Model Question Paper Project Management - I (PM1)

Section A
Answer all questions. 1. 2. 3. 4. 5. 6. ( 60 marks) Planning refers to the process of designing the future course of action for an organization to achieve specific goals. Discuss the nature of planning. ( 10 marks) Managerial behavior is influenced by the managers assumptions about people and the related theories. Explain the Edgar H. Scheins model of the complex person. ( 10 marks) Power is the ability of individuals or groups to induce or influence the beliefs or actions of other persons and groups. Discuss the various bases of power in an organization. ( 10 marks) The concepts of time value of money provide a fundamental background for the valuation of bonds and stocks. Explain the various concepts of value. ( 10 marks) Organizations implement control in a number of ways and at different levels. Discuss the various types of control based on timing or stage in the production process. ( 10 marks) Companies issue securities to the public in the primary market and get them listed on the stock exchanges. Discuss the major activities involved in making a public issue of securities. ( 10 marks)

Section B
Answer all questions. 7. McWellon India plans to install an additional capacity plant costing Rs. 30 crores. The sources of finance estimated by the finance manager are: Rs. 1.50 crores of equity, Rs. 86 lakhs of term loans and Rs. 30 lakhs of general reserve. The companys estimated profit (after interest and taxes) by the end of financial year would be Rs. 50 lakhs. The company has to pay interest on borrowed funds at 15% and it comes under tax bracket of 60%. The company has issued 1 lakh equity shares of face value Rs.100 each at market price of Rs.150 per share. The company can pay 40% of its earning per share (EPS) as dividends. You are required to calculate: i. 8. The cost of equity ( 40 marks)

ii. The weighted average cost of capital for the company. ( 8 marks) The balance sheet of Crayon India Pvt. Ltd., as on March 31, 2008 is given below: Liabilities (Rs. in Lakhs) Assets (Rs. in Lakhs) Paid-up share capital 25 Net fixed assets 35 Reserves and surplus 20 Cash and bank 14 Long term loan 12 Inventory 18 Trade creditors 18 Receivables 16 Accrued expenses 5 Provisions 3 Total 83 Total 83 The inventory on April 01, 2007 was Rs.15 lakh. The sales and purchases for the year were Rs.92 lakh and Rs.35 lakh respectively. You are required to calculate the following: i. ii. iii. Gross Profit margin. Current ratio. Quick ratio. ( 2 marks) ( 2 marks) ( 2 marks)

9.

iv. Debt equity ratio. ( 2 marks) v. Debt asset ratio. ( 2 marks) Ashma Ltd. is evaluating two proposed projects A and B. The projected cash flows of the projects are as follows:

CO

C1

C2

C3

Project A -8,000 5,000 4,000 2,000 Project B -12,000 8,000 7,000 5,000 Suppose you are the project manager of the company, you are required to recommend which project should be selected on the basis of net benefit-cost ratios when required rate of return is 15%? ( 6 marks)

Caselet
Read the caselet carefully and answer the following questions: 10. 11. Managerial decision-making can be of two types - programmed and non-programmed. Which type of decision was Mrudhula required to make? Justify. ( 7 marks) Discuss the various suggestions that were given to Mrudhula to help her in taking the decision whether to lead Perk into the digital age. ( 9 marks) Mrudhula, Chief Executive Officer (CEO) of Perk Electronics, faced a difficult decision. Her company was a leader in making parts for standard cassette and reel-to-reel tape recorders. Mrudhula had watched with some misgivings as digital technology hit the market in the form of compact disc players and she had to decide whether to lead Perk into the digital age. Even though digital tape players were encountering legal hurdles in the American market, they were starting to take hold in Japan and Europe. Was America-and Perk-ready for them? Mrudhula had plenty of help in making the decision. First she met with the companys marketing division. Everyone had an opinion. Some predicted that every audio component would be digital by the turn of the century; others believed the popularity of even compact disc players was already waning. Everyone agreed that they needed time to conduct surveys, gather data, and find out what products the public really wanted and how much they would be willing to pay for them. The people in research and development had a different approach. They were tired of making small improvements in a mature and perfected product. They had been reading technical material about digital tape, and they saw it as an exciting new technology that would give an innovative company a chance to make it big. Time was of the essence, they insisted. If Perk was to become an important supplier of parts for the new decks, it had to have the components ready. Delay would be fatal to the product. A meeting of the Vice Presidents produced a scenario with which Mrudhula was all too familiar. Years ago these executives had discovered that they could not outargue one another in these meetings, but they had faith in their staffs abilities to succeed where they had failed. Before Mrudhula even walked into the room, she knew what their recommendation would be: to create a committee of representatives from each division and let them thoroughly investigate all aspects of the decision. Such an approach had worked before, but Mrudhula was not sure it was right this time. Desperate to make the decision and get it out of her mind, Mrudhula mentioned it to her fifteenyear-old son, who, it turned out, knew everything about digital tape. In fact, he told her, one of his friends-the rich one-had been holding off on buying a new tape deck so that he would be on the cutting edge of digital recording. Its gotta happen, Mom, her son said. People want it. Intellectually, Mrudhula believed he was right. The past thirty years had shown that Americans had an insatiable appetite for electronic gadgets and marvels. Quadraphonic sound and video discs were the only exceptions she could think of to the rule that if someone invented an improved way of reproducing images or sound, someone else would want to buy it. But intuitively, Mrudhula was not so sure. She had a bad feeling about the new technology. She believed the record companies, which had lost the battle to tape manufacturers, might get together with compact disc makers and audio equipment manufacturers to stop the digital technology from entering the American market. So far, no American company had invested substantially in the technology, so no one had an interest in funding the legal battle to remove the barriers to the new machines. Exhausted, Mrudhula went to bed. She hoped that somehow her subconscious mind would sort out all the important factors and she would wake up knowing the right decision. END OF CASELET END OF QUESTION PAPER

