Question Paper

Project Management –I (241) : October 2004

Section A : Basic Concepts (30 Marks)
• • This section consists of questions with serial number 1 - 30.
• • Answer all questions.
• • Each question carries one mark.
• • Maximum time for answering Section A is 30 Minutes.
< Answer
1. Which of the following is not an advantage of the traditional form of organization for the management >
of projects?
(a) Budgeting and control are easy
(b) It facilitates better technical control
(c) It is easy to integrate the functions of all concerned departments towards the fulfillment of the
project objectives
(d) The lines of communication are well established
(e) It is easy to estimate the staff requirement for each department.
< Answer
2. In which of the following conditions there is a high likelihood of entry of competitors into an industry? >

(a) The economies of scale are high

(b) The capital required to set up a venture is high
(c) The profitability of an organization depends upon a wide access to distribution channels
(d) The existing players in the industry have a history of strong retaliation to any firm attempting to
enter the industry
(e) There is a low degree of product differentiation in the industry.
< Answer
3. Which of the following is false in the context of demand estimation? >

(a) If a firm collects demand estimates from its salesmen, then the demand may be underestimated
(b) Estimation of demand based on users’ expectations requires the deployment of a large staff
(c) In the Delphi method of demand estimation, the estimates are collected from industry experts
(d) The end use method is a qualitative method of demand estimation
(e) The econometric method of demand estimation considers major economic factors influencing
demand.
< Answer
4. The internal rate of return can be said to be based on the assumption that the intermediate cash flows are >

(a) Perfectly certain

(b) Highly variable
(c) Reinvested at the cost of capital of the firm
(d) Reinvested at a rate equal to the internal rate of return of the firm
(e) Reinvested at the cost of equity capital of the firm.
< Answer
5. Gupta Plastics Ltd. invested Rs.36 crores in its recent project. The company expects a uniform cash >
inflow of Rs.12 crores for five years from this project. The cost of capital for the company is 12%. The
modified NPV of this project is Rs. 8.123 crores. What is the reinvestment rate applicable to the cash
inflows expected to be generated by this project?
(a) 11% (b) 12% (c) 13% (d) 14% (e) 15%.
< Answer
6. Which of the following schemes is a type of direct assistance in project financing? >

(a) Bill rediscounting scheme (b) Supplier’s line of credit

(c) Equipment finance scheme (d) Risk capital assistance
(e) Underwriting.
 < Answer
7. Value chain analysis is aimed at identifying the activities of the firm that are contributing value to the >
firm. Which of the following activities is considered to be a primary activity as per this analysis?
(a) Purchase of raw materials
(b) Creation of consumer awareness about the product
(c) Acquisition of process technology
(d) Recruitment of fresh people in the organization
(e) Rewarding creative people in the organization.
< Answer
8. Which of the following is not a part of a milestone schedule prepared in project planning? >

(a) The date when the project starts

(b) The date when the project ends
(c) The inputs and standards of inputs required for each part of the project
(d) Major events like review meetings, testing, etc
(e) Both (c) and (d) above.
< Answer
9. A project costs Rs.1 million and has a base case NPV of zero. If the firm invests, its debt capacity >
increases by Rs.5,00,000. The present value of interest tax shields on this debt is Rs.76, 000. Assuming
a tax rate of 50%, the project’s adjusted net present value is
(a) Zero (b) Rs.76,000 (c) Rs.1,52,000 (d) Rs.2,88,000
(e) Insufficient data.
< Answer
10. Which of the following is not true with regard to the top-down approach to project budgeting? >

(a) The procedure starts with an estimate for the cost of the project which is broken down into the cost
estimates for smaller and smaller activities in the project
(b) The process assumes that employees at the lower level tend to overstate the time and cost factors
(c) It fosters healthy relationship amongst the employees
(d) Only essential activities are funded, as the overall budget is limited
(e) It is easy to keep the expenditure within limit.
< Answer
11. The relationship between equipments, buildings and civil works is shown in >

(a) Organizational layout (b) Communication layout

(c) Utilities layout (d) Transport layout
(e) General functional layout.
< Answer
12. Which of the following statements is /are true regarding Boston Consultancy Group matrix? >

I. Question marks produce a lot of surplus, but have no potential for reinvestment as the growth of its
market is low.
II. Cash cows and dogs are very demanding – not just in terms of financial resources but also in terms
of creative talent.
III. Dog is the name used for units which neither have a good market share at present nor promise
growth in future.

