Reference no: EM133189417

Question - King Builder specialized in office building construction for more than 10 years, has been banking with Banks of Australia for over 5 years. It has been recently been awarded a contract to build an office building for JP Morgan. The total contract price is $130 million and the construction length will be 13 months. It is expected that labor costs and material costs will be 60 percent and 40 percent of costs, respectively. It is estimated that this builder will make a profit of twenty-five (25) percent of the contract value.

As this is a relatively straightforward project for King Builder, it is safe to assume that construction progress will be spread evenly over the life of the project. Assume that monthly certificates will be issued at the end of the month and payments will occur 25 days after the issue of each certificate.

A retention fund has been set up which will require retentions at the rate of 5 percent of the monthly payments and a minimum level 7 percent of the total contract value at the beginning of the construction. As a well-established builder, King Builder expects no difficulties in obtaining two-month credit terms from the suppliers of the necessary construction materials.

What's the total cashflow out of this builder at the end of the second month?