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REVISION

Richard Hill

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Consulting Engineers & Scientists


 !"
x   O st F br ary 2006 a c tract r r c iv s a
c tract with a val f £48m which was pric d with a
c trib ti f 30% Th stimat d c mpl ti tim is 24
m ths
x T rms f paym t ar :
x 0% with rd r
x 20% c mpl ti f drawi s
x 50% i m thly paym ts a ai st c rtifi d w rk c mpl t d sit
x 0% tak - v r f th w rks by li t
x 0% r t ti f r tw lv m ths aft r c mpl ti f c str cti
x Paym t is d 30 days fr m th dat f i v ic

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Consulting Engineers & Scientists


 !"
x Õ ri th fi a cial y ar (Ja ary t Õcmbr) th tract r:
x c mpltd all th drawi s by April 3st 2006 a d i v icd th lit
x startd w rk  sit  April st 2006 ad c mpltd 75% f th sit w rk
x rcivd iv ics f r matrials t th val  f £2m f r which paymt is
d   3 Ja ary
x hird a t wr cra sit cabis ad J B f r th c tract at a avra  f
£5000 pr m th starti at st April
x s bmittd a claim  3st Õcmbr t th lit f r tras val d at
£500000
x What ar th val s f th ab v itms ad f th rmaii c tract
val  ad h w will thy appar i
x Th Balac ht [0 marks]
x th Pr fit L ss Acc t [0 marks]

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Consulting Engineers & Scientists


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Consulting Engineers & Scientists


 !#
x Vry brifly dfi
x T rvr
x trib ti
x Ovrhads
x Prfit [4 marks]
x Ths f r itms mak p th  tli f a yar¶s b siss pla
x Ass mi that all sals yild th sam prcta ctrib ti draw
a raph shwi th rlatiship f th last thr f ths itms
aaist t rvr O it shw a yar¶s plad wrk ad prfit ad
th ³brakv pit with sm typical  mbrs [6 marks]
x With rfrc t th raph vry brifly dscrib Ovr-tradi ad
its cs cs [6 marks]
x Brifly dscrib Marial lli its ss ad limitatis [4 marks]

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Consulting Engineers & Scientists


 !#
x T rvr is th ttal sals fr th yar (ttal ivicd)
x trib ti f a ctract is th ctract pric mi s th dirct csts
x Ovrhads ar csts which cat b attrib td t idivid al ctracts
x Prfit is T rvr - (Õirct sts + Ovrhads) r trib ti ± Ovrhads

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Consulting Engineers & Scientists


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6 

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Consulting Engineers & Scientists


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x Ovrtradi is th rs lt f cmmitti th cmpay t prd ci mr tha it
is capabl f prfrmi ad i partic lar mr tha th cmpay¶s wrki
capital ca s pprt ( hw  raph)
x Th tmptati t vrtrad lis i th fact that th raph sms t shw that
cdi th plad t rvr rs lts i sharply icrasd prfitability I fact
it will prbably t d s Th raph is basd  th ass mpti that th
vrhads ar fid (I  idpdt f th t rvr) This is ly tr  fr small
chas i t rvr cdi th plad t rvr will rs lt i icrasd
vrhads which will at p sm r all f th icrasd prfit which th raph
appars t prmis
x ic th cmpay¶s pla sh ld hav cmmittd th cmpay t prd c as
m ch as its limitatis allw vrtradi mas vrstppi  r mr f
ths limitatis Th prblms which aris dpd  which f th cmpayµs
limitatis is bi cdd:
x * cdi th cmpay¶s capacity fr wrk r its tchical capability will lad
t dlay ad psiv mistaks
x * If th cmpay¶s wrki capital cat s stai th icrasd dmad th
cmpay may bcm islvt This ca happ v whil th cmpay is
appartly tradi prfitably
|  

Consulting Engineers & Scientists


 !#

x Marial lli is sf l ly wh a cmpay has  sd capability


Wh that is th cas th cmpay ca lwr its ctrib ti blw th
plad lvl i th hp that th rd cd slli pric will bri i tra
wrk t tak p th slack Ay sals mad i this way will t bri i th
plad ctrib ti b t thy will bri i sm which is bttr tha 
x Marial slli ca apply t th whl cmpay if it ds t achiv its
plad  tp t r t parts f th cmpay which happ t b dr-
mplyd

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Consulting Engineers & Scientists


& !"
x Õfi ad brifly plai th fllwi:
x a) Prfit Mari D" '(
x b) Rt r  harhldrs¶ apital D" '(
x c) rrt rati D" '(
x d) Li id rati D" '(
x Th 2008 p blishd Prfit ad Lss Acc t ad Balac
ht fr Wss Watr plc whs pricipal b siss is
driki watr s pply ar st  t blw Fr ach yar
calc lat th val s fr ach f th abv paramtrs ad
cmmt  hw ad why thy diffr frm typical val s fr th
ctracti id stry D") '(
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Consulting Engineers & Scientists


