Project Planning Appraisal and Control Assignment

Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM: MFC

SEMESTER-IIISubject Name : Project Planning Appraisal and ControlStudy COUNTRY :BotswanaRoll Number (Reg.No.) :MFC001112014-20160175Student Name :MPHO PELOEWETSE TAU

INSTRUCTIONSa) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKSAssignment A Five Subjective Questions 10Assignment B Three Subjective Questions + Case Study 10Assignment C Objective or one line Questions 10

b) Total weightage given to these assignments is 30%. OR 30 Marksc) All assignments are to be completed as typed in word/pdf.d) All questions are required to be attempted.e) All the three assignments are to be completed by due dates and need to be

submitted for evaluation by Amity University.f) The students have to attach a scan signature in the form.

Signature : Date : ________________29/11/2015________________

( √ ) Tick mark in front of the assignments submittedAssignment

‘A’√ Assignment ‘B’ √ Assignment ‘C’ √

1

Project Planning Appraisal and ControlASSIGNMENT A

Problem 1: Precision Engineers Ltd. is considering a proposal to replace one of its machines.

The following data is available regarding the same:

a. The machine was purchased 4 years ago for Rs.15 lacs and has been depreciated at 25%

p.a. as per the WDV method. The machine has a remaining life of 5 years, after which its

salvage value is expected to be Rs.0.80 lacs. Its present salvage value is Rs.6.0 lacs.

b. The new machine costs Rs.22lacs, and would be depreciated at 40% p.a. as per WDV

method. Its expected life is 8 years and after 5 years it is expected to fetch Rs.6 lacs. The

installation of this machine will increase the annual revenue by Rs.5 lacs, apart from

decreasing the operational costs by Rs.1.10 lacs per annum.

Assume no change in the depreciation rate if old machine is continued to be used.

If the company uses a discounting factor of 17% p.a. for calculating the present value of

future cash flow, should it go for the replacement of existing machine with the new machine?

Marginal tax rate of the company is 20%.

Show all your workings.

Solution – 1:

Information:

Salvage value of old machine at present = Rs 6 lacs

Cost of new machine = Rs 22 lacs

Depreciation = 40% WDV

Expected life = 8 years

Annual revenue increment = Rs 5 lacs p.a.

Decrease in Operation Cost = Rs 1.1 lacs p.a.

Discounting factor = 17%

Tax rate = 20%

Salvage value after 5 years = 6 lacs

2

Solution:

Year Inflow Rev InflowTax saving on Total Disc Factor PV

(W.Note 1) dep (W.Note 2)

0 600000 - - 600000 1 600000

0 -2200000 - - -2200000 1 -2200000

1 - 488000 176000 664000 0.857 569048

2 - 488000 105600 593600 0.731 433922

3 - 488000 63360 551360 0.624 344049

4 - 488000 38016 526016 0.534 280893

5 600000 488000 22810 1110810 0.456 506529

NPV 534440

As NPV is positive so it is viable to accept the project.

W.Note 1

Year Rev Cost Total Tax Exp Net Inflow

increase decrease

1 500000 110000 610000 122000 488000

2 500000 110000 610000 122000 488000

3 500000 110000 610000 122000 488000

3

4 500000 110000 610000 122000 488000

5 500000 110000 610000 122000 488000

W.Note 2

Year Cost/ WDV Dep rate Dep Tax Saving

1 2200000 40% 880000 176000

2 1320000 40% 528000 105600

3 792000 40% 316800 63360

4 475200 40% 190080 38016

5 285120 40% 114048 22810

Problem 2: Matrix pharma Ltd. Is considering investing in a new line of pharmaceuticals. The

Company has a plan that after five years it will sell the unit at a good profit to a

pharmaceutical major. The project outlays are as follows:

Particulars Rs. In lacs.

Land 80

Building 100

Plant & machinery 500

Other fixed assets 100

Technical know-how fees 160

Gross working capital 450

The project to be financed is as follows:

Rs. In lacs.

