Housing Construction Company (HCC) Has Agreed to Build a Housing

question 6

Essay

Housing Construction Company (HCC) has agreed to build a housing project for the city of New York. On January 1^st, 2006 the company and the city agreed on the following terms, the construction should take no more than 3 years, HCC would be paid a total of $150 million for the project; the $150 million would be paid: 3 payments of $50 million each at the end of year 2006, 2007 and 2008. HCC expects contractions costs to be $50 million in year 2006, $50 million in year 2007, and $10 million in year 2008.
a. If HCC uses the completed contract method, what revenues and expenses would HCC recognize in year 2006, 2007, and 2008?
b. If HCC uses the percentage of completion method, what revenues and expenses would HCC recognize in year 2006, 2007, and 2008?
c. Show the balance on the construction-in-process account at the end of 2006, 2007, and 2008 (prior to the completion of the project) using both the completed contract and the percentage of completion methods?

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Definitions:

Supply Uncertainty

The risk of unpredictability in obtaining required materials or products from suppliers, which can affect production schedules, costs, and market responsiveness.

Exchange Rates

The value of one currency expressed in terms of another currency, which plays a critical role in international trade and finance.

Simulation Methods

Techniques used to imitate the operation of real-world processes or systems over time, often for the purpose of analysis or training.

Discounted Cash Flow (DCF) Analysis

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.