis in dollarsb. Service life in years or hoursc. Salvage values in dollars

Three major factors in calculating depreciation of an asset:

Salvage values

some residual value in the piece of equipment at the end of its life, unelss this value exceeds 10% of the first cost of the equipment, this value is neglected and the entire first cost is considered to be available for depreciation.

Depreciation vs Amortization:

Depreciation is a legitimate cost of busines that recognizes the loss in value of equipment over time, as such it is an expense that can be deducted from revenues, resulting in a lowering of taxes.

Depreciation: reflects the loss of value and obsolescence or property (e.g. equipment) involved in the operation of a business.

IIT Costs,Interest,insurance and tax costs

Insurance, applicable taxes, interest on loan•

% of Average Annual Value (AAV)•

AAV= C(n+1)/2nAav is the average annual life, c is the initial value of the asset, and n is the number of years.

Chapter 14: Equipment Productivity

Two characteristics that dictate the rate of output

Amortizing the equipment occurs when to provide for the replacement of the equipment at some point in the future, contractors charge the client an amount that provides a fund to purchase new equipment.. This is a protocol in theindustry and allows the contractor to accumulate funds for renewing the equipment fleet over time

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Two characteristics that dictate the rate of outputCyclic capacity-establishes the number of units produced per cycle1.Cyclic rate- speed of a piece of equipment2.

Material has different weight to volume ratio when it is placed in its construction location and is compacted to its final density.Bank cubc yards, (cu ydp[bank], in situ volume)1.Loose cbic yards2.Comapcted cubic yards3.The higher the load factor the smaller tendency the material has to bulk up, threfore, with a high load factor the loose volume and th in situ volume tend to be closer to one another.

a.

The shrinkage factor relates the volume of the compacted material to the volume of the bank material.b.

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The second factor affecting rate of ouput is time required to complete a cycle

The power requireda.Power availableb.The usable portion of the power available that can be developed to propel the equipment unitc.

This function is governed by

Rolling resistance (RR) due to internal friction and friction developed between the wheels or tracks and the traveled surface.Grade resistance:power required is also a function of the grade resistance inherent in the slope of the traveled wayUpward slope= RR+GR and vicerversa for downward slope

14.3 Power available: controlled by the engine size of the equipment and the drive train, which allows transfer of power to the driving wheels or power take off pointMaximum power is the peak power that can be developed in a gear for a short period of tiem to meet extraodinary power requirements.Two primary constraints in using the available power are the road surface traction characteristics, and the altitude at which operations are conductedCoeficient of traction is a measure of the ability of a aprticular surface to receive and develop the power being delivered to the driving wheels and has been determined by experiment.Usable poounds pull (revisit)

Power Available -engine size -drive train -manufacturer’s tables•

Usable Power-road surface traction -altitude•

______________________________________________________________________________CHAPTER 10 EXAMPLES

Labor• Estimate Types• Methods of Cost Determination• Airport Estimate ExampleHalpin & Senior, Chapters 15 & 16

Lesson 11 – Labor, Cost Estimating

Chapter 15. Labor Resource:The Man power component of the four M

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Labor Organization1.Labor Law2.Labor Cost3.Labor productivity4.

The Man power component of the four M

Key Legislation:

Pro Management

Sherman Antitrust Law (1908)

• enacted to suppress the formation of large corporate trusts and cartels, which dominated the market and acted to fix prices and restrain free trade.

Taft-Hartley Act (1947)

• The wagner act endorsed the concept of the closed shop and made it legal. This concept was later revoked by the tafft hartley act and replaced by union shop. It is the first post depression law to place effective constraints on the activites of labor. monitors the activities and power of labor unions

Pro labor

Clayton Act (1914)• In 1914 congress acted to offset the effect of the sherman antitust act by passing the clayton act which authorized employees to neogtiate with a aprticuar employer

Davis-Bacon Act (1931)

• provides wages and fringe benefits on all federal and federal and federally funded projects shall be paid at the "prevailing" rate in the area.

Norris-LaGuardia Act (1932)

• also referred as the Anti-Injuction Act, specifically stated that the courst could not intercede on the part of management so as to obstruct the formation of labor organizations. It outlawed the use of "yellow" dog contracts which had an employee sign a contract upon being hired in which he agreed not to join or become active in any union organization.

Wagner Act (1935)• National labor relations act, Wagner act, established a total framework within which labor management relations are to be conducted.