Equity share capital 500

12% Preference share capital 250

16% term loan 300

4

18% Bank loan for working capital 340

The Unit is expected to generate sales value of Rs.10 crores in the first year, Rs.12 crores in

the second year and Rs.15 crores for the next 3 years. The cost of production excluding

depreciation would be to the extent of 70% of the sales. The applicable rate of depreciation on

building is 4% on straight line method and 33% written down value method on plant and

machinery and other fixed assets. The technical know-how fees will be written-off over the

period of five years. The salvage value of plant and machinery after five years would be 20%

of the acquisition cost, nil for other fixed assets and book value for land and building. The

term loan for the project will be repaid after 5 years when the project would be sold. The

effective tax rate for the company is 30%.

You are required to:

a. Define the cash flows for the investment proposal from the long term funds point of view.

b. Calculate the net present value at a cost of capital of 20%.

c. Calculate the internal rate of return for the investment period.

d. Comment on the investment proposal of Matrix Pharma Ltd. Will your recommendation

change, if an additional cash flow of Rs.5 crore arise by disposing off the project? Explain.

Solutions – 2 a)

(in lacs)

Year Sales V.C Cont Cont S. value W.capital Outflow W.Note 1 Total

(A.tax) on Dep Cash flow

0 0 0 0 0 0 -1230 0 0 -1230

1 1000 700 300 210 0 0 -98.84 61 172.16

2 1200 840 360 252 0 0 -98.84 41 194.16

3 1500 1050 450 315 0 0 -98.84 28 244.16

4 1500 1050 450 315 0 0 -98.84 19 235.16

5 1500 1050 450 315 280 450 -98.84 13 959.16

5

W.Note 1:

Year P&M Other FA Build Total Tax Saving on dep

1 165 33 4 202 61

2 111 22 4 137 41

3 74 15 4 93 28

4 50 10 4 64 19

5 33 7 4 44 13

W.Note 2:

Year Fees Int (T.Loan) Int (W.Cap) Total After tax saving

1 -32 -48 -61.2 -141.2 -98.84

2 -32 -48 -61.2 -141.2 -98.84

3 -32 -48 -61.2 -141.2 -98.84

4 -32 -48 -61.2 -141.2 -98.84

5 -32 -48 -61.2 -141.2 -98.84

Solution 2b):

Year Net Cash Flow D.Factor @20% PV

0 -1230 1 -1230

1 172.16 0..833 143.41

2 194.16 0.694 134.75

6

3 244.16 0.579 141.37

4 235.16 0.482 113.35

5 959.16 0.402 385.58

NPV -311.54

NPV is negative. So reject the proposal as it is not financially viable.

Solution 2 c):

Year Net C.Flow D.factor PV D.factor PV

10% 11%

0 -1230 1 -1230 1 -1230

1 172.16 0.909 156.49 0.901 155.12

2 194.16 0.826 160.38 0.812 157.66

3 244.16 0.751 183.36 0.731 178.48

4 235.16 0.683 160.61 0.659 154.97

5 959.16 0.621 595.64 0.593 568.78

NPV 26.49 -14.99

IRR = 10 + [{1/(26.49 + 14.99)}*26.49] = 10.64

Therefore IRR = 10.64% where NPV will be Zero

Solution 2 d):

If after disposing off the project additional revenue of Rs 500 lacs is generated then it will arise at the end of Year 5. So calculating the present value of this Cash Flow, it will be

Rs 500 * 0.402 = Rs 201 lacs. But NPV negative was Rs 311.54 lacs.

So it will recover Rs 201 lacs but even then the project is not viable because the NPV is negative for Rs 110.54 lacs.

Hence the decision will not change.

7

Problem 3: Conservative Industries Ltd. is considering a proposal for the purchase of a new

machine requiring an outlay of Rs.1500 lacs. Its estimate of the cash flow distribution for the

three years life of the machine is given below:

Rs. In lacs

Year 1 Year 2 Year 3

-------------------------------------------------------------------------------------------------------

Cash flows probability cash flows probability cash flows probability

800 0.1 800 0.1 1200 0.2

600 0.2 700 0.3 900 0.5

400 0.4 600 0.4 600 0.2

200 0.3 500 0.2 300 0.1

The probability distribution is assumed to be independent. The risk-free rate of interest is 5%.

