IIT GUWAHATI

CASE STUDY
COMPETITION







Contents of this booklet:
Page

Pre-seen material BZCS construction case 2


Pre-Seen Appendices 1- 4


9


Question Requirement

Case Study Assessment Criteria

13

14

Unseen Material 15 - 18


Maths Tables and Formulae

19 - 22







The Chartered Institute of Management Accountants 2011
2



BeeZed Construction Services (BZCS) case


Construction industry background

Due to the current economic climate, the demand for building work in Europe has fallen overall
by over 10% from 2008 levels. Furthermore, it is forecasted that the volume of construction work
will not increase until the start of 2011. Many companies in the construction industry have
suffered falls in profits as a direct result of the slowdown in new contracts being awarded.

Many European construction companies are involved in a large range of projects in many
countries worldwide. Few large construction companies (except some house building
companies) operate only within their national boundaries. Most construction companies have
established a range of expertise in specific types of project, such as construction of office
buildings, hospitals, airports, roads or schools. This expertise allows the construction companies
to use their skills and reputation to bid for, and win, further projects in Europe and in other
countries around the world.

Many large construction projects are financed using Private Finance Initiatives (PFI). PFI is
defined as private finance being used to fund public infrastructure work. Private finance is
defined as finance provided mainly by banks, institutional investors and pension funds. The
Private Finance Initiative (PFI) is a way of creating Public Private Partnerships (PPP). PPP is
defined as agreements between public bodies or central governments and private construction
companies to deliver the agreed projects. Examples of public infrastructure works are road
building and construction of new schools. PFI projects also involve the private sector
construction company taking on responsibility for providing an on-going service. This typically
includes maintaining and managing the project over the life of the building or for a fixed term of
20 years or longer. Therefore, PFI projects generate revenue streams for the construction
company for the initial construction project as well as for long-term maintenance and
management of the asset. PFI projects involve the private construction company as a partner in
the project and this has generated favourable outcomes in respect of the percentage of projects
completed on time and completed to the agreed budget.

In the construction industry there are 3 main types of contract, which are:

1. Fixed price contracts this is where the revenue for the private construction company is
fixed at the contract stage, subject to changes in specifications agreed during
construction.

2. Cost plus contracts this is where the revenue for the private construction company
will comprise all of the actual costs of the project plus an agreed profit element.

3. Long-term PFI projects this is where the revenue for the private construction company
will include the contracted construction revenue as well as revenues for on-going
maintenance and property management for a long-term project, typically 20+ years.

The process for private construction companies to win a new contract for a large construction
project is summarised in the following steps:

1. A company or government body will invite tenders
2. The construction company will tender for the contract by preparing a detailed bid
3. A company or government body will select its preferred contractor
4. The bid price and the contract details will be negotiated and agreed
5. Contracts are then signed
6. Selection and appointment by the construction company of suppliers for manpower
resources (sub-contractors), as well as for materials
7. Work commences

3

It should be noted that during construction work, there are often many requests for changes to
the original contract specifications or design which are submitted to the construction company.
These changes usually affect costs and manpower. All of these change requests have to be
negotiated and additional revenues agreed before the changes can be made.

BeeZed

BeeZed is a c onstruction and pr operty management company listed on a E uropean stock
exchange.

BeeZed has 3 wholly owned subsidiary companies which are:

BeeZed Construction Services (BZCS) concerned with a wide range of construction
projects

BeeZed Professional Services (BZPS) concerned with offering consultancy services

BeeZed Building Support Services (BZBSS) concerned with property management
and maintenance services.

In respect of PFI projects, the parent company, BeeZed, will sign the overall contract for the
project. BZCS will be i nvolved only with the construction work and B ZBSS will manage the
ongoing maintenance and property management work. When a P FI contract is signed, the
parent company, BeeZed, will agree on how the revenues will be s plit between BZCS and
BZBSS.

This case study is concerned ONLY with BeeZed Construction Services (BZCS).

BZCS

BZCS has many construction projects around the world, ranging from road building, construction
of public sector buildings, including hospitals, schools and u niversity buildings to commercial
contracts for office buildings. Some of the construction projects that BeeZed is involved with are
financed by PFI. However, only the revenue related to the construction project is allocated to
BZCS. The revenue relating to the ongoing maintenance and property management work is
allocated to BZBSS and is not

included in this case study. BZCS has a good reputation in this
industry for quality and safety as well as its ability to deliver projects on time. These are all
critical success factors for keeping its existing customers content and for providing a basis for
winning future business.
BZCS has 6 divisions, which are:

1. Office Buildings Division includes building bespoke office buildings for specific
company orders, as well as speculative construction of office buildings in city centres or
on business park complexes.

2. Sports Facilities Division includes the construction of large sports stadiums as well as
the construction of small regional sports facilities.