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Consulting Engineers & Scientists


& !*
x I mth  f th prst fiacial yar a
ctractr was awardd a ctract t dsi
s pply dlivr istall ad cmmissi a
pharmac tical ma fact ri facility val d at
£300m
x Trms f paymt ar
x 0% with rdr
x 20%  apprval f drawis
x 50%  cmplti f istallati
x 0%  cmmissii ad
x 0% rtti fr 2 mths

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Consulting Engineers & Scientists


& !*
x Õ ri th prst fiacial yar:
x (a) Th ctractr¶s drawis wr apprvd i Mth 4
x (b) Th ctractr cmpltd istallati ad ivicd i
Mth  with paymt d  3 mths latr
x (c) mmissii is schd ld t b cmpltd ad
ivicd 3 mths aftr cmplti f istallati
x (d) Th ctractr has rcivd ivics frm all th
matrials s pplirs ad s bctractrs ttalli £225m fr
which sttlmt is d  i 30 days aftr th d f th
c rrt fiacial yar
x () Th ctractr has s bmittd a claim t th lit fr
tras val d at £5m
x Hw will ths itms appar i:
x (i) Th Balac ht D" '(
x (ii) Th Prfit Lss Acc t D" '(
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Consulting Engineers & Scientists


& !*

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|  

Consulting Engineers & Scientists


& !+
x Brifly dfi:
x (a) T rvr D" '(
x (b) Õirct csts D" '(
x (c) trib ti D" '(
x (d) Prfit D" '(
x () Brakv D" '(

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Consulting Engineers & Scientists


& !+
x  ar th hif c tiv Officr f a ctracti cmpay i th chmical
prcss plat sctr I 2008 y r t rvr was £50m ad th Prfit ad
Lss acc t shwd:
 ] 
 V 
$  /  V 
^  %$ V 
$ $%  $  V 
$%  %$ V 
$ %  %$ $  V 
$ %  %$ %   V 

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Consulting Engineers & Scientists


& !+
x As a rs lt f th lbal cmic sit ati y
aticipat a dwt r i th markt fr 2009 by
as m ch as 40%
x (f) At th 2008 lvl f ctrib ti ad vrhad
csts what t rvr w ld y d t achiv
brakv i 2009? D+ '(
x () If y r t rvr wr t drp by 40% hw w ld
this affct y r pr ctd prfit fr 2009 ass mi
ctrib ti ad vrhads rmai at th 2008 val s?
D+ '(
x (h) What stps miht y csidr taki i rdr t
rd c th impact f th rd cd t rvr? D  '(
|  

Consulting Engineers & Scientists


& !+
x (a) T rvr is th cmpay¶s  tp t i th yar
mas rd by th ttal ivicd [ mark]
x (b) Õirct sts ar csts dirctly attrib tabl t idtifid
ctracts [ mark]
x (c) trib ti is th val  f a ctract mi s its dirct
csts; it is th s m f my that a ctract ctrib ts t
th cmpay¶s vrhads ad prfit r "Grss Prfit"
[ mark]
x (d) Prfit is th s m lft aftr all cmpay¶s csts i th
yar hav b dd ctd frm all th aris [ mark]
x () Brakv is th t rvr that st cvrs th
cmpay¶s dirct csts ad vrhads lavi  t
prfit [ mark]

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Consulting Engineers & Scientists


& !+
    
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|  

Consulting Engineers & Scientists


& !+
x (f) Brakv t rvr at 2008 ctrib ti ad
vrhads £20m [4 marks]
x () A 40% rd cti i t rvr ivs a 0% lss [4
marks]
x (h) Rd c vrhads t £27m t iv brakv ± thr
ptis s ch as marial slli (b t this may t b
pssibl if markt is dprssd) sll iri srvics
(dsi ly fr f t r ivstmt) r cmmissii
srvics [7 marks]

|  

Consulting Engineers & Scientists


& !)
x (a) What factrs ctrib t t what miht b csidrd
t b a rasabl lvl f itrst  a bak la? D#
'(
x (b) Th Bak f lad hlds r lar mti t st th
Bas Rat What circ mstacs miht mak th Bak f
lad wat t rais r lwr it? D+ '(
x (c) What is LIBOR hw is it st ad hw ds it affct
itrst rats  las t cmpais? D# '(
x (d) Hw d baks act ally st th itrst rats which
thy char  las t cmpais? D '(
x () Why ds a cha i th Bas Rat hav a
immdiat impact  sm f ths wh hav bak
las? D+ '(

|  

Consulting Engineers & Scientists


& !)
x (a) Th factrs ar:
x Bas Rat [ mark]
x c rity/Risk [ mark]
x Admi sts [ mark]
x Prfit [ mark]
x NOT iflati rat - that is icl dd i th Bas Rat [ mark]
x (b) Th Bas Rat idirctly ctrls th am t f
my cmi it th cmy Hih rats disc ra
brrwi ad vic vrsa If th cmy is dprssd
ad ds bsti th bak ca d that by lwri th
bas rat ad vic vrsa If iflati is s t b risi t
a dsirabl lvl th bas rat will b raisd i th
hp f slwi dw r rvrsi th ris [4 marks]
|  