(a) Only (I) above (b) Only (II) above

(c) Only (III) above (d) Both (I) and (III) above
(e) All (I),(II) and (III) above.
< Answer
13. Consider the following projects: >

Cash Flow
Year (Rs. lakhs)
Project X Project Y
0 –9 –4
1 –4.105 +25
2 +20 –25
IRR 28% 400%; 25% Which of the following is\are
 true regarding the projects?
(a) Project X is a simple and pure project but Project Y is a non-simple and pure project.
(b) Project Y is a non-simple and mixed project but Project X is a simple and pure project
(c) Both are non-simple and pure projects
(d) Both are simple projects but Project X is mixed project and Project Y is a pure project
(e) Both are non-simple and mixed projects.
< Answer
14. A certain activity has a budgeted cost of Rs.80,000 and at the time of the periodic progress review it is >
estimated that 60 per cent of the work has been accomplished at the cost of Rs.52,800. Therefore cost
over-run (under-run) is
(a) 9.1% (b) 34.0% (c) (10%) (d) (9.1%) (e) 10%.
< Answer
15. Which of the following is\are not true regarding the risk adjusted investment appraisal techniques? >

I. In the certainty equivalent method, if there is high degree of correlation between the cash flows
over the entire project life the certainty equivalent coefficient is taken as one for all the years.
II. In sensitivity analysis, the impact of the changes in one or more variables on the criterion of merit
is studied.
II. Simulation does not produce an optimal solution but the user of the technique has to generate all
possible combinations of conditions and constraints to choose the optimal solution.
(a) Only (II) above (b) Only (III) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
< Answer
16. Which of the following is\are the difference(s) of the Capital Market Line and Security Market Line? >

I. In SML the measure of risk of individual security is its variance whereas in CML the measure of
risk is its covariance of its return with the market return
II. In SML the measure of risk is the beta of the asset and in CML it is the standard deviation of
return.
III. The slope of SML is E(Rm)–Rf whereas the slope of CML is
R m -R f
Standard Deviation of the market return

(a) Only (II) above (b) Only (III) above

(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) Both (I) and (III) above.
< Answer
17. The method of project termination in which the property and functions of the project are absorbed into >
the parent and are distributed among the existing departments is
(a) Extinction (b) Inclusion (c) Absorption (d) Integration
(e) Both (b) and (d) above.
< Answer
18. Which of the following is\are true regarding the Life Cycle Costing, a technique of budgeting? >

I. It assumes that the life of the project is finite and is known.

II. It is expensive to perform and is suited only for large projects.
III. It considers the costs involved until project implementation and ignores the costs involved after
implementation of the project.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
< Answer
19. Ramanna Constructions Ltd is evaluating projects P, Q, R, S and T for investment. If project R cannot >
be accepted unless at least two projects from the projects P, Q, S and T are accepted, then the
 corresponding constraint can be represented as
(a) XR ≤ XP + XQ + XS + XT (b) 2 XR ≤ XP + XQ + XS + XT
(c) XR ≤ 2 (XP + XQ + XS + XT) (d) 4 XR ≤ XP + XQ + XS + XT
(e) 2XR ≥ XP + XQ + XS + XT.
< Answer
20. If the objective is to minimize the value achieved in relation to a given level, then the corresponding >
term in the objective function while formulating that in a goal programming problem would be
(a) Minimize (d–) (b) Minimize (d+)
(c) Minimize (d+ + d–) (d) Minimize (d– – d+)
(e) Minimize (d+ – d–).
< Answer
21. Which of the following aspects related to a project cannot be monitored by comparison of works with >
the schedules?
(a) Cost of the project (b) Morale of the employee
(c) Completion time of the project (d) Attitude of the client
(e) Both (b) and (d) above.
< Answer
22. In a network diagram the critical path is the path, which >