Suggested Answers Project Management - I (PM1)

Section A
1. NATURE OF PLANNING Planning is Goal-oriented Planning is a means for achieving set goals or objectives. It is of no value unless it contributes in some positive way to the achievement of desired goals. Well-defined goals are essential for effective planning. Planning is an Intellectual or Rational Process Planning requires managers to apply their imagination, creativity and their analytical skills to tackle problematic situations. Planning also requires foresight and sound judgement on the part of a manager. Thus, planning can be regarded as the outcome of an intellectual or rational process. Planning is a Primary Function Planning is the initial activity in the management process. All other functions of management, i.e. organizing, staffing, directing and controlling, can be carried out efficiently only if they have been properly planned. Planning thus precedes the execution of all other managerial functions. Planning is All-pervasive The planning function extends throughout the organization. It is an essential aspect of management at all executive levels. Managers at the top level prepare long-term plans for the organization, which would enable it to achieve its overall objectives. Middle-level managers formulate departmental and functional plans for the medium term, while managers at the lowest level prepare operating and short-term plans. Thus, the scope, extent and nature of planning tend to vary at different levels of management. Planning is Forward-looking Planning is primarily concerned with anticipating the future. Predicting future trends and preparing for them is an integral part of planning. Thus, accurate forecasting is essential for planning. Planning is a Perpetual Process Planning is a continuous activity; it goes on as long as an organization exists. Plans may be updated, modified, or replaced by new ones. When a situation calls for a totally new set of goals, new plans take the place of existing ones. Plans are changed or modified, but are never abandoned. Planning is an Integrated Process Plans made at different levels are interdependent and interrelated. The top level of an organization develops strategic plans, on the basis of which the middle level of management develops tactical plans. In turn, the lower levels of management develop operational plans on the basis of tactical plans. Thus, plans constitute a hierarchy in the organization. Even though plans are made at different levels, they should be in tandem with corporate objectives. These plans can be either long-term plans or short-term plans. Whatever be the term of the plans, they should be well coordinated so as to achieve the goals of the organization within a definite time-horizon. Planning Involves Choice Planning is essentially a decision-making process that involves the selection of a suitable course of action. Usually, several alternatives are available for achieving a particular objective or set of objectives. Since all may not be equally feasible and suitable for the organization, only the best among the alternatives has to be selected. Thus, plans are the decisions made after evaluation of alternative courses of action. 2. Edgar H. Schein's Model of the Complex Person Edgar H. Schein based his study of human behavior on four concepts. These concepts are based on rationaleconomic assumptions, social assumptions, self-actualizing assumptions, and complex assumptions. Rational-economic Assumptions The concept of rational-economic assumptions is based on the idea that people are primarily motivated by economic incentives. Individuals always prefer economic incentives to all other rewards at work. Economic incentives are controlled by the organization and the employees of the organization are passive and have no say in