From the above information, determine the following:

a. The expected NPV of the project

b. The standard deviation of the probability distribution of NPV

c. The probability that the NPV will be zero or less.

Solutions – 3a

a) Expected Cash Flow in Year 1 = [(800*0.1)+(600*0.2)+(400*0.4)+(200*0.3)] = 420Expected Cash Flow in Year 2 = [(800*0.1)+(700*0.3)+(600*0.4)+(500*0.2)] = 630Expected Cash Flow in Year 3 = [(1200*0.2)+(900*0.5)+(600*0.2)+(300*0.1)] = 840

Year Cash Flow D.Factor @ 5% PV

0 -1500 1 -1500

1 420 0.952 400

2 630 0.907 571.43

3 840 0.864 725.62

8

NPV 197.05

So Expected NPV is Rs 197.05 lacs

9

Solution 3 b):

For Year 1:

CF Prob CF- Expec (CF-Exp)2 (CF-Exp)2*p

800 0.1 380 144400 14440

600 0.2 180 32400 6480

400 0.4 -20 400 160

200 0.3 -220 48400 14520

Variance 35600

S.D 188.68

For Year 2

CF Prob CF- Expec (CF-Exp)2 (CF-Exp)2*p

800 0.1 170 28900 2890

700 0.3 70 4900 1470

600 0.2 -30 900 180

500 0.4 -130 16900 6760

variance 11300

S.D 106.3

For Year 3

CF Prob CF- Expec (CF-Exp)2 (CF-Exp)2*p

1200 0.2 360 129600 25920

900 0.5 60 3600 1800

600 0.2 -240 57600 11520

300 0.1 -540 291600 29160

Variance 68400

S.D 261.53

10

Standard Deviation of probability Distribution of NPV =

Sq Root of [(188.68/1.05)2 + {106.3/(1.05)2}2 + {261.53/(1.05)3}2]

= 304.35

Solution 3 c):

Probability that NPV will be zero or less:

Z ≤ (0 – 197.05)/ 304.35

≤ -0.647

Area for 0.647 from normal distribution table will be 0.2422

So required area will be = 0.5 – 0.2422

= 0.2578

So probability will be 25.78%

Problem 4: Following are the details related to M/S GLOBAL SPICES, who wants to set up

spices manufacturing unit in India which is estimated to cost Rs.2500 crores:

a. Estimated sales Rs.1500 crores

b. Estimated input costs Rs. in crores

Raw material 700

Consumables 150

Other production overheads 100

Repairs and maintenance 44

Administration overheads 110

Selling overheads 60

c. International prices for spices are about 25% greater than domestic prices on an average.

d. Raw materials and consumables if imported would cost about Rs.600 crores and Rs.200

crores respectively at current prices.

e. Current Re./$ exchange rate is Rs.45/-

11

You are required to compute the Effective rate of Protection (ERP), if any, enjoyed by the

project as well as its Domestic Resource Cost (DRC). Interpret the figures computed by you

clearly stating the assumptions you need to make.

Solutions – 4

Effective rate of protection means % change in Value addition due to Free trade and Tariff value.

