PROJECT CASH FLOW

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PROJECT CASH FLOW
CHAPTER - 9
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SCENARIO TESTING

• The Need Cash flows can be estimated from (1)
  projects in progress, (2) projects under
  contract, but not yet begun and (3) potential
  projects which will start during the coming
  financial accounting period
• The advantages of spreadsheet analysis and high
  speed computing has led to scenario testing of
  future cash flow expectations.
• The Technology Spreadsheets allow managers to
  run probabilistic cash flow projections that take
  into account the factors noted above.

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CASH FLOW PROJECTION

• The projection of income and expense during the
  life of a project can be developed from several
  time-scheduling aids
• Public contracts, the owner requires s-curve of
  estimated progress and costs across the life of
  the project
• The contractor develops this by constructing a
  simple bar chart
• Fig. 9-1, Development of the S-curve
• S-curve is nothing more than a graphical
  presentation of the cumulative expenditures over
  time

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Figure 9-1 Development of the S - Curve
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CASH FLOW TO THE CONTRACTOR

• Flow of money from the owner to the contractor
• Retainage (fig. 9-2)
• Difference between revenue and expense is
  financed by the contractor
• Outstanding balance or overdraft
• To minimize the amount of overdraft and therefore
  the interest
• Prime rate
• Requesting front or mobilization money from the
  owner
• Shifts the position of the revenue profile so
  that a reduced, or zero, overdraft occurs
• See fig. 9-4 for calculation of maximum overdraft

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Figure 9-2 Expenses and Income Profile
Figure 9-3 Influence of Front, or Mobilization
Payment on Expense and income Profiles
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Table 9-1 Overdraft Calculations
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Figure 9-4 Plot of Maximum Overdraft
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Figure 9-5 Composite Overdraft Profiles
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COMPARISON OF PAYMENT SCHEMES

• Rate-of-return (ROR) analysis is helpful in
  comparing the economic value to a contractor of
  varying payment schemes.
• This technique utilizes engineering economy to
  evaluate the value of economic plans and
  strategies based on the time value of money.
• It provides a vehicle for examining the economic
  impact of (1) Varying retainage policies, (2)
  Delay in payment strategies, and (3) The payment
  of a mobilization item to the contractor.
• Consider the small four-activity project of
  figure 9.1. The owner will consider the payment
  of a mobilization item at the end of the 1st
  period.
• To determine the impact of this payment, the ROR
  on the original payment sequence (Table (9.2)
  will be compared to ROR given mobilization
  payment (Table 9.4)

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Figure 9-6 ROR for Small Bar Chart Problem
(80,000 1,476)
(70,000 1,003)
(20,000 903)
(30,000 300)
Payment Review
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Table 9-2 ROR Calculation for Small Project
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Figure 9-7 ROR for Small Bar Chart Problem with
Mobilization Payment
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Table 9-3 Overdraft Calculations with
Mobilization Payment