this matter. They are motivated, manipulated and controlled by the organization. The assumptions made here are similar to the Theory X assumptions proposed by McGregor, which will be discussed later in the chapter. Social Assumptions This concept is based on Elton Mayo's idea that, basically, people are motivated by social needs - the need to belong, to feel part of a group, to display loyalty, and to give and receive friendship, acceptance and support from others at work. Thus, the social forces of the peer group play a more important role than controls imposed by managers in determining the behavior of individuals. This concept stresses the need for a manager to understand people's feelings and their need to identify with a group, and to harness these needs for the benefit of the organization. Self-actualization Assumptions The concept of self-actualization suggests that people are primarily influenced by then-own needs and motives. According to this concept, motives fal! into five categories. They form a hierarchy ranging from the simple need for survival to the highest need of self-actualization which involves the maximum use of a person's potential. This concept highlights the 'intrinsic' satisfaction that an individual derives from the tasks and responsibilities associated with his or her job. Complex Assumptions This concept presents Schein's own view of people. According to this concept, people are complex and highly variable in their behavior. They develop and change in response to internal processes and external factors. Further, as time progresses, new motives develop in people and they learn to respond to different managerial strategies. Thus, even if a manager knows his subordinates well, he should always be prepared for surprises. 3. POWER: BASES OF POWER Power, a much broader concept than authority, is the ability of individuals or groups to induce or influence the beliefs or actions of other persons and groups.Formal authority is a type of power. It refers to the right to exert influence. Formal authority is derived from the formal position defined by the organization, and individuals who have this authority can use it only within prescribed limits. By conferring formal authority upon an individual, the organization makes it lawful or legitimate for the individual to exercise this authority. Power is the ability to influence other people and their behavior. A manager is said to have power if he can change the behavior or attitudes of his employees. Thus, while authority is conferred by the organization, the personality and actions of an individual give him the power to influence others. Unlike authority, power requires no formal position. Power can be derived from not only the job position, but also from expertise, technical competence, and seniority in the organization. Legitimate Power The type of power which is very important in the organizational context is legitimate power. Legitimate power is similar to authority, and exists when a subordinate acknowledges the right of a superior to exert influence within certain limits. The rights, obligations and duties associated with a certain position in an organization provides legitimate power to the individual holding that position. For example, a Ticket Collector in the Railways has the power to levy a fine on individuals who travel without a ticket. This power is legitimate power since it is conferred on him by the institution - in this case, the Railways. Power works both ways - downward and upward. For example, a plant manager has the right to establish reasonable work schedules. In this case, he is exercising 'downward legitimate power.' A guard asking the company's president to present an identification card before being allowed onto the premises is exercising 'upward legitimate power.' Expert Power Power may also be derived from the expertise of a person or a group. This is known as expert power. Expert power is based on the belief that the influencer has some relevant expertise, special knowledge or skill which the influencee lacks. For example, doctors, lawyers, engineers and university professors are able to influence others because they are very knowledgeable in their specialized field. Referent Power Another form of power is referent power. Referent power refers to the desire of the influencee to identify with or imitate the influencer. It may be held by a person or a group. In other words, it is the influence which certain persons or groups are able to exert on others, and arises due to the latter's belief in them and their ideas. For example, Martin Luther King hardly had any legitimate power, but he was able to influence many people by the