3. Environmental Projects Division includes the construction of water treatment facilities,
the construction of sophisticated waste management facilities and marine projects,
including the construction of container terminals and marinas.

4. Infrastructure Projects Division includes road building and airport construction.

5. Community Projects Division includes the construction of hospitals and smaller
healthcare facilities as well as schools and university facilities.

6. Energy Projects Division includes the construction of gas storage facilities and power
stations.
4

Each of these 6 divisions is headed by a Commercial Director who is responsible for all of the
projects undertaken by that division.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in
Appendix 1 on page 9.

In the year ended 30 September 2010, BZCS generated total revenues of 1,267 million and
operating profit of 34.7 million.

BZCS is a wholly owned subsidiary of BeeZed. An extract from the accounts for BZCS is shown
in Appendix 2 on page 10.

All of the non-current liabilities represent inter-company long-term loans from its parent
company, BeeZed. BeeZed has a r ange of non-current liabilities with several external bodies
including bank loans.

BZCSs cash flow statement for the year ended 30 September 2010 is shown in Appendix 3 on
page 11.

Geographical analysis of revenues

BZCS currently has construction projects operational throughout Europe, the USA, the Middle
East and in some other countries, mainly in Asia.

The geographical analysis of the total construction services revenue of 1,267 million for the
year ended 30 September 2010 was as follows:



Analysis of revenues and operating profit by division

The revenues and operating profit for each of BZCSs 6 divisions for the year ended 30
September 2010 are shown in a table on the next page:







Europe 690 m
USA 369 m
Middle East 110 m
Rest of World 98 m

5

Revenue

Operating
profit


Office buildings
million

220.0
million

8.5

Sports facilities 145.2 3.4

Environmental projects 193.1 4.2

Infrastructure projects 365.2 16.8

Community projects 213.6 1.3

Energy projects 129.9 0.5


Total

1,267.0

34.7

Financials

The operating profit margins achieved by BZCS are low, as is the norm for this industry.
However, for some of BZCSs PFI construction projects, BZBSS, which is part of the BeeZed
group, earns additional revenues for a further 10 to 30 years for the ongoing maintenance and
property management of the PFI projects.

Whilst BZCS prepares annual financial accounts, all of the accounting for each construction
project is accounted for on a project basis. All direct costs are allocated to the respective project,
including salary and associated costs for all of BZCSs employees working on each project as
well as sub-contractor costs. All non-project based overhead costs are allocated to projects
using activity based costing techniques based on appropriate cost drivers.

The monthly management accounts show the following information for all on-going operational
construction projects:

Contract revenues and costs
Approved change requests to contracts and amended revenues and costs
Cumulative costs to date for the project (spanning current and past financial years)
Forecast of costs for the remainder of the project (which are split between costs to be
incurred in the current financial year and costs to be incurred in future financial years)

BZCS uses a project management system called BZPM. Each Project Manager is responsible
for all direct costs incurred on the project for which he / she is responsible.

Each Project Manager is responsible for presenting the projects financial and operational issues
that have occurred for each project on a monthly basis. These presentations are to senior
management groups chaired by the Commercial Director for the relevant division of BZCS.
These presentations cover all aspects of the project, including safety issues, forecasts for the
delivery of the project against plan and any significant operational problems or successes. If
there is a significant problem, the Project Manager will be expected to travel to BZCSs Head
Office to present the information to the BZCS Board. Where there are no operational or financial
concerns, the Project Manager conducts his monthly presentation by video conferencing.

Order book

At 30 September 2010 BZCS had an order book valued at over 2,400 million. This is 30%
higher than the level of BZCSs order book at the 30 September 2009. The order book
represents the value of contracts signed which have either not yet been commenced or are
currently in progress.
6

Project Management

BZCS uses a project management system to plan each project, called BZPM. The contract
details and agreed key stages are set up in BZPM when the contract is signed for each new
construction project. A Project Manager is appointed for each project. He or she is responsible
for controlling all stages of the project using BZPM. This includes control of resources, both
BZCS employees and outsourced sub-contractors, timings for each stage of the project, project
planning and managing contract change requests. The Project Manager is also responsible for
control and reporting of costs against the original contract and the updated budget for the
project.

The finance system interfaces directly with BZPM allowing data on payments for materials and
sub-contractors, payroll costs and revenues to be directly allocated to each stage of the relevant
project. The Project Manager and his team, assisted by the Finance Department, prepare
monthly accruals based on activities undertaken in the month, which have not been invoiced.
BZPM is able to generate reports on all aspects of each project, including forecast timings for all
activities and costs, by the end of day 3 after each month end.

Corporate Social Responsibility

BZCS takes its Corporate Social Responsibility (CSR) very seriously. The BZCS Board is
committed to safety on all projects and also to the reduction of waste from sites and the
reduction of carbon emissions. It is also very aware of environmental concerns and works
closely with the communities in which it operates.