Here Selling price with free trade = 1500 crores

Cost of Inputs with free trade = 700 + 150 = 850 crores

Value addition with free trade = 1500 – 850 = 650 crores

And, Selling Price with tariff = 1500*1.25 = 1875 crores

Cost of inputs with tariff = 600 + 200 = 800 crores

Value addition with tariff = 1875 – 800 = 1075 crores

Now, Effective rate of protection = (VA with tariff – VA with free trade) / VA with free trade

= (1075 – 650)/ 650

= 65.38%

Domestic Resource Cost is a technique used to measure the degree of comparative advantage of productive activities. It measures the opportunity cost of producing or saving foreign Exchange. If Domestic Resource cost is less than Foreign Exchange rate, then it is favourable. Here the Exchange rate given is 1$ = Rs 45

And Domestic Resource cost = Opportunity Cost of Domestic resource/ Value added in Border price

12

The effective rate of protection is used to estimate the protection really afforded to domestic producers at each stage of production, i.e., how much extra they can charge and still be competitive with imported goods. In this context, it does not matter whether the final product or the inputs used to make it were actually imported or not. What is important is that they are importable. If so, the implied tariffs should be included in the above formulas because, even if the item was not actually imported, the existence of the tariff should have raised its price in the local market by an equivalent value. The Higher the rate of protection, the higher the protection to domestic producers.

Solution 5: A project is subjected to a preliminary evaluation before a detailed appraisal is done. What is the criteria that are usually applied for such preliminary evaluation? Give brief details.

Solution – 5

Preliminary Evaluation means to check the preliminary viability of project before a detailed appraisal of project regarding the Economic, Technical and other viability, means to create a model and to see how it will work, in case, it is finalized.

Project appraisal is a generic term that refers to the process of assessing, in a structured way, the case for proceeding with a project or proposal.

Process of Project Appraisal includes:

Initial Assessment Define problem and long-list Consult and short-list Develop options Compare and select Project

13

But it’s a long process to follow, so, a preliminary Evaluation technique is used to check the initial Viability of the project, to avoid the unnecessary cost and efforts.

A Preliminary Evaluation will be conducted to evaluate and determine the limitations of the project before any optimization or enhancement is applied. So preliminary Evaluation means to create the working model and then assessing that whether it will work or not? Is there any need for the changes to have better attainment of objectives? The results obtained in this stage serve two important goals:

(1) To provide a better insight into the project specifications which may identify a new issues/problems to consider, and

(2) To compare with the results after enhancements and thereby assess the value of such optimizations.

So project Preliminary Evaluation is the testing level of Project before its full Implementation.

ASSIGNMENT –B

Problem 1: Following are the details related to Ten Investment projects: (Rs. in lacs.)

Project cash outflow in cash outflow in cash outflow in Net present Value

Year 1 Year 2 Year 3

1 20 40 0 12

2 25 35 0 19

3 23 28 5 20

4 30 24 4 22

5 34 21 0 10

6 38 26 10 32

7 19 45 7 14

14

8 12 20 35 24

9 10 33 10 9

10 6 44 9 15

The budget constraints for years 1, 2 and 3 are Rs.150 lacs Rs.200 lacs and Rs.80 lacs respectively.

The following project interrelationships exist:

a. Of the set of projects 3,4 and 8, at most two can be accepted.

b. Projects 5 and 9 are mutually exclusive, but one of the two must be accepted.

c. Project 6 cannot be accepted unless both projects 1 and 10 are accepted.

d. Project 2 can be delayed by a year. Though the cash flows required will be the same, the net present value will drop by 50%.

e. Projects 3 and 7 are complimentary. If the two are accepted together, the total cash flows will be reduced by 10% and net present value will be increased by 12%.

You are required to develop Integer Linear Programme from the above information.

Solutions – 1

1) Let x1, x2, x3, x4, x5, x6, x7, x8, x9, x10 be the investment in ten investment opportunities respectively.

Now, As per Integer Linear Programme, the equations will be:

Maximize z = 12x1 + 19x2 + 20x3 + 22x4 + 10x5 + 32x6 + 14x7 + 24x8 + 9x9 + 15x10

Subject to constraints:

20x1 + 25x2 + 23x3 +30x4 + 34x5 + 38x6 + 19x7 + 12x8 + 10x9 + 6x10 ≤ 15040x1 + 35x2 + 28x3 +24x4 + 21x5 + 26x6 + 45x7 + 20x8 + 33x9 + 44x10 ≤ 2005x3 + 4x4 + 10x6 + 7x7 + 35x8 + 10x9 + 9x10 ≤ 80x3 + x4 + x8 ≤ 2x5 – x9 ≤ 1x6 ≤ x1 + x10xj € (0, 1 ) where j = 1,2,3……..10

15

Problem 2: Why Conflicts arise between two or more mutually exclusive projects? Analyse the situations where conflicts may arise and suggest how these conflicts can be resolved.

