Professional Documents
Culture Documents
)
Examination, July/August 2006
(Updated Scheme)
MANAGEMENT
F - 6 :Project ~ppraisaland Finance .
Time: 3 Hours Max. Marks: 75
SECTION - A .
SECTION - B
1 5. XYZ Ltd. is considering a project with the following expected cash flows initial
i
I
I
investment Rs. 1,00,000. Expected cash inflows 1" year Rs. 70,000, 2ndyear
Rs. 60,000, 3d year Rs. 45,000. The cost of capital is 10%. Due to uncertainty
of future cash flows, the management decides to reduce to cash inflows to certainty ,
I
equivalents by taking only 80%, 70% and 60% respectively. Is it worth while to
I
10. Varsha Ltd. is considering which of the two mutually exclusive projects it should
undertake, since both the projects has the same initial outlay and length of life.
The company anticipates a cost of capital of 10%and the net after tax cash flows
of the project are as follows :
Year 0 1 2 3 4 5
Cash flows
(Rs. in lakhs)
p,j,t - x [2001 35 80 90 75 20
hojwt - Y [200] 218 10 10 4 3
Required :
a) Calculate N.P.U. and I.R.R. of each project.
b) State, with reasons, which project you would recommend.
11. Skylark Airways is planning to acquire a light commercial aircraft for flying
class clients at an investment of Rs. 50,d0,000.The expected Cash Flow After
Tax (CFAT) for the next three years is as follows :
I
I
Year 1 Year 2 Year 3
i
i
CFAT Probability CFAT Probability CFAT 'Probability
14,00,000 0.1 15,00,000 0.1 18,00,000 0.2
18,00,000 0.2 20,00,000 0.3 25,00,000 0.5
25,OO.OOO 0.4 32,00,000 0.4 35,00,000 0.2
40,00,000 0.3 45,00,000 0.2 48,00,000 0.1
The company wishes to take in to consideration all possible risk factors relating
to an airline operations. The company want to know
i) The expected N.P.U. of this venture assuming independent probability
distribution with 6 percent risk free rate of interest.
ii) The possible deviation in expected value.
1 12. A small project is composed of seven activities whose time estimates are listed in
the table as follows :
Estimated duration (weeks)
Activity
Optimistic Most likely Pessimistic
1-2 1 1 7
1-3 1 4 7
2-4 2 2 8
2-5 1 1 1
3-5 2 5 14
4-6 2 5 8
5-6 3 6 15
You are required to
! a) Draw the project network.
b) Find the expected duration and variance of each activity.
c) Calculate the early and late occurrence for each event and expected project
length. I
SECTION - D
Case Study
PART - A
PART - B
2. Briefly explain the methods of demand forecasting. Explain the different stages
in Technical Analysis, How does infrastructure financing differ from Industrial
financing ?
3. Phoenix Company borrows Rs. 5,00,000 at an interest rate of 14%. The loan is
to be amortised in four equal annual installments payable at the end of each of
the next four years. Prepare the loan amortisation schedule.
6. Three projects, A, B and C have expected returns of 0.12, 0.18 and 0.24
respectively. The variance co-variance matrix is as follows:
7. a) What is the difference between equity beta and asset beta and explain the
need for computing the asset beta?
b) Wisemann Machine fabrique Ltd., computed its equity returns beta to 1.25.
Its debt to equity ratio is 40%. What is its Asset beta ?
PART - C
Answer any three of the following:
9. What are the different ways of raising money from overseas market for financing .
projects ? Explain.
10. Bajaj Electronics Ltd.,is planning to add two new assets, X and Y to go along,
with its existing portfolio of assets, A. The Economic analysts advising the
company have projected the following economic scenarios' and the respective
subjective probabilities.
r 1-3
3-4
3-5
8
7
5
4
5
3
10,000
8,000
7,000
13 .OOO
11,000
10,000
Find the minimum cost project schedule if the indirect costs are:
It": a) Rs. 1,500 per week
12. A project involves an outlay of Rs. 1,00,000. Its expected cash inflow at the end
)r: of year 1 is Rs. 40,000. Thereafter, it deci-easesevery year by Rs. 2,000. It has
B: an economic life of 6 years. The certainty equivalent factor is a t = 1- 0.05t.
a, Calculate the net present value of the project if the risk free rate of return is 10
percent.
a: 13. This question is compulsory.
PART - D
13
Assume that you recently went to work for Axis Components Company, a
supplier of auto repair parts used in the after market with products from Chrysler,
Ford and other auto makers.Your boss, The Chief Financial Officer (CFO), has
just handed you the estimated cash flows for two proposed projects. Project L
involves adding a new item to the firm's ignition system line; it would take.
some time to build up the market for this product, so the cash inflows would
increase over time. Project S involves an add-on to an existing line, and its cash
flows would decrease over time. Both projects have 3-year lives, because Axis
is planning to introduce entirely new models after 3 years.
Here are the Projects' net cash flows (in thousands of rupees):
Expected Net Cash Flow
Year Project L Project S
0 (100) (100)
1 10 70
2 60 50
3 80 20
Depreciation, Salvage values, Net working capital requirements and tax effects
are all included in these cash flows.
The CFO also made subjective risk assessments of each project and he concluded
that both projects have risk characteristics which are similar to the firm's average
project. Axis's weighted average cost of capital is 10 percent.
1) You must now determine whether one or both of the projects should be
accepted.
2) Define the term Modified I.R.R. (MIRR). Find the MIRRs for projects L
and S.