Fair Labor Standards Act (1938)

established a national minimum wage,[3] guaranteed 'time-and-a-half' for overtime in certain jobs,[4] and prohibited most employment of minors in "oppressive child labor,"

Watch dog organizations ensure its provisions are propertly administered NLRBClosed shop- if the majority voted for union membershp,then to work in the shop the new employee had to belong t the union. In an open shop employees which are not organized and do not belong to an unionUnion shop: a shop in which a nonmember can be hired. The worker Is given a grace period usually 30 days during which time he or she must become a union member,.This shop gives the worker a chance to join the union\

15.11 Vertical vs Horizontal Labor Organizational structureUnion Structure: National, State&City, Union LocalTraditional craft unions are horizontally structured unions, strong power base that is located in the union local,lConstruction unions are craft unions with a strong local organization. The Associated general contractots AGC in the local area acts such way. The real power inmost issues however, is concentrated at the local level , the horizontal organization with strenthg at the bottom and coordination the topVertically structured unions tend to concentrate more of the power at the national level, CIO While AFL maintains a strong local horizontal structure

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While AFL maintains a strong local horizontal structure

15.12: Define Jurisdictional disputesJurisdictional disputes present fewer problems in vertically structured unions, since craft integrity is not a matter that determins the strenght of the union.

15.13 the largest labor organization in the US is AFL-CIO american dederal labor and congress of industrial organizations.Union locals: are smalles divison of the nation union and provide for contact with other works in the same trade and area to obtain bette working conditions etc.15.18. Secondary boycotts:

15.19 in an open shop firm there is no union agreement and workers are paid and advanced on a merit basis., open sho contractors have bid succesfully in the housing and small building market in which the rquired skill level is not as high. Union contractors have dominated the more sohphsitcated building and heavy construction market s based on ther ability to attact skilled labor with higher wages and benefits.

To be able to bid in both open shop and unio formats some firms have Double breasted Operations cotractos. Large firms will have on subsidiary that opreats with no union contrac.ts a separately managed company will be signed to al union contracts. In this way the parent firm can bid both in union shop markets and in markets in which the lower priced open shop encourages more cost competitive buildings

Contracts include: maintenance of membership, fringe benefits, work rules, wages, hours, union area, etc.Fringe benefits are economic concessions gained by unions covering vacation pay, health and wefare, differents in pay due to shift, contrubution by the contractor to apprenticeship pograms,etc these are paid by the contractor in addition to the base wage and garnish the salary of the worker.

Work rules are an important item of negotiation and have a significant efect on the productivity of workers and the cost of instaled construction.

The contractor must know how much cost to put in the bid to cover the salary and associated contributions for all the workers.Hourly average cost of a work to the contractor consists of the following components: direct wages, fringe benefits, social security contributions (FICA), unemployment insurance, Public liability and property damage insurance, etc.

15.21 Labor costs

All workers most pay socials ecurity and medicare on a portion of their salary, for every dollar the worker pays the employer must pay a matching dollar.

1.

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Chapter 16:Estimating: the process of looking into the future and trying to predict project costs and resource requirementsUnrealistic estimating and bidding practices are major reasons for failure

Preliminary design: takes place at 40% project completion and is prepared by the architect or architect/engineer to reflect expected costs based on more definitive data, once this has been approved final or detail design is completed.

1.

Conceptual,Preliminary, Engineer's, Bid Estimatea.

Break project into cost centersi.

Quantity takeoffsii.

-unit cost

-resource enumeration

Establish pricingiii.

Run the extensionsiv.

Detailed Estimates:b.

Four level of estimates2.

Five of the most common errors in quantity takeoff:Arithmetic1.Transposition(copying or transferring figures)2.Poor reference(scaling drwaings rather than using indicated dimensions)3.Unrealistic waste or loss factors4.

Types of estimates:

Althought unit pricing data are presented in dollars per unit format, the cost of the resource group and the rate of production achieved must be considered.

a.

Unit cost: ratio of resource costs to production rate. Bare cost is direct cost of labor and materials. Total cost includes th cost of burdens, taxes, and subcontractor o&p

b.

O&P charnges associated with labor: fringe benefits, workmen's compensation, average fixed overhead, subcontractor overhead and profit.

c.

Disadvantages: unit price available from averaging values on previous jobs has to be treated with some caution. Since every job Is unique, some of the estimator's intuition must be applied to ensure that the value is adapted to the conditions of the job being estimated.

d.

Use of unit-pricing approach assumes that historical data have beeen maintained for commonly encountered cost accounts.

e.