Solutions 2: Mutually Exclusive Project means that almost one project can accept from them. Means it’s not possible to accept all of them because they lead to same results and are alternatives for each other.

Sometimes conflicts arise in two or more mutually exclusive projects due to:

I. Cash Flow PatternII. Different Lives

Situations where conflicts may arise:

i) Cash Flow pattern

Year Cash Flow Cash Flow

Project A Project B

0 -100000 -100000

1 70000 20000

2 60000 50000

3 20000 100000

NPV @ 10% 28249 (Rank 2) 34636 (Rank 1)

IRR 28.70% (Rank 1) 24.57% (Rank 2)

So the conflict is IRR method prefers Project A but NPV Method Prefers Project B.

But as per Expert View, NPV method should be decisive method as it gives more correct and precise results. So project B should be preferred.

16

ii) Different Lives:

Year Cash Flow Cash Flow

Project A Project B

0 -50000 -90000

1 33000 30000

2 33000 30000

3 33000 30000

4 30000

5 30000

6 30000

NPV @10% 32066 (Rank 2) 40658 (rank 1)

IRR 43.81% (Rank 1) 24.29% (rank 2)

As same as above the conflict is between NPV Method and IRR Method decision. So again, the NPV method would be preferred and Project B will be selected.

Problem 3: Write a note on lending norms and policies of the institutions.

Solution 3: Lending means to grant advances to borrowers and lending norms and policies means the guidelines and controlling power of such lending. An institutions statement of its basic lending philosophy, including standards, guidelines, and limitations that are to be observed and adhered to in the process of deciding whether to grant a loan is called Lending Norms and policies of institutions. Lending norms and policies of institution means the policies and norms adopted by the institution for its borrowers and clients.

Policies that are set in place to create universal guidelines within a financial institution for all potential borrowers.

17

Lending standards may vary from one financial institution to another and from one region to another.

For example, a national bank may have lower requirements or lending standards for potential clients than savings and loan institutions. This may be because national banks generally have greater access to capital.

Lending Norms and policies are set as per the strategic issues and goal of an institution.

Lending Norms are set by the institutions to have assurance of fulfillment of plans.

Lending policies ensures the fair treatment to all borrowers and hence adds value to the institutions.

CASE STUDY

A new company incorporated recently in Andhra Pradesh is in the processing of setting up a 10 million tonnes per annum capacity cement project and has appointed a new project manager to study various aspects of project appraisal in respect of the proposed cement project. Put yourself in the place of the project manager and present the appraisal process covering all the aspects.

Solutions: Project Assessment is a means of analyzing the prospects of project to check the feasibility from a no of point of views. Some measures, which are considered for Project appraisal, are:

Legal Framework: Some Businesses are required to follow some legal Policies and rules and without following them, it’s not possible to go for them. So firstly we will check for any such legal requirement regarding license or Legal policies or some other legal framework. So that Legal compliance is made on time and project can be successful.

Investment Cost: Project Appraisal also contains some technique for evaluating the cost of project, which is the main factor for any project,

18

because the feasibility of project depends upon the cost that is required to invest in the project. Also it’s seen that what the phase of expenditure and whether the cost is justified. And what are the contingencies regarding the variance in the cost estimate. All must be considered while managing the project. Whether local currency is required or foreign currency is also required for the project.

Environment Compatibility: Project is also seen to have Environmental Compatibility because in Cement Project, there will be some waste material which will be required to dispose, then the disposal method should be the least polluting. Means the project should be Environment friendly to have good reputation in the Society.