BZCSs commitment to health and safety and environmental issues is shown below.

Health and Safety
Health and safety is a top priority for BZCS. BZCS continues to enhance its culture of safety
throughout the company and its supply chain, to ensure that its employees, sub-contractors and
the public are safe. BZCS also ensures that environmental safety is adhered to, so as to try to
ensure that the communities in which it operates are not damaged or polluted.

BZCS, like all construction companies, adheres to all Health and Safety legislation and BZCS
goes beyond what is required by law. It trains all of its employees to ensure their competency
and full understanding of what and why safety is so important in all aspects of the company.
This training covers all aspects of health and safety, from construction work at building sites to
transportation of materials and disposal of waste. BZCS continues to measure its performance
against a range of key Health and Safety indicators.

BZCSs annual accident frequency rate has fallen over the last 7 years and is currently 0.16
accidents per 100,000 work hours. This is the lowest accident rate ever achieved by BZCS and
is amongst the lowest of the top construction companies globally. 20,000 person days of Health
and Safety training has been provided by BZCS during the last financial year ended 30
September 2010.

BZCS recognises that it is also important that its supply chain is fundamental to the safe delivery
of all construction projects and it works closely with the companies in its supply chain. It tries to
ensure that best practice is promoted and that a positive safety culture is created. BZCS
provides Health and Safety awareness training to its key suppliers to ensure that they meet
BZCSs challenging Health and Safety requirements. BZCS also conducts audits of its suppliers.
Recently some suppliers contracts were not renewed as they did not meet the criteria set by
BZCS for Health and Safety standards.

Environmental issues
BZCS is committed to complying with a European Union (EU) wide programme to reduce the
volume of waste that goes to landfill sites. Where possible waste from construction sites is
sorted by category of material (such as earth, packaging or materials which can be recycled)
and is recycled or disposed of in a safe way. BZCS has a range of waste management
contractors which manage the safe disposal of site waste. They have demonstrated their

7

abilities to divert waste from landfill sites. Last year, ended 30 September 2010, BZCSs target
was to dispose of, or recycle, 60% of site waste that would otherwise have ended up in landfill
sites. BZCS exceeded this target and disposed of, or recycled, 62% of its waste from its
construction sites.

BZCS is committed to reducing its carbon footprint and to minimising its impact on the
environment. BZCS uses the latest technology on its construction projects so that new buildings
are able to operate in an environmentally responsible way and utilise efficient electrical fittings.
Many of the buildings contracted by European government departments, such as schools and
hospitals, use renewable energy sources and BZCS works closely with the architects to ensure
that the buildings will help to deliver planned reductions in carbon emissions.

BZCSs Mission Statement and CSR initiatives are shown in Appendix 4 on page 12.

Contracts

BZCS is continuously working on bids for possible new contracts. It has specialised teams
headed up by Bid Managers in each of BZCSs 6 divisions. When a bid has been won and a
contract signed, then a Project Manager is appointed to manage the project. Sometimes, on a
particularly complicated project, the initial Bid Manager will become the Project Manager.

Each of BZCSs 6 di visions usually has between 1 and 5 pr ojects in progress at any point in
time. Furthermore, each of the 6 di visions is usually involved in the bid preparation and the
bidding process for several other proposed projects. Whilst BZCS has been the preferred
supplier for some European government departments in the past for infrastructure projects and
community projects, these large customers are now imposing increasingly strict criteria for
suppliers to meet. Bids need to be competitive in the current challenging economic climate.
Therefore, BZCS, like many other construction companies, is not successful in winning all of the
projects for which it bids for.

In order to balance the risk of relying on s pecific construction sectors and a r elatively small
customer base, BZCS tries to win contracts from a wide selection of organisations. These
include government and private sector customers. BZCS also undertakes a w ide range of
different types of construction project.

BZCS has secured some construction projects for the London 2012 Olympic Games.

At any point in time BZCS usually has between 12 and 2 0 projects in progress, with bid
preparations taking place for a f urther 10 or more projects. The bid value of a contract varies
greatly, ranging from 5 million to over 800 million for individual contracts. Contract duration
often spans more than 2 years.

As at the end of December 2010, BZCS has 14 projects currently operational, of which 10 are
due for completion during 2011 and the remaining 4 are due to be completed in 2012.

Bid tendering process

In the UK, the Governments regulator, the Office of Fair Trading (OFT) has been undertaking
investigations of bid-rigging in the construction industry. The OFT has established that there is
widespread evidence of construction companies which have been involved in manipulating the
bidding process. This has allowed specific companies to win Government awarded construction
projects at higher prices than could be achieved through a fair competitive bidding process. This
on-going investigation has involved the OFT accessing paperwork for over 100 contracts from
20 construction companies. It will also impact on the ways that construction companies,
including BZCS, bid for new projects in the future.