sheer force of his ideas, his magnetic personality, and his ability to preach. Similarly, a sportsperson or a movie star or a politician may possess referent power. Referent power functions at superior and peer levels. For instance, charismatic superiors and peers may influence their subordinates and colleagues to agree to their viewpoints. The strength of referent power depends upon the respect and admiration the superior or peer commands from the subordinates and colleagues respectively. . . . Reward Power The basis for reward power is the ability of the influencer to reward the influencee for performing a job well or meeting other organizational requirements. For example, a university professor holds a considerable amount of reward power, for he or she has the power to award grades to the students. Coercive Power Coercive power is the negative dimension of reward power. It is based on the influencer's ability to punish the influencee for failing to perform a job well, Punishment may involve pulling up a subordinate or withholding a hike in pay, the loss of a minor privilege, or even the loss of the job. Generally, coercive power is used in organizations to ensure a minimum standard of performance. Concepts of Value Book value is an accounting concept. Assets are recorded at historical costs and they are depreciated over years. Book value may include intangible assets at acquisition cost minus amortized value. The book value of debt is stated at the outstanding amount. The difference between the book value of assets and liabilities is equal to shareholder's funds or net worth (which is equal to paid-up equity capital plus reserves and surplus). Replacement value is the amount that a company would be required to spend if it were to replace its existing assets in the current condition. Liquidation value is the amount that a company can realize if it sells its assets after having terminated its business. It is generally a minimum value which a company may accept if it sells its business. Going concern value is the amount that a company can realize if it sells its business as an operating one. Its value would always be higher than the liquidation value, the difference accounting for the usefulness of assets and value of intangibles. Market value of an asset or security is the current price at which the asset or the security is being sold or bought in the market. Types of control based on timing: Feedforward control In feedforward control, inputs are monitored to ensure that they meet the standards necessary for the transformation process. Inputs in the production process may include materials, people, finances, time and other resources used by an organization. For effective control,, managers need a system that warns them well in time of the need to take corrective action and informs them of the problems that could arise if they failed to do so. Feedforward control enables managers to prevent serious difficulties from arising in the production process. Since feedforward control is future oriented, it is sometimes referred to as precontrol, preaction or preliminary control. Feedforward controls use policies, procedures, and rules to limit activities in advance and minimize the likelihood of significant deviations requiring corrective measures. Concurrent control Concurrent control regulates ongoing activities that are a part of the transformation process to ensure that they conform to organizational standards. Such controls are also known as "steering controls." They are used during the implementation of plans (i.e., during the performance of an activity), and are perhaps the most frequently used controls. Concurrent control techniques help managers identify deviations from predetermined standards and allow remedial measures to be taken while the activity is being performed. Since concurrent controls involve checkpoints at which decisions are made regarding the continuance of a process, they are sometimes referred to as screening or yes-no controls. Quality control inspections, approval of requisitions, safety checks and legal approval of contracts are common examples of yes-no controls. Feedback control Feedback control measures the results and compares them against the predetermined standards. This form of control is exercised after a product or service has been produced to ensure that the final output meets quality standards and goals. The aim of feedback control is to identify deviations that went undetected earlier. A major benefit of feedback control is that it provides information that facilitates the planning process. Data provided by

4.

5.

this type of control helps managers revise existing plans and formulate new ones. Feedback control is also useful for rewarding employee performance by providing information about the output produced by the employee. Final inspections, summary of activity reports, and balance sheets are examples of feedback control. Feedforward control is considered as preventive control since it involves implementation of control measures before the activities are performed. Concurrent' steering/yes-no controls and feedback controls are known as corrective controls since they involve the implementation of control measures while the activities are in progress or after the activities have been performed. Although preventive (feedforward) and corrective controls (concurrent, steering, yes-no and feedback controls) are used at different phases in a firm's operations, both play an important role in ensuring successful performance. Multiple controls Multiple control systems use two or more control processes and involve several strategic control points. Such control systems were developed because of the need for different controls for different phases of a firm's operations. Firms that do not have such control systems experience difficulties, forcing managers to reevaluate their control process. PUBLIC ISSUE Companies issue securities to the public in the primary market and get them listed on the stock exchanges. These securities are then traded in the secondary market. The major activities involved in making a public issue of securities are as follows: Appointment of the Lead Manager Before making a public issue of securities the firm should appoint a SEBI registered Category-I Merchant Banker to manage the issue. The lead manager will be responsible for all the pre and the post-issue activities, liaison with the other- intermediaries, statutory bodies like SEBI, Stock Exchanges and the Registrar of Companies (ROC) and finally ensures that the securities are listed on the stock exchanges. Preparation of the Prospectus The Lead Manager is responsible for the preparation of the prospectus. The prospectus is a document that disseminates all the information about the company, the promoters, the objectives of the issue and has the contents as specified by the Company Law. The final prospectus has to be forwarded to SEBI and the listing Stock Exchange. Appointment of Intermediaries The other intermediaries who are involved in the public issue of securities are underwriters, registrars, bankers to the issue, brokers and advertising agencies. Apart from these it also involves promotion of the issue, printing and despatch of prospectus and application forms, obtaining statutory clearances, filing the initial listing application, final allotment and refund activities. The cost of a public issue ranges between 12-15% of the issue size and can go up to 20% in bad market conditions.

6.

Section B
7. i.

Cost of equity (k e ) =

DPS 100 MP

k e = Cost of Equity Capital

DPS = Dividend Per Share (DPS = 40% of EPS) = 0.4 50 = Rs.20
MP = Market price of share So, ii.
Cost of equity (k e ) = 20 100 = 13% .\ 150

The weighted average cost of capital: Sources of Capital Debt Equity Reserve Amount (cr.) 0.86 1.50 0.30 2.66 Specific Cost 6% 13% 13% Total Cost 0.0516 0.1950 0.0390 0.2856

WACC =

0.2856 100 = 10.73% . 2.66

Working Notes:

EPS =

Earning after Interest and Taxes 50, 00, 000 = = Rs.50 No.of Shares 1, 00, 000 .