-
OE - 2027
M.B.A. IV Semester Examination, October 2004
(Updated Scheme)
Paper
- F-6: MANAGEMENT
Project Appraisal and Finance
SECTION -A
SECTION - B
2. What is IRR and how is it calculated ? Discuss problems associated with it.
3. W ~ a tare the three elements of the cash flow stream of a project and three
components of the cash flcw steam of a replacement project ?
5. Discuss the principal source of discrepancy between social cost and benefit
on the one hand and monetary costs and benefits on the other.
6. What is the 'effective rate of protection' and the 'domestic resource cost' ?
How are the two related ?
7. %hat are the different sources of financing the projects ? Discuss by taking
the global finance also into consideration.
P.T.O.
SECTION - C
- 1
Answer three questions. Each question carries 10 marks. (3x10 = 30)
i
a) The investment outlay on the project will be Rs. 400 million. It consists of
Rs. 300 million on the plant and machinery and Rs. 100 million on net
working capital. The entire outlay will be incurred in the beginning.
b) The life of the project to be 7 years. At the end of 7 years, fixed assets will
fetch a net salvage value fo Rs. 96 million whereas net working capital will I
be liquidated at its book value.
c) The project is expected to increase the revenue of the firm by Rs. 500 1
million per year. The increase in costs on account of the project is expected F
to be Rs. 200 million per year. (This includes all item of cost other than
depreciation, interest and tax) The tax rate is 30%.
i
4
A
d) Plant and Machinery will be depreciated at the rate of 25% per year as per 1
the written down method. i
i ) Calculate the post-tax cash flow of the project
ii) Calculate the IRR of the project.
9. a) If an equipment costs Rs. 5,00,000 and lasts E years, what should be the i
minimum annual cash inflow before it is worthwhile to purchase the
1
equipment ? Assume that the cost of capital is 13%.
I
b) How much be paid for a machine which brings in an annual cash inflow of
Rs. 25,000 for 10 years ? Assume that the discount rate is 12%.
10. Your company is considering two projects, M and N, each of which require an 4
initial outlay of Rs. 50 million. The expected cash inflow from these projects
are:
Year Project h1 Project P1'
1. Rs. 11 million 38 million
2. 19 million 22 million
3. 32 million 18 million
4. 37 million 10 million
a) What is the payback period for each of the projects ?
b) What is the discounted payback period for each of the projects if the c o s ~
of capital is 12% ?
c) If the two projects are independent and the cost of capital is 12%, which
project(s) should the firm invest in ?
d) If the two projects are mutually exclusive and the cost of the capital is
lo%, which project should the firm invest in ?
e) If the two projects are mutually exclusive and the cost of capital is 15%,
which projects should the firm invest in ?
f) If the cost of capital is 24%, what is the modified IRR of each project ?
11. Discuss the procedure for simulation analysis. What are the pros and cons of
simulation ?
SECTION - A
ijtc : .Ansu:er any three questions from this Section .Each question carries
2 17;al.k~. I
SECTION - B
-<ate : A I ~ S Wany
C T thl-ce cluestions from this Section. Eacb question carries
5 a u k s .' (3x5 = 15)
..
7 Explain the different methods used for computing the cost of equity.
c(1--- 5. What are the various risks lo be considered while appraising foreign projects ?
SEC'TION - C
Note : Answer any two questions from this Section. Each question carries
8 marks. (2x8 = 16)
' 7 , Discuss Llle basic principles of network cost system and 'malyse the reasons for
-. time and cost over runs.
.
-
-7
8. Discuss tllc 'various aspccts Lo be consldcred in technical analysis of projects.
1' 8 -
K!. .. ~ ..-~
3
9 . Discuss L ~ S C~ C ~ )involvcd
S in project fonnulation and implementation.
10. Discuss thc irlstilutional structure for project financing in India including foreign projects .:
LO be sct up in India.
"
P.T.0.
SECTION - D
Case Study :
Water Purity Limited has developed a scientifically more effective water filter than the
I
ones currently available in the market. One op:ioii before the company is to start
production on a large scale by installing a large plant costing Rs. 50 lakhs.Altematively.
it can initially insstalla small plant at s cash outlay o r Rs. 10 Iakh and then decide to
expand the capacity after a year at a cost of Rs. 45 lakh if thc initial demand is high.
There is a 50-50 chance that the initial demand will be high or low. If it is high, then there
is a 70 p e r c e ~chance
t that demand in the subsequent years will be high. If it t~lrnsout to
I'
be low, it is expected to remain low in subsequent years also.
I The large plant is likely to generate net cash flow of Rs. I0 Ink11 in ycar 1 il'tJc~l-~a~)d is
high and Rs. 7 lakh if demand is low. With a high initial dernund, net cash flows are
expected to be Rs. 16 lakh in perpetuity if the subsequent dernand is high and
Rs. 10 lakh if the subsequent demand is low. The subseqcznt demand will rclnain low i f
the initial demand is low and the expected cash flow in perpetuity will bc Rs. 7 lak11. T t ~ c
small plant is csti~natedto yicld net cash flows , ~Ks.f 4 lakh i n ycur ! iSdcrnalid is higt,
and Rs. 2 lakh if denland is low. If the initial dcmancl is high, L ~ I colnpany
C will cxpa11(1
its capacity and it is expected to generate net cash flows of Ks. 20 lakh i n per-pcl~rityi f rllc
subsequent dcmand is high ar~dRs. 8 lakh iS the st~bsccli~cnt d c r n a ~ ~isd:ow. I1'tirc: i r l i ~ i ; ~ !
demand i s low, the suhsec;uent demand will be lour, and the expected net cash flov iii
Ks. 2 lakh i n perpetuity.
Poser :
..---- --
What should Wzter Purity Limited do ?