Economic + Financial Viability: Every project is required Investment if it is economically and Financially Viable otherwise rejected. So first of all cost effectiveness is checked and capital budgeting technique such as Payback period, NPV, Economic IRR, Financial IRR are analyzed to check for the financial viability of project. If NPV is positive, then the project will provide benefits. And the best method is NPV for financial analysis.

Technology and Design: Project success depends upon the technology used because an out dated technology can never help to survive in the market. Project must have capability to adapt for technical progress and all factors regarding life expectancy and technical capacity need to be checked. As per the requirement, it must meet the capacity requirement for 10 million tones processing per month; otherwise, it will be of no use.

Market Prospects: Project can be successful if market will adopt it and will give a positive response. So demand pattern, Product Quality, its prices, degree of Competition all need to be analyzed.

Strategically Issue: Project must be that which can add some value to the business and is in line with the Organizational goals. It must be a value addition for the Business. So before deciding for the project, it

19

must be checked that whether it can go with organizational goals or not.

So all above are steps for Project Appraisal to decide whether the project is viable for the business or not.

ASSIGNMENT – CAssignment-C1. The importance of capital expenditure decisions stems from inter-related

reason(s) likea. Long-term effectsb. Substantial Outlaysc. Measurement problemsd. Both (a) and (b) abovee. Both (b) and (c) above

Answer: D

2. Which of the following is/are correct?a. Accept when Benefit Cost Ratio is greater than oneb. Reject when Payback Period is greater than target period.c. Reject when Accounting Rate of Return is less than target rated. Both (a) and (c) abovee. All of (a), (b) and (c) above

Answer: E

3. Which of the following is false?a. A capital project involves a current outlay of funds which give a

stream of benefits extending far into future.b. A capital project represents a scheme for investing resources that can

be analyzed and appraised reasonably independently.

20

c. Capital Budgeting is a simple process which may be divided into five broad phases of planning, analysis, selection, implementation and review.

d. Capital expenditure decisions pose difficulties such as uncertainty and temporal spread.

e. Both (b) and (d) aboveAnswer: B

4. Which of the following is not an investment strategy? a. Capacity expansionb. Vertical integrationc. Modernizationd. Conglomerate Diversification e. Merger

Answer: B

5. Which of the following is/are not the method(s) of measuring individual creativity?a. Attribute listingb. Brainstormingc. Nominal Group Techniqued. Black Boxe. Both (b) and (c) above

Answer: E 6. Which of the following is not an entry barrier, which results in positive

NPV?a. Economies of scaleb. Product differentiationc. Technological edged. Low tariffse. Marketing reach

Answer: A

21

7. Which of the following is not a causal method? a. Chain Ratio Methodb. Moving Average Methodc. Leading Indicator Methodd. Econometric Methode. End Use Method

Answer: B

8. When the income level was Rs.1000, the quantity demanded was 50 last year. In this year, the demand went up to Rs.55, when the income rose to Rs.1020. What is the income elasticity of demand this year?a. 4.81.b. 1.122c. 0.25d. 4.10e. 4.00

Answer: A

9. The choice of technology is influenced by a variety of considerations. Which of them is/are not such consideration(s)?a. Plant capacityb. Investment outlayc. Production costsd. Product pricese. Ease of absorption

Answer: D

10. Pre-operative expenses do not includea. Company flotation expensesb. Interest during construction periodc. Brokerage and commission on capitald. Both (a) and (c) abovee. Both (b) and (c) above

Answer: B

22

11. To meet the cost of project, which of the following is not a means of finance?a. Deferred Creditb. Debenture Capitalc. Margin money for working capital. d. Both (a) and (c) abovee. Both (b) and (c) above

Answer: D

12. The break-even point in percentage terms, for the data (Optimum Capacity: 90%, Sales at 100% Capacity: Rs.1,80,000, Variable Cost: 60% of Sales, and Fixed Costs: Rs.36,000) would bea. 55.56%b. 50.00%c. 45.00%d. 33.33%e. 30.00%

Answer: B

13. Which of the following statements is/are true?a. Accept when BCR is greater than 1 and NBCR is greater than 0.b. Indifferent when BCR is equal to 1 and NBCR is equal to 0.c. Accept when BCR is less than 1 and NBCR is less than 0.d. Both (a) and (b) abovee. All of (a), (b) and (c) above.