In order to be treated leniently, BZCS has advised the OFT that it did have discussions with
some other construction companies concerning the level of its bid for a UK hospital construction
project that it won the contract for in 2008. The project is proceeding on time and it is forecast
that it will not over-run the agreed fixed price budget.
8


BZCS is waiting to hear the outcome of the OFTs investigation into this specific contract. BZCS
has included a provision for a contingent liability, for a possible fine, in the accounts for the
current financial year ending 30 September 2011.

Re-structuring of BZCS

During 2009 and the early part of 2010, BZCS underwent a re-structuring process to enable it to
become more competitive following the downturn in construction projects due to the current
economic environment. The Board of BZCS recognised the need to become more flexible and to
sub-contract a greater volume of its core construction work. Following a Board decision in March
2009, BZCS reduced the number of its employees by 1,800 within 1 year. At the end of
September 2010, BZCS had 10,100 employees. Many of BZCSs ex-employees have joined
some of BZCSs supply chain companies, which are BZCSs sub-contractors. Therefore some of
these people work on the same project as previously but now are employed by sub-contractors
or have become short-term freelance contractors to BZCS.

BZCS has also focused on winning a wider range of private construction projects as many
European governments have cut the budgets on public sector projects and bidding is more
competitive than ever.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in
Appendix 1 on page 9.

Within each division, the Commercial Director has responsibility for each of the Project
Managers who are each responsible for one operational project. Projects that are operational
are defined as a project in which the contracts have been signed but construction is not
complete. Each division also has Bid Managers responsible for preparing bids or tenders for
new projects and Sales and Marketing Managers for selling to, and liaising with, customers.
Additionally there is a Post Completion Manager responsible for all projects that have ongoing
problems or require minor rectification work after the project has been completed.

Re-structuring of the Procurement Department
Before the re-structuring of BZCS, each division was responsible for the procurement for each of
the projects under its control. Effective from 1 January 2011, there is a new central Procurement
Department for the whole of BZCS. This is under the direct control of an experienced
Procurement Director, who reports directly to BZCSs Managing Director. The new Procurement
Director was recruited from a rival construction company and joined BZCS in October 2010.

The employees who worked in the procurement departments within each of BZCSs 6 divisions
have been brought together in one centralised Procurement Department, based in Europe. This
should help to facilitate better control over purchases and achieve higher bulk discounts,
especially for some raw materials. On an operational level, all of BZCSs Project Managers at
construction sites in each country will now make all purchases through the new centralised
Procurement Department. They will be given limited authority to purchase goods locally where
no global contract is in place for particular materials.

The new centralised Procurement Department is in the process of selecting preferred suppliers
within each country in which it operates. Where possible, the preferred supplier will be another
large international company that can provide materials to BZCS in many of the countries in
which BZCS has on-going construction projects. The Finance Department is working closely
with the Procurement Director in the selection and appointment of new and existing suppliers.
The re-structuring of BZCSs Procurement Department has resulted in an overall reduction in
headcount in procurement employees. The new centralised Procurement Department will help
meet BZCSs target for Head Office cost savings.

A
p
p
e
n
d
i
x

1

B
Z
C
S

s

n
e
w

o
r
g
a
n
i
s
a
t
i
o
n
a
l

s
t
r
u
c
t
u
r
e

e
f
f
e
c
t
i
v
e

f
r
o
m

1

J
a
n
u
a
r
y

2
0
1
1

B
Z
C
S

M
a
n
a
g
i
n
g

D
i
r
e
c
t
o
r

S
p
o
r
t
s

F
a
c
i
l
i
t
i
e
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

O
f
f
i
c
e

B
u
i
l
d
i
n
g
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

E
n
v
i
r
o
n
m
e
n
t
a
l

P
r
o
j
e
c
t
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

I
n
f
r
a
s
t
r
u
c
t
u
r
e

P
r
o
j
e
c
t
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

C
o
m
m
u
n
i
t
y

P
r
o
j
e
c
t
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

E
n
e
r
g
y

P
r
o
j
e
c
t
s

D
i
v
i
s
i
o
n

C
o
m
m
e
r
c
i
a
l

D
i
r
e
c
t
o
r

B
Z
C
S

F
i
n
a
n
c
e

D
i
r
e
c
t
o
r

B
Z
C
S

P
u
b
l
i
c

R
e
l
a
t
i
o
n
s

a
n
d

M
a
r
k
e
t
i
n
g

D
i
r
e
c
t
o
r

B
Z
C
S

P
r
o
c
u
r
e
m
e
n
t

D
i
r
e
c
t
o
r

P
o
s
t

C
o
m
p
l
e
t
i
o
n

M
a
n
a
g
e
r

P
r
o
j
e
c
t

M
a
n
a
g
e
r
s

f
o
r

e
a
c
h

p
r
o
j
e
c
t

B
Z
C
S

-



I
T

M
a
n
a
g
e
r

B
i
d

M
a
n
a
g
e
r
s

f
o
r

e
a
c
h

n
e
w

p
r
o
p
o
s
e
d

p
r
o
j
e
c
t
W
i
t
h
i
n

e
a
c
h

D
i
v
i
s
i
o
n

S
a
l
e
s

&

M
a
r
k
e
t
i
n
g

M
a
n
a
g
e
r
s

f
o
r

e
a
c
h

p
r
o
j
e
c
t
.