Consulting Engineers & Scientists


& !)
x (c) Ld Itrbak Offrd Rat [ mark] which is th
rat fr sc rd las btw baks [ mark]
x It is st wkly by cmmitt f British Bakrs' Assciati
(BBA) [ mark]
x It is w a bttr mas r f th rat at which baks ca
brrw my tha th bas rat s has a ratr ifl c
 itrst rats chard by baks [2 marks]
x (d) I practic baks char as hih a rat as thy ca
limitd mstly by cmptiti frm thr baks ad
ldrs [2 marks]
x () Rats f itrst  may las ar st at ³Bas
Rat+ % ad th itrst paymts  s ch las
varis a tmatically with th Bas Rat [4 marks]
|  

Consulting Engineers & Scientists


& !
x (a) Th Prst Val  f a f t r s m f £ pr
a m is iv by:


     p 
   >
 p

x plai what th diffrt trms i th frm la


ma D+ '(

|  

Consulting Engineers & Scientists


& !
x (b)  hav t istall a p mpi stati t dlivr 200m3/h f
watr fr 70% f th yar ad 800m3/h fr 30% f th yar  hav
th ptis f istalli thr 600m3/h p mps ach 25kW r f r
400m3/h p mps ach 5kW
x I th first pti tw p mps will r  cti  sly ad th flw will b
thrttld t mt th 800m3/h d ty with  rd cti i pwr
cs mpti I th scd pti thr p mps will r  t mt th
200m3/h d ty ad tw will r  t mt th 800m3/h d ty
x Th 25kW p mps cst £20000 ach ad th 5kW p mps £8000
ach
x lctricity csts 0p/kWh Us a itrst rat f 5%pa t calc lat
th NPV f ach pti s as t idtify th lwst cst vr th
fift yar lif f th p mpi stati D") '(

|  

Consulting Engineers & Scientists


& !
x (a) I th frm la:
x PV = prst val 
x  = f t r val  (val  f th icm r cst pr
a m)
x i = th itrst rat vr ach tim itrval sd
t calc lat th NPV
x T = th  mbr f yars vr which th s m
£pa is paid

|  

Consulting Engineers & Scientists


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Consulting Engineers & Scientists


& !
x (b) NPV = PV f F t r icm ± Ivstmt
x NPV = PV f prati cst ± capital cst
x NPV Opti  = -£454629 ± £90000 = -£-544629
x NPV Opti 2 = -£368250 ± £44000 = -£52250
x Hc Opti 2 is prfrrd

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Consulting Engineers & Scientists


 !
x Th UK Bas rat is th itrst rat which th
Bak f lad chars  las t thr baks
 What prcta is th UK Bas Rat tday? D, '(
2 Hw ad why is it chad frm tim t tim? D#, '(
3 mpais s ally dpd i part  bak las What
ar th bfits ad disadvatas f this? D), ']
4 What is th ccti btw th Bas Rat ad th
itrst chard by baks  las t cmpais?
D*, '(
5 Why w ld a bak b likly t iv a larr la t a
ma fact ri cmpay tha t a ctracti cmpay
with a similar t rvr? D+ ']

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Consulting Engineers & Scientists


 !
 The current base rate is « % (2)
2 Its level is reviewed and possibly changed monthly () by a
committee () of the Bank of England () If the economy
needs stimulating () the committee may decide to reduce
the bank rate This makes it less epensive to borrow money
and so encourages spending and investment Raising the
bank rate has the opposite effect ()
3 A company borrows money in order to increase the capital
available to support its business () If the additional
contribution which this brings in is greater than the interest
payable on the loan the company¶s profit and the return on
shareholders¶ capital will increase (2) Interest on a loan
must be paid whether the company is doing well with it or
not() Taking out too large a loan means the interest
payment can ruin a company (2)

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Consulting Engineers & Scientists


 !
 Interest on new loans is normally some percentage
points higher than the Base Rate () and some loans
pay interest at some fied percentage above Base
Rate so the it changes automatically whenever the
Base Rate changes (2)
2 The typical contractor has few or no fied capital
assets (2) If the company fails therefore there is
nothing left with which the bank can at least recover
some of its loan (2) By contrast typical manufacturers
have premises machinery work in progress and stock

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Consulting Engineers & Scientists