Answer: A

14. Which of the following is/are correct?a. Scenario analysis looks at some plausible scenarios and examines how

the NPV behaves.b. Monte Carlo Simulation is a flexible and versatile tool for generating

probabilities of NPVs. c. Decision Tree Analysis analyses risk free situations in decision makingd. Both (a) and (b) abovee. All (a), (b) and (c) above

Answer: D

15. Which of the following is/are true in respect of ‘doubling the period by using the more accurate Rule of Thumb’?

23

a. At 10% interest rate, the doubling period is 7.25 yearsb. At 15% interest rate, the doubling period is 4.95 yearsc. At 10% interest rate, the doubling period is 7.20 yearsd. Both (a) and (b) abovee. Both (b) and (c) above

Answer: D

16. Capital recovery factor is thea. Inverse of future value interest factor for annuityb. Inverse of future value interest factor c. Inverse of present value interest factor for annuityd. Inverse of present value interest factor e. Same as present value interest factor for annuity

Answer: C

17. During the current year, ABC Ltd paid a dividend of Rs.20, which is expected to grow at a rate of 5% indefinitely. If the current market price of ABC Ltd is Rs.84, the cost of equity will be

a. Rs.23.8%b. Rs.25%c. Rs.30%d. Rs.28.8%e. 16.8%Answer: B

18. The investment required for creating a capacity of 5,000 units for a product is Rs.9 crore. What is the investment required for creating a capacity of 20,000 units, if the capacity cost factor is 0.5?a. Rs. 36 croreb. Rs. 18 crorec. Rs. 4.5 crored. Rs. 13.5 crore e. Rs. 22.5 crore

Answer: B

19. Which of the following is not a step in Decision Tree Analysis?a. Identifying the problem and alternativesb. Evaluating various decision alternatives

24

c. Delineating the decision treed. Grouping of probabilitiese. Specifying probabilities and monetary outcomes.

Answer: C

20. Which of the following is/are false?a. Capital projects like securities are usually divisibleb. Capital projects are assessed in terms of NPVs whereas financial

securities are assessed in terms of rate of return.c. All the points lying on a given risk-return indifference curve offer the

same level of satisfaction.d. Both (a) and (c) above e. Both (b) and (c) above

Answer: A

21. Social Cost Benefit Analysis (SCBA) focuses on social costs and benefits, but these often tend to differ from the monetary costs and benefits of the projects. The principal sources of discrepancy are:a. Taxesb. Market imperfections c. Internalitiesd. Both (a) and (c) abovee. Both (a) and (b) above

Answer: C

22. Which of the following is/are false?a. The extent of which a project is sheltered is measured by Domestic

Resource Cost. b. The difference between the selling price and input costs is the value

added.c. Economic Rate of Return is simply the Internal Rate of Return of the

stream of social costs and benefits.

25

d. If the value of Domestic Resource Cost is more than the exchange rate, it is favorable.

e. Both (a) and (d) aboveAnswer: E

23. Which of the following is/are false? a. Because of constraints like project dependence, capital rationing, and

project indivisibility, investment projects can be viewed in isolation.b. Capital projects are generally indivisible, which means that projects

can be accepted partially.c. Capital rationing exists when funds available for investment are

inadequate. d. Both (a) and (b) abovee. Both (b) and (c above

Answer: B

24. If a project has Effective Rate of Protection (ERP) of 38% and if the Exchange Rate is Rs.40 to a Dollar, then the Domestic Resource Cost (DRC) of the project is a. Rs. 55.00b. Rs. 67.00c. Rs. 55.20d. Rs. 53.20e. Rs. 15.20

Answer: D25. In respect of a project A, you are given that the Initial Investment is