B
Z
C
S

H
u
m
a
n


R
e
s
o
u
r
c
e
s

D
i
r
e
c
t
o
r


10

Appendix 2

Extracts from BZCSs Statement of Comprehensive Income,
Statement of Financial Position and Statement of Changes in Equity


Statement of Comprehensive Income
Year ended
30 September 2010
Year ended
30 September 2009

million

million

Sales revenue 1,267.0 1,280.0
Cost of sales 1,210.3 1,222.0
Gross profit 56.7 58.0
Administrative expenses 22.0 22.8

Operating profit

34.7


35.2
Finance income 0.2 0.3
Finance expense 7.5 8.7
Profit before tax 27.4 26.8
Tax expense (effective tax rate is 20%) 5.5 5.4

Profit for the period

21.9

21.4

As at
Statement of Financial Position 30 September 2010
As at
30 September 2009

million

million

million

million

Non-current assets (net)

241.0 234.0
Current assets
Inventory 3.1 3.4
Trade receivables 167.0 167.8
Cash and cash equivalents 23.4 31.2
193.5 202.4
Total assets 434.5 436.4

Equity and liabilities

Equity
Share capital 10.0 10.0
Retained earnings 176.0 154.1
186.0 164.1
Non-current liabilities
Inter-company loan
(provided by parent company BeeZed)


125.0


145.0

Current liabilities
Trade payables 118.0 121.9
Tax payables 5.5 5.4
123.5 127.3
Total equity and liabilities 434.5 436.4

Note: Paid in share capital represents 10 million shares of 1.00 each at 30 September 2010 which are
100% owned by parent company BeeZed

Share
Statement of Changes in Equity Capital
Share
premium
Retained
earnings
Total

million


million

million

million
Balance at 30 September 2009 10.0 - 154.1 164.1
Profit - - 21.9 21.9
Dividends paid - - - -
Balance at 30 September 2010 10.0 - 176.0 186.0

11





Appendix 3

Cash Flow Statement


Year ended
30 September 2010


million

million
Cash flows from operating activities:

Profit before taxation (after Finance costs (net)) 27.4

Adjustments:
Depreciation 88.0
Finance costs (net) 7.3
95.3
(Increase) / decrease in inventories 0.3
(Increase) / decrease in trade receivables 0.8
Increase / (decrease) in trade payables
(excluding taxation)

(3.9)

(2.8)
Cash generated from operations 119.9

Finance costs (net) paid (7.3)
Tax paid (5.4)
(12.7)

Cash generated from operating activities 107.2

Cash flows from investing activities:

Purchase of non-current assets (95.0)

Cash used in investing activities

(95.0)

Cash flows from financing activities:
Repayment of inter-company loans (20.0)

Cash flows from financing activities

(20.0)

Net decrease in cash and cash equivalents

(7.8)

Cash and cash equivalents at 30 September 2009 31.2


Cash and cash equivalents at 30 September 2010

23.4
12

Appendix 4

BZCSs Mission Statement and CSR initiatives

BZCSs mission statement is:

To be the preferred supplier for quality construction projects and to strive to implement a
long-term relationship with our customers based on safety, quality and a timely service



BZCS has the following CSR initiatives:

Prudent use of natural resources:
Reducing waste
Improving design
Improving the use of resources
Improving its supply chain
Increasing the use of locally sourced resources

Environmental issues:
Reducing water pollution
Reducing emissions into the atmosphere
Reducing waste going to landfill sites

Social issues:
Improving Health and Safety for our employees and sub-contractors
Supporting our employees
Giving due consideration to the communities in which we work
Developing the skills of our employees

Economic growth
Investing in the communities in which we operate
Rewarding our shareholders
Satisfying our customers
Managing our risks















End of pre-seen material






13

BZCS - Construction company case Unseen material provided on examination day



Additional (unseen) information relating to the case is given on pages 15 to 18.

Read all of the additional material before you answer the question.


ANSWER THE FOLLOWING QUESTION


You are the Management Accountant of BZCS.

The Finance Director has asked you to provide advice and recommendations on the
issues facing BZCS.