Unit-price : standard project, normally nationally averaged price per unit (averaging of previous job, inflation)1.

Advantages: allows the estimator to stylize the resource set or crew to be used to the work in questiona.In the unit pricing approach, the resource costs and the production rates are the aggregate values of resources and rates accumulated on a number of jobs over a historical data collection period

b.

Resource enumeration, the estimator specifies a particular crew or resource group at a particular charge rate and particular prodcuction level for the specific work element being estimated., yielding a much more precise cost per unit definition.

c.

(+)greater precision (-) time consuming so only used when no unit cost data is availble, and for big ticket items which constitute a alrge percentage of the overall cost of a job and requries a precise cost analysis, or an extremely complex work items on complicated and unique proejcts

d.

Resource Enumeration: used for unusual architectural itemas that are unique to the structure and require special forming or erectionnproceduresl in this case the price must be developed byu breaking the special work item into its subfeatures and assigning a typical resource group to each subfeature.

2.

work package collection sheets used. (can be thought of as an extension of the resource enumeration method3.

Quantity takeoff: quantities required for cost centers that represent physical end items

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Lesson 12:Safety costs: Direct costs of previous accidents, direct cost of eac accident occurrence, indirect cost (investigation, loss of skilled workers, equipment, and production)Impact of an accident:Direct cost- Workers’ compensation- Insurance• Indirect cost- Overtime cost- Replacement of worker- Training and orientation- Investigation of accidentLimited and short tenure of workerDynamic and ComplexLarge and labor-intensive

Disputes Resolution Techniques

Arbitration use of an arbitrator to settle a dispute

Litigation a legal proceeding in a court; a judicial contest to determine and enforce legal rights.

Role of the Civil EngineerRisk-averse & defensiveImplement agendas set by othersWe should be the Decision-MakersPolitical & Social ChallengeWell-rounded educational program-speak the lingo• Influence choices that affect infrastructure

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Example 7-1. Bank Offers 3 repayment plans on a $20k loan for 5 years at 9%interest

Example 7-2: Recently retired Special Agent Jack Bauer has taken a $150,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for 30 equal annual payments, what is the amount of each payment?

Example 7-3

Example 7-4

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Example 7-4

Example 7-5

Year Beg of Year

Balance

Year-end

Interest on

Balance

Total Year-

end

Payment

Amortization

of Loan

End-of-

year

Balance

1 100,000 10,516 40,576.98 30,060.98 69,939

2 69,939 7354.79 40,576.98 33,222.19 36,716

3 36,716 3861 40,576.98 36,716 0

Example 8-1 Discount Rate

-use up to $2500 of it to pay a tuition loan, on which you pay 12% interest on unpaid balances.-put as much as you want of the $5000 in a savings bank to earn 5% per year.-buy a discounted bond for $5000 (the smallest denomination), that is redeemable only after 3 years for $8500. You can then reinvest this money in more of the same type of bonds.

Assume you receive $5000 to invest for your future. Your available alternatives for this money are:

(a) What is the opportunity cost, in percent, of the $5000?(b) What discount rate should you use for evaluating an investment opportunity for the entire $5000 in some other business? For only $2500 of the $5000?

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Example 10-1

a. Calculate the depreciation for the first and second year using the straight-line and DDB methods.

Tax: 2%

Insurance: 2%

Interest: 7%

b. The IIT components of ownership cost based on average annual value are:

What cost per hour of operation would you charge to cover IIT?

You have just bought a new pusher dozer for your equipment fleet. Its cost is $ 100,000. It has an estimated service life of 4 years. Its salvage value is $12,000.

Example 10-2 Depreciation Using MACRS Table

Find the yearly depreciation of a $100,000 five-year class concrete mixer, assuming that it is new when purchased. What would the firm’s projected tax savings be in Year 2, assuming a corporate tax rate of 34%?

Example 10-3 Earth Volume Relationships

A customer estimates that he is getting 30 cu yd (loose) of gypsum in his scraper. Determine the percent overload if the load estimate is correct. The maximum load capacity of the scraper is 84,000 lb.

Example 10-4 Available Power

The ABC Company is planning to start a new operation hauling sand to a ready-mix concrete plant. The equipment superintendent estimates that the company-owned 30-yd wheel tractor scrapers can obtain 26-ton loads. He is concerned about the high rolling resistance of the units in the sand (RR factor 250 lb/ton) and the low tractive ability of the tractors on this job. Will traction be a problem? If so, what do you suggest to help?

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