Rs.1,30,000, the terminal value is Rs.2,14,720, the annual cash inflow is Rs.40,000 and the project life is 4 years, the reinvestment rate assumed for the above project isa. 20%b. 5.37%c. 4%d. 1.34%ne. 7.5%

Answer: A

26. Domestic Resource Cost is associated with

26

a. The cost of raising resources within the countryb. The opportunity cost of depleting the domestic resourcesc. The cost of environmental benefitd. The usage of domestic resources vis-à-vis saving/earning of one unit of

foreign exchangee. Rate of Protection offered to domestic industries

Answer: D

27. Which of the following is/are false?a. Detailed Project Report (DPR) is generally prepared for submission to

the Financial Institutions (FIs)b. The format of DPR and the application form for the All-India FIs are

one and the same. c. There is a set pattern in which the DPR has to be presented.d. There is no set pattern in which the DPR has to be presented.e. Both (b) and (c) above

Answer: C

28. Which of the following is/are not major reason(s) for the failure of a project?a. Inefficiency of staff managersb. Poor project planningc. Wrong choice of technologyd. Both (b) and (c) abovee. All of (a), (b) and (c) above

Answer: C

29. Which of the following is/are true in respect of a project?a. A project is a complex of routine activitiesb. A project has specific starting and ending points c. A project is a permanent endeavor to create a unique product d. Both (a) and (c) abovee. All of (a), (b) and (c) above.

Answer: B

30. Delphi Method is aa. Technique in which the executives are asked to forecast demand

27

subjectively.b. Technique in which salesmen of different territories are asked to

collect information regarding buying plans of users.c. Technique in which estimates are called from a group of experts in

the field. But the group is not allowed to debate each other’s opinion independently.

d. Technique in which a group discussion is conducted to pool up creative ideas.

e. All of (a), (b) and (d) above. Answer: A

31. Which of the following is a time series model of demand forecasting? a. Exponential smoothing methodb. Leading indicator methodc. Consumption level methodd. Chain ratio method e. End use method

Answer: A

32. Which of the following is not a characteristic of a project?a. Specific goalsb. Unique activitiesc. Specified timed. Sequence of activitiese. Unspecified activities

Answer: E 33. Which of the following methods is/are qualitative for demand forecasting?

a. Field sales force methodb. Jury of executive opinion methodc. Delphi methodd. Both (a) and (b) abovee. All of (a), (b) and (c) above

28

Answer: E

34. Generation of project ideas based on individual creativity does not includea. Attribute listingb. Black box c. Directed dreamingd. Brain storminge. Checklist

Answer: D35. Which of the following has/have impact on the plant location?

a. Government policies/regulations.b. Raw material availability and their proximityc. Availability of infrastructured. Both (a) and (c) abovee. All of (a), (b) and (c) above

Answer: D

36. Which of the following is not included in the estimation of cost of the project?a. Margin money for working capitalb. Technical know-how feesc. Contingencies on firm costsd. Expenses on foreign and Indian technicianse. Both (a) and (b) above.

Answer: E

37. Pre-operative expenses do not includea. Insurance during constructionb. Interest during construction periodc. Company floatation costsd. Both (a) and (b) abovee. Both (b) and (c) above

Answer: A

29

38. Which of the following statements is/are false?a. Pre-operative expenses are allocated only to depreciable assetsb. Cost of land and site development costs go togetherc. Margin money for working capital is included under cost of capital. d. Contingency need to be provided for all assets both already purchased

and yet to be purchased e. All of (a), (b) and (c) above.

Answer: E

39. The break-even point in percentage terms, if sales are Rs.2000 crore, variable cost is 60% of sales, and fixed cost is :Rs.400 crore, would bea. 50.00%b. 20.00%c. 30.00%d. 33.33%e. 08.00%

Answer: A

40. Which of the following appraisal techniques help(s) in achieving the objective of shareholder’s wealth maximization?a. IRRb. NPVc. BCRd. NBCR e. Both (a) and (b) above

Answer: B

30