Question 1 part (a)
Prepare a report that prioritises, analyses and evaluates the issues facing BZCS and
makes appropriate recommendations.
(Total marks for Question 1 part (a) = 90 Marks)


Question 1 part (b)
In addition to your analysis in your report for part (a), the Finance Director has asked
you to prepare an email to be sent to non-financial managers in the Office Buildings
Division of BZCS explaining the principles and the meaning of NPV calculations in
general, together with your recommendation on the office building proposal.

Your email should contain no more than 10 short sentences.

(Total marks for Question 1 part (b) = 10 Marks)



Your script will be arked against the Case Study Assessment Criteria
shown on the next page.



14


Assessment Criteria

Criterion Maximum
marks
available
Analysis of issues (25 marks)
Technical 5
Application 15
Diversity 5
Strategic choices (35 marks)
Focus 5
Prioritisation 5
Judgement 20
Ethics 5
Recommendations (40 marks)
Logic 30
Integration 5
Ethics 5
Total 100


15

BZCS - Construction company case unseen material provided on examination day

Read this information before you answer the question


Waste materials

Charlie Rix is a junior procurement manager for BZCS. In the course of his work he came
across some documents concerning the collection of waste materials from a site where BZCS is
constructing a new water treatment plant. On investigation, Charlie Rix has found that the
collected waste has not been sent to specialist waste disposal sites, but instead has been
delivered to a local landfill site. Charlie Rix is concerned that some of the site waste could
contain toxic chemicals.

In your role as Management Accountant you had been asked to provide an analysis of the
volumes of waste handled by all of BZCSs waste material sub-contractors and the levels of
materials recycled. You had a meeting with Charlie Rix last week to discuss gathering this
information. However, when you met with him, he showed you the documents he has found
concerning the disposal of this waste material which has been sent to a landfill site.

Unfinished sports club

BZCS signed a contract in August 2010 to construct 2 sports clubs for a small chain of private
sports clubs called EXX Sports (ES) to be completed by December 2011. The contract was for a
fixed price of 25 million for each of the 2 sports club buildings. All construction work would use
BZCS employees and very few sub-contractors, as BZCS had employees immediately available
to work on this project. BZCS planned to complete the first sports club before work started on
the second, and this was acceptable to ES.

An initial payment of 5 million for the first building was paid by ES when contracts were signed.
Work commenced on the first of these 2 sports clubs in November 2010, but work was
suspended temporarily when ES did not make the first stage payment of 5 million due in
December 2010. Payment was made in late January 2011 and work was re-started. The next
stage payment for another 5 million, became due at the end of April 2011, but was not paid on
time. BZCS was informed that payment would be made in 10 days time and work continued.

Following media speculation concerning ESs cash problems, ES was put into liquidation on
Friday 13 May 2011. All work on site was suspended that day. The 50 BZCS employees working
on this project have not yet been allocated to other projects. To date ES has only paid 10
million.

BZCS has applied to the liquidator to be added to the list of creditors. BZCS is claiming the
contract revenue of 25 million for the first sports club which is partially completed, less the 10
million already paid, as well as the loss of profit of 3 million for the second sports club which
has not been started. BZCSs total claim is for 18 million. The liquidator is not optimistic and
has indicated that all creditors may receive only around 10% of their claims.

Alternatively, BZCS is considering a proposal to contact ESs liquidator with an offer to pay
3 million to take on legal ownership of the unfinished sports club. If BZCS were to take legal
ownership of the sports club, it considers that the maximum it could realise from the sale of the
completed building would be 20 million, due to current depressed market conditions. BZCS has
spent 14 million so far on the partially completed sports club. It is forecast that BZCS would
need to spend a further 8 million to complete it.

The Finance Director has asked you, as Management Accountant, to advise on whether BZCS
should pursue the proposal to try to take ownership of the incomplete sports club. You should
also advise on what would be the maximum that BZCS should pay to take on the unfinished
sports club, if BZCSs offer of 3 million is not accepted.

16

Office building proposal

BZCS has worked with a leading international architect, Ben Bleur, on many projects previously.
All of the projects were commercially successful and some building designs have won awards.
BZCS has recently been asked by Ben Bleur to be the developer of, and to construct, an
innovatively designed 50 floor office building in a European capital city. The project would utilise
the latest environmentally sound technology to recycle heat and reduce carbon emissions. Ben
Bleurs building design has just received planning permission to proceed. He is now selecting a
company to develop and construct the office building and has been approached by several
interested competitors of BZCS. The deadline for BZCS to make a decision is 31 May 2011.

The Commercial Director of BZCSs Office Buildings Division is very confident that the proposed
building design and the association with Ben Bleur will attract corporate buyers of prestige office
space. This would be the first city centre large office building that BZCS has considered
constructing without first identifying customers to buy the completed office space. Therefore, if
BZCS decided to proceed with the development it would bear all of the commercial risk of this
proposal, including the purchase of the land at 50 million. BZCSs parent company has
confirmed that it could secure sufficient external financing for this proposed development.