Cost of debt k d = I (1 t ) = 15(1 0.60) = 6% .

8.

( )

a.

Gross profit margin Cost of goods sold

Sales Gross profit margin

= = = = = = = = = = =

Sales Cost of goods sold Sales Opening stock + Purchases Closing stock 15 +35 18 Rs.32 lakh Rs.92 lakh 92 32 92 = 0.6522 i.e. 65.22%.

b.

Current ratio Current assets Current liabilities

Current Assets Current Liabilities Cash & Bank + Inventory (i.e. closing stock) + Receivables 14 +18 + 16 = Rs.48 lakh Trade creditors + Accrued expenses + Provisions 18 +5 + 3 = Rs.26 lakh 48 26 = 1.846 or 1.85 Current Assets Inventories Current Liabilities
48 18 26 = 1.154.

Current ratio c. Quick ratio =

= =

d.

Debt equity ratio Total debt = Equity

= =

Total Debt Equity Long term loan + Trade creditors + Accrued expenses + Provisions 12 + 18 +5 + 3 = Rs.38 lakh Paid up share capital + Reserves and surplus 25 + 20 Rs.45 lakh
38 45 = 0.84.

= = =

Debt equity ratio

e.

Debt asset ratio

= =

Total Debt Total Asset

38 83 = 0.46.

9.

Project A Present Value of investment at 15%

5000 4000 2000 + + = 2 3 PV = (1.15 ) (1.15 ) (1.15 ) 4348+3024+1315 = Rs.8,687

NBCR =

8, 687 8, 000 PV I = 8, 000 = 0.086 I

Project B Present Value of investment at 15%

8000 7000 5000 + + = 2 3 PV = (1.15 ) (1.15 ) (1.15 ) 6,956+5,293+3,287 = Rs.15,537

NBCR = PV I 15,537 12, 000 = 12, 000 = 0.2947 I

10.

11.

On the basis of NBCR, Project B should be accepted by Ashma Ltd.. Mrudhula, chief executive officer of Perk Electronics, faced a difficult decision. Her company was a leader in making parts for standard cassette and reel-to-reel tape recorders. Mrudhula had watched with some misgivings as digital technology hit the market in the form of compact disc players, and she had to decide whether to lead Perk into the digital age. The decision that Perk Electronics takes falls under the non-programmed decision type. A new problem or decision making situation which involves the development and evaluation of alternatives without the aid of a decision rule is generally called a non-programmed decision. Due to the complexity involved in making nonprogrammed decisions, these decisions are made at the top management level in organizations and determine the long-term effectiveness of these organizations. Decisions such as how to market an entirely new product or service, whether it is advisable to acquire or merge with a particular company etc. are examples of non-programmed decisions. Non-programmed decisions are characterized by a poorly defined structure and lack of goal clarity. They are made in the absence of reliable and well defined sources of information and lack of an explicit procedure for decision making which, thus is responsible for the poorly defined structure of non-programmed decisions. Various suggestions given to Mrudhula Mrudhula had to decide whether to lead Perk Electronics into the digital age. She first met with the companys marketing division and that division asked for sometime to conduct surveys, gather data to make the decision. The people in research and development had a different approach. They were tired of making small improvements in a mature and perfected product. They had been reading technical material about digital tape, and they saw it as an exciting new technology that would give an innovative company a chance to make it big. Time was of the essence, they insisted. If Perk was to become an important supplier of parts for the new decks, it had to have the components ready. Delay would be fatal to the product. A meeting of the Vice Presidents recommended to create a committee of representatives from each division and let them thoroughly investigate all aspects of the decision. Mrudhulas fifteen-year-old son, who, it turned out, knew everything about digital tape. In fact, he told her, one of his friendsthe rich onehad been holding off on buying a new tape deck so that he would be on the cutting edge of digital recording. Its gotta happen, Mom, her son said. People want it. Mrudhula believed that Americans had an insatiable appetite for electronic gadgets and marvels. But she had a bad feeling about the new technology. She believed the record companies, which had lost the battle to tape manufacturers, might get together with compact disc makers and audio equipment manufacturers to stop the digital technology from entering the American market. So far, no American company had invested substantially in the technology, so no one had an interest in funding the legal battle to remove the barriers to the new machines. In this way Mrudhula had plenty of help in making the decision.