(a) Has the longest duration

(b) Can be completed without committing any resources
(c) Does not contain any dummy activity
(d) Contains the largest number of dummy activities
(e) Has the shortest duration.
< Answer
23. Which of the following organization structures is very costly to maintain due to duplication of >
equipment, skills etc. in each division?
(a) Simple organization structure (b) Traditional organization structure
(c) Line-staff organization structure (d) Product organization structure
(e) Matrix organization structure.
< Answer
24. Which of the following is not an assumption in the linear programming model? >

(a) The objective function and the constraints are linear

(b) All the co-efficient in the objective function and the constraints are known with certainty
(c) The decision variables are discrete in nature
(d) The objective function is undimensional
(e) Resources are homogenous.
< Answer
25. Which of the following does not indicate the presence of intense rivalry in an industry? >

(a) Competitors are numerous or are roughly equal in size and power
(b) Industry is growing very fast
(c) The product or service lacks differentiation
(d) Fixed costs are high or the product is perishable
(e) Exit barriers in the industry is very high.
< Answer
26. Recently the rate per minute of long distance domestic telephone calls is reduced to Rs.4 from Rs.6. >
During the last year total long distance domestic telephone calls made were 3,350 billion hours, at Rs.6.
If the price elasticity of demand for long distance domestic telephone calls is 1.41, the expected demand
for the coming year is
(a) 4295 billion hours (b) 4725 billion hours
(c) 5255 billion hours (d) 5980 billion hours
(e) 6250 billion hours.
< Answer
27. Which of the following is/are true? >

I. When exercise price is greater than the stock price, call option is said to be ‘in the money’.
 II. When exercise price is less than the stock price, put option is exercised by the holder.
III. The liability of the writer of call option may be nil if the exercise price is more than the stock
price.
(a) Only (III) above (b) Only (I) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
< Answer
28. If you like to analyze the fate of a project under different market conditions, then the most appropriate >
analysis would be
I. Sensitivity analysis.
II. Scenario analysis.
III. Monte Carlo simulation.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
< Answer
29. XA and XB are two decision variables pertaining to Project A and Project B respectively, in an integer >
linear programming problem formulation for decision making from multiple projects. If XA is less than
or equal to XB, which of the following statements is/are true?
(a) They are mutually exclusive projects (b) They are complementary projects
(c) Project A is contingent on Project B (d) Project B is contingent on Project A
(e) Both (b) and (c) above.
< Answer
30. In which of the following methods of project termination a successful project is institutionalized as a >
part of parent company, say as new division or department?
I. Extinction
II. Inclusion
III. Integration
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.

END OF SECTION A
 Section B : Problems (50 Marks)
• This section consists of questions with serial number 1 – 5.
• Answer all questions.
• Marks are indicated against each question.
• Detailed workings should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

1. Irevna Electronics is currently considering investment in a new plant using an indigenous technology with an
intention of making a follow-on investment in an advanced technology three years from now. The advanced
technology requires six times the outlay and is estimated to yield five times the cash inflows of the current project.
The projected cash flows from the new project currently being estimated as follows:

0 1 2 3

Initial outlay (20)