If BZCS decided to proceed with this proposal, then it would need to generate publicity in order
to secure sales of the office space. As is usual with the construction of such an office building,
the actual construction work would not commence until a certain specified level of sales of office
space had been made. BZCS would commence a sales campaign to sell whole floors in the
building to customers off plan. An off plan sale is defined as a contracted sale of office space
(usually a specified floor or several floors) before building work has even commenced.

The off plan sales would be subject to BZCS selling a specified percentage of the building by a
certain date. The Sales and Marketing Manager for the Office Buildings Division of BZCS has
proposed that the percentage that should be sold before building work commences should be
set at 30% by 31 December 2011. Usually, when a building is under construction, sales are
easier to achieve as potential customers can see the style of the building under construction and
are often attracted by the media interest it generates. However, if the 30% target for off-plan
sales were not achieved, then BZCS could sell the undeveloped city centre building plot,
although it may receive less than the 50 million that it would have paid for it.

BZCSs civil engineers have forecast that this project would use around 900 employees each
year, as well as specialised sub-contractors. It is forecast that the total cost of the building would
be 525 million (based on 2011 prices) over 4 years, including the cost of the land.

It is forecast that the sale of all office space will be achieved over 4 years and will generate
sales revenue of 700 million (based on 2011 prices). It is forecast that all office space will be
sold within 1 year of the planned completion of the building in September 2014.

The Finance Director recognises the need to secure sales of office space and you have been
asked to discuss what actions the Office Buildings Division of BZCS should take in order to
secure the sales of office space in order to generate the forecast cash inflows shown in the table
on the next page.

A sale of part, or all, of the building is sometimes made to a property management company
rather than a corporate customer. The forecast cash inflows from sales shown in the table on
the next page include all sales, irrespective of whether it represents the end customer or not.

Following preliminary discussions with corporate customers looking for new office premises, DJ,
a global insurance company, has expressed a serious interest in purchasing 25 floors of the
building, which represents 50% of the office space. However, DJ has stated that the maximum
price it is prepared to pay is 300 million, spread over 3 years, a discount of 50 million.
However, an early sale of a significant proportion of the office building will also help attract other
corporate customers.



17

Note: All figures shown below are based on 2011 prices

Year ended: 30 Sept
2011
30 Sept
2012
30 Sept
2013
30 Sept
2014
30 Sept
2015
Totals
All figures pre-tax
million

million

million

million

million

million

Cash outflows 50 180 170 125 0 525

Cash inflows:
Without sale to DJ 0 120 150 180 250 700

With sale of 25 floors to DJ 0 140 170 200 140 650

The pre-tax cash flows are summarised in the table above. You should assume that the effective
tax rate is 20% and that tax is paid, or refunded, 1 year in arrears. It should be assumed all cash
flows shown in the table above are eligible for tax relief. The Finance Director has stated that the
relevant post-tax discount rate is 15%, which includes a premium for the risk of this project.

Problems with BZPM

BZCS uses a project management system called BZPM. It is an off-the-shelf project
management system which is widely used. BZCS pays an annual software licence fee to the
software company, EAG. This IT system is used by all of BZCSs Project Managers for each
project to help them plan and monitor the progress, costs and resources for each project. This
system is key to the day to day management of all projects and holds details of all current
contracts and forecast cost details, as well as manpower resource planning details. The BZPM
system interfaces with other BZCS IT systems. This allows the transfer of data electronically into
BZPM in respect of payroll costs, supplier and sub-contractor invoices, all of which are charged
to each activity within each individual project.

The IT department installed the recently released upgraded software for BZPM last weekend,
after all users had been informed that BZPM would be unavailable for the weekend. The
upgraded BZPM was then tested and the IT department issued an email to all users on Monday
morning of this week, informing them that the upgraded system was operational again. The IT
department reminded all users about the new features of the upgraded BZPM and asked for any
queries to be directed to the IT Manager, Nicos Talli.

By the end of Tuesday of this week, 2 days after the upgrade was installed, Nicos Talli had
received over 80 emails with queries from almost all of the Project Managers and their
administrative staff. Nicos Talli is totally overwhelmed by the volume of emails with queries and
problems raised by users throughout all of the divisions of BZCS. He has chased, by phone and
by emails, his contact person at the software company, EAG, which has now admitted that it has
other customers who are also experiencing some problems with the new software release.

Nicos Talli has suggested that BZPM is closed down for 2 days whilst he investigates the
problems. However, the Finance Director is under pressure to keep BZPM operational. He has
asked Nicos Talli to check the integrity of the data contained in BZPM and to investigate what
data has been corrupted, as some Project Managers have stated that dates have been changed
within a project. He has also asked Nicos Talli to propose what actions should be taken.

