Erdao, Sharvie E.

CT 413 - M

BETCT- 3A January 25, 2023

Final Exam
FINANCIAL MANAGEMENT
1. Briefly Discuss, what is a Financial Statement Analysis of a Construction company, site
sample problems to each.
Financial statement analysis is the process of analyzing a company’s financial statements for
decision-making purposes. External stakeholders use it to understand the overall health of an
organization and to evaluate financial performance and business value. Internal constituents
use it as a monitoring tool for managing the finances.
▪ Financial statement analysis is the process of reviewing and analyzing a company’s
financial statements to make better economic decisions. Financial statement analysis
evaluates a company's performance or value through a company's balance sheet, income
statement, or statement of cash flows. By using a number of techniques, such as horizontal,
vertical, or ratio analysis, investors may develop a more nuanced picture of a company's
financial profile.
▪ There are four basic reports that make up the core financial statements of a construction
company: Balance Sheet, Income Statement (or Profit and Loss Statement), Cash
Flow Report, and Work-in-Progress (WIP) report.
2. Briefly discuss, the following:
a. Compound Interest
Compound interest is the interest on savings calculated on both the initial principal and
the accumulated interest from previous periods. Generating "interest on interest" is known
as the power of compound interest. Interest can be compounded on any given frequency
schedule, from continuous to daily to annually. Compounding multiplies money at an
accelerated rate.
b. Net Present Value (NPV)
Net present value (NPV) is the difference between the present value of cash inflows and
the present value of cash outflows over a period of time. NPV is used in capital budgeting
and investment planning to analyze the profitability of a projected investment or project.
 NPV is the result of calculations that find the current value of a future stream of payments,
using the proper discount rate. In general, projects with a positive NPV are worth
undertaking while those with a negative NPV are not.
c. Equivalent Annual Cost
Equivalent annual cost (EAC) is the annual cost of owning, operating, and maintaining an
asset over its entire life. Firms often use EAC for capital budgeting decisions, as it allows
a company to compare the cost-effectiveness of various assets with unequal lifespans.
d. Loan Redemption
The full repayment of a loan. When something is borrowed by one person / entity from
another. Normally it refers to money, and a rate of interest is charged whilst the debt
remains outstanding.
3. What is an Internal Rate of Return (IRR) and briefly discuss the difference between IRR
and NPV.
The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present value
(NPV) of all cash flows equal to zero in a discounted cash flow analysis.
Difference between internal rate of return (IRR) between net present value (NPV).
Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time. By contrast, the internal rate of return
(IRR) is a calculation used to estimate the profitability of potential investments.
4. What is the effect of inflation?
The construction Industry faces significant challenges due to inflation as it drives up the cost
of building supplies, machinery rental charges, skilled labor, and other construction resources.
It may disrupt the supply chain and project completion resulting in lower profit margins.
▪ An increase in the general level of prices implies a decrease in the purchasing power of the
currency. The effect of inflation is not distributed evenly in the economy, and as a
consequence there are hidden cost to some and benefits to others from this decrease in the
purchasing power of money.
Deflation ( a fall in prices – negative inflation)
Moderate inflation enables adjustment of wages.
Inflation can boost growth.
5. When is inflation adjustment considered or not considered?
The inflation-adjusted return is the measure of return that considers the time period's inflation
rate. The purpose of the inflation-adjusted return metric is to reveal the return on an investment
after removing the effects of inflation.
▪ Inflation adjustment is a term often used in the financial world. What does it mean and
when is it considered? Inflation adjustment is a term used in the financial world to
describe how current prices are adjusted for changes in prices over a certain time
period. Therefore, it can be said that inflation adjustment is done when prices and
wages are adjusted to account for inflation over time. For example, if the cost of an
item has increased by 10% over the last 3 years, it would be considered an inflationary
environment and a price increase would be considered for this item.
6. Briefly discuss the cost volume profit analysis in construction.
Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact
that varying levels of costs and volume have on operating profit.
▪ Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and
fixed costs affect a firm's profit.
▪ Companies can use CVP to see how many units they need to sell to break even (cover
all costs) or reach a certain minimum profit margin.
▪ CVP analysis makes several assumptions, including that the sales price, fixed, and
variable costs per unit are constant.
7. How to analyze the financial viability of the project.
Assessment of financial viability is basically one of the measures taken by the investor to
reduce the risks involved. While assessing the financial viability of a project, there are various
factors that are considered to maintain a checklist of mandatory elements. These are the
following principles to be implemented:
The processing of financial viability assessment should start while planning for the
tender as it is proportionate to the risk involved in the project.
 Based on the information provided of the past record of the company, the decision
can be made regarding the financial viability of the project, keeping in view the
projections.
The financial viability of a tenderer increases or decreases due to the economic and
environmental changes in the industry. Hence, the recognition of the high-risk
tenders should be done at the time of assessment of financial viability of the
company. Please note that it cannot substitute or reduce the significance of efficient
project planning and contract management.
During the process of documentation, a mechanism is adopted to exclude entities
of high risk and list out the documents required for the assessment of financial
viability of the project should be stipulated.
Certain financial ratios with the help of those a tenderer’s financial viability,
profitability, liquidity, and financial stability can be determined. However, these
financial ratios vary according to the industry you are working for. In case, a project
is assessed, and the result shows medium or high risk then the project must seek for
the professional assessment of the project. The entities should only go with their
own financial analysis for assessment as they have the expertise for it.
8. What is an S-Curve and How it is derived.
S-Curves are used to visualize the progress of a project over time. They plot either cumulative
work, based on person-hours, or costs over time. The name is derived from the fact that the
data usually takes on an S-shape, with slower progress at the beginning and end of a project.
You can analyze baseline, design or actual work, or baseline, design or actual costs. One of the
primary uses of the S-Curve is to compare any two or all three of these cost or work values at
once.
How S-curve is derived.
▪ The general procedure to generate S-curves is the addition of a series of UHs of specified
duration, where each UH is translated by its duration time. The UH for generating the S-
curve is usually obtained by solving an inverse problem with respect to a rainfall–runoff
relationship.
▪ An S-curve is constructed from a series of unit hydrographs of period T by the simple
process of successive displacement by T and summing up the ordinates (discharge values).
 In theory, the unit hydrographs for storms of any duration may be derived from the resulting
S-curve.

