Question

A small construction firm, A&B Construction, is working on a house project for Mr. Long. The estimated building time is 8 months and the estimated costs to the firm (labor, materials, etc.) are $20,000 per month for 8 months (assume that the firm needs to pay the monthly costs at the end of each month). The contract indicates that the customer will pay a total of $200,000 for the project but it does not specify when the customer will pay the firm. To solve this problem, the firm offers to let the customer pay $50,000 in the end of each month for the first four months, but the customer offers to pay $23,000 in the end of each month for 8 months plus another payment of $16,000 when the project is completed. Assume that the firm would deposit all the earned money (profit) in a bank account earning a monthly interest rate of 0.476% (compounded monthly). (a) Conduct an analysis to estimate the difference in the firm's total profit (i.e., bank account balance) at the end of the project between the firm's offer and the customer's offer (you need to use the computer program in Excel). Note that the major objective of this project is to estimate what the difference between the two offers will be. (b) Write a business memo to the manager of this construction firm. It should include at least three sections: Introduction, analysis and results, and conclusions (recommendations). (C) The business memo must follow the should ha

Answer 1

Introduction: Mr. Long has proposed a payment plan different from the one we had proposed. Instead of paying off the $200,000 over the first four months in equal instalments, according to our proposal, he is proposing to pay $23,000 each month for the first 8 months and the balance $16,000 when the project is completed.

Analysis: Assuming that we are able to complete the project in 8 months, we will get $23,000 each month for the first 7 months and $39,000 in the eighth month. Our ability to keep larger balances in the bank will be much lower according to Mr. Long's proposal as compared to our own. Accordingly, we will earn just about $404 in interest if we agree to Mr. Long's proposal, as compared to $2,604 as per our own. More importantly, we run the risk of Mr. Long cancelling the contract mid-way leaving us with an unfinished project which we may find harder to sell.

Recommendation: Our recommendation is to persuade Mr. Long to agree to our proposal or something way better than his own, to make it financially more attractive and less risky for us.

End of Month	Cost	Inflow (firm's proposal)	Deposited in Bank	Interest earned	Net earnings	Inflow (customer's proposal)	Deposited in Bank	Interest earned	Net earnings
1	20,000	50,000	30,000		30,000	23,000	3,000		3,000
2	20,000	50,000	30,000	143	30,143	23,000	3,000	14	3,014
3	20,000	50,000	30,000	286	30,286	23,000	3,000	29	3,029
4	20,000	50,000	30,000	430	30,430	23,000	3,000	43	3,043
5	20,000		-20,000	575	-19,425	23,000	3,000	58	3,058
6	20,000		-20,000	483	-19,517	23,000	3,000	72	3,072
7	20,000		-20,000	390	-19,610	23,000	3,000	87	3,087
8	20,000		-20,000	297	-19,703	39,000	19,000	101	19,101
Total	1,60,000	2,00,000	40,000	2,604	42,604	2,00,000	40,000	404	40,404