One of the Project Managers has suggested to Nicos Talli that the last backed-up version of
BZPM from last Friday night, before the software update was installed, should be re-installed.
However, there has been 3 days of new input of data, as well as transfers of data from other
BZCS IT systems, since the last backed-up version of all the operational projects in BZCS.

The Finance Director has asked you, as Management Accountant, to work with Nicos Talli to
establish what actions are necessary in order to make BZPM fully operational and reliable.


18

Safety checks

BZCS has a very good track record on safety issues and training and this is an important issue
for its construction site workforce. At one of the government funded road building projects which
BZCS is under pressure to complete in 3 weeks time, the required weekly safety checks on site
machinery have not been completed for the last 2 weeks. The Project Manager is concerned
that an accident could occur. He has repeatedly phoned and emailed BZCSs Head Office every
day for the last week. He has now stated that unless the safety checks are carried out by 5 pm
tomorrow, work on site will completely stop. The cost of all employees and sub-contractors is
80,000 per day. BZCSs Head Office has instructed the Project Manager to continue working
on site.

The Project Manager has been told by BZCSs Head Office that a new contractor, TT, was
appointed 2 weeks ago to carry out BZCSs safety checks in this European country. BZCSs
Head Office has advised that this delay is just a one-off effect of the transfer to TT. However, on
further investigation, TT has now admitted that it cannot undertake the safety checks at this site,
as well as some other BZCS sites, for a further 4 weeks due to insufficient staffing.

The Project Manager at the road building site has identified a suitable local safety management
company, which has quoted a premium rate of 20,000 per week for all safety checks to be
performed immediately for the road building site only. However, the contract is for a minimum
period of 12 weeks.











End of unseen material














19



APPLICABLE MATHS TABLES AND FORMULAE


Present value table

Present value of 1.00 unit of currency, that is (1 + r)
-n
where r = interest rate; n = number of periods until
payment or receipt.

Periods
(n)
Interest rates (r)
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149


Periods
(n)
Interest rates (r)
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
20

Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of
each year for n years

+
r
r
n
) (1 1


Periods
(n)
Interest rates (r)
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods
(n)
Interest rates (r)
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870


21

FORMULAE
Valuation Models
(i) Irredeemable preference share, paying a constant annual dividend, d, in perpetuity,
where P
0
is the ex-div value:

P
0
=
pref
k
d

(ii) Ordinary (Equity) share, paying a constant annual dividend, d, in perpetuity, where P
0
is
the ex-div value:
P
0
=
e k
d

(iii) Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constant
rate, g, where P
0
is the ex-div value:
P
0
=
g k
d
- e
1
or P
0
=
g k
g

+
e
0
] [1 d

(iv) Irredeemable (Undated) debt, paying annual after tax interest, i (1-t), in perpetuity, where
P
0
is the ex-interest value:
P
0
=
net
] [1
d
k
t i

or, without tax:
P
0
=
d
k
i

(v) Future value of S, of a sum X, invested for n periods, compounded at r% interest:
S = X[1 + r]
n
(vi) Present value of 1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(vii) Present value of an annuity of 1 per annum, receivable or payable for n years,
commencing in one year, discounted at r% per annum:
PV =

n
r r ] [1
1
1
1

(viii) Present value of 1 per annum, payable or receivable in perpetuity, commencing in one
year, discounted at r% per annum:
PV =
r
1




22

(ix) Present value of 1 per annum, receivable or payable, commencing in one year, growing
in perpetuity at a constant rate of g% per annum, discounted at r% per annum:
PV =
g r
1

Cost of Capital
(i) Cost of irredeemable preference capital, paying an annual dividend, d, in perpetuity, and
having a current ex-div price P
0
:

k
pref =
0
P
d

(ii) Cost of irredeemable debt capital, paying annual net interest, i (1 t), and having a
current ex-interest price P
0
:
k
dnet
=
0
] [1
P
t i

(iii) Cost of ordinary (equity) share capital, paying an annual dividend, d, in perpetuity, and
having a current ex-div price P
0
:
k
e
=
0
P
d

(iv) Cost of ordinary (equity) share capital, having a current ex-div price, P
0
, having just paid a
dividend, d
0
, with the dividend growing in perpetuity by a constant g% per annum:
k
e
=
g
P
d
+
0
1

or k
e
=
g
P
g d
+
+
0
] 1 [ 0

(v) Cost of ordinary (equity) share capital, using the CAPM:
k
e
= R
f
+ [R
m
R
f
]

(vi) Weighted average cost of capital, k
0
:
k
0
= k
e

+
+
+
D E
D
d
D
E
V V
V
k
V
V
E
V




CIMA India Liaison Office
T. +91 74988 85068, +91 22 42370 100 / 105 / 110 / 111
E. [email protected] | www.cimaglobal.com/india
CGMA is powered by the resources, influence
and reputations of AICPA and CIMA.