USED REFERENCES/LINKS
Home. (2017, May 17). Financial Statement Analysis.
https://www.slideshare.net/NikhilHarshavardhan/financial-statement-analysis-76047386

Kenton, W. (2022, March 6). Financial Statement Analysis. Investopedia.

https://www.investopedia.com/terms/f/financial-statement-analysis.aspThe Power of Compound
Interest: Calculations and Examples. (n.d.). Investopedia.
https://www.investopedia.com/terms/c/compoundinterest.asp#:~:text=Compound%20interest%2
0is%20interest%20calculated

How Equivalent Annual Cost Helps with Capital Budget Decisions. (2019). Investopedia.
https://www.investopedia.com/terms/e/eac.asp

Net Present Value (NPV). (n.d.). Investopedia.

https://www.investopedia.com/terms/n/npv.asp#:~:text=Investopedia%20%2F%20Julie%20Ban
g-

S-curve - Glossary of Meteorology. (2022). Ametsoc.org. https://glossary.ametsoc.org/wiki/S-

curve#:~:text=An%20S%2Dcurve%20is%20constructed

Fernando, J. (2021, December 31). Internal Rate of Return (IRR). Investopedia.

https://www.investopedia.com/terms/i/irr.asp#:~:text=The%20internal%20rate%20of%20return

Gallant, C. (2022, May 23). Present Value vs. Internal Rate of Return. Investopedia.
https://www.investopedia.com/ask/answers/05/npv-irr.asp#:~:text=our%20editorial%20policies-

Financial Viability of Project: Definition and importance. (n.d.). Www.resurgentindia.com.

Retrieved January 21, 2023, from https://www.resurgentindia.com/financial-viability-of-project-
definition-and-importance

S-Curve Analysis. (n.d.). Www.archibus.net.

https://www.archibus.net/ai/abizfiles/v21.2_help/archibus_help/Subsystems/webc/Content/web_
user/projects/reports/monitor/s_curve_analysis.htm#:~:text=S%2DCurves%20are%20used%20to

Seong, K.-W., & Sung, J. H. (2021). Derivation of S-Curve from Oscillatory Hydrograph Using
Digital Filter. Water, 13(11), 1456. https://doi.org/10.3390/w13111456