After tax operating cash flows 5 8 8

Terminal cash flows 2 Assume the discount rate for the above
to be 10 % and risk free rate is 5 %.
You are required to compute:
a. The net present value of the cash flows of the new project currently under study.
b. The standard deviation per unit per year that the new technology project can have for the call value just
enough to offset the NPV of old technology.
(2 + 8 = 10 marks)< Answer >
2. Eastern Industries Ltd. is planning to purchase a machine, which costs Rs.30 lakhs.
The expected operating costs and salvage values of the machine are estimated for each year the machine will be in
use, and are given in the table below:
Operating and maintenance costs Salvage value
Year
(Rs. in lakhs) (Rs. in lakhs)
1 6.0 20.0
2 7.0 17.0
3 8.0 13.0
4 10.0 8.0
5 13.0 5.0
6 17.0 3.0 The rate of depreciation
applicable to the machine is 30% on WDV basis. The tax rate applicable to the company is 36% and its cost of
capital is 12%.
You are required to find out the number of years of usage after which the machine should be replaced by the
company.
(10 marks) < Answer >
3. Sabana industries is considering seven projects with the following characteristics:
 Contribution to net income Contribution to sales growth
Initial outlay (Rs. in crore) (%)
Project NPV
(Rs. in crores)
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
1 120 4 4 5 1.1 1.2 1.2 40
2 140 6 7 7 1.3 1.5 1.7 50
3 150 5 6 7 1.4 1.4 1.5 60
4 160 8 7 6 1.2 1.5 1.8 80
5 110 4 3 4 1.3 1.3 1.3 40
6 230 11 8 8 1.5 1.6 1.7 90
7 200 9 9 8 1.3 1.4 1.3 70 The
capital budget constraint is Rs.550 crore. The goals sought by management are as follows:
a. Maximization of NPV
b. Contribution to net income of Rs.32 crores, Rs.35 crores and Rs.38 crores in years 1, 2 and 3 respectively.
c. Contribution to sales growth of 5%, 7% and 9% in years 1, 2 and 3 respectively.
The priorities assigned to various goals are as follows:
Priority 1 : Net income
Priority 2 : Sales growth
Priority 3 : NPV
At priority level-1, the relative weights attached to the contribution to net income of year 1, 2 and 3 are 3, 2 and 1
respectively. At priority level-2, the relative weights attached to the contribution to sales growth of year 1, 2 and 3
are 4, 2 and 1 respectively.
You are required to formulate the problem as a goal-programming problem.
(10 marks)< Answer >
4. The activities, durations and direct activity costs of a project are as follows:
Time in weeks Cost (Rs.)
Activity
Normal Crash Normal Crash
1–2 12 6 80,000 140,000
1–3 10 6 60,000 104,000
2–4 4 2 120,000 168,000
3–4 20 12 140,000 196,000
2–5 6 4 90,000 126,000
4–5 8 4 52,000 100,000 The indirect costs are
Rs.10,500 per week.
You are required to determine
(a) The minimum time, after crashing, in which this project can be completed and the cost associated with it.
(b) The minimum cost, after crashing, at which the project can be completed and the duration of the same?
(5 + 5 = 10 marks)< Answer >
5. Ajay Industries Ltd. has the following two operating divisions:
Division Percentage of Firm value
Confectionaries 0.7
Computers 0.3 AIL is proposing to start a cosmetics division, the
 cash flows of which is estimated as follows:
Year Cash flows (Rs. Cr.)
0 –1
1 0.1
2 0.2
3–5 0.5 It proposes to apply the risk adjusted discount rate method to appraise
the above project and estimates a premium of 2% over the company’s weighted average cost of capital.
To estimate the weighted average cost of capital of the firm, it has identified the following competitors:
Company Estimated equity beta Estimated Debt Beta D:E
Britania 0.75 0.2 1:4
Satyam 1.8 0 2:3 Both the above firms
pay nil tax.
AIL has a debt-equity ratio of 0.3, cost of debt of 10%, debt-beta of zero and the marginal tax rate of 30%. Assume
the risk free rate of return and market return are 7.5% and 14% respectively.
You are required to:
a. Calculate the present weighted average cost of capital of AIL without considering the investment in new
division.
b. Appraise the proposed project using risk adjusted discount rate method.
(7 + 3 = 10 marks) < Answer >

END OF SECTION B

Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 6 - 7.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on section C.

6. A detailed project report (DPR) is a precious formal document of commitment prepared and presented by the
sponsors of a project. This document should consist of ideas orchestrated around every piddling aspect of a project
substantiated with supplementary notes. The preparation of DPR is undertaken only after the investment decision
is made on the basis of the technical, economic and financial feasibility studies, so that expensive efforts involved
in the preparation of DPR are not wasted. What is a DPR? Explain how is it different from the feasibility report
(FR).
( marks) < Answer >
7. In recent years, environmental concerns have assumed a great deal of significance and rightly so. Ecological
analysis should be done particularly for major projects which have significant ecological implications like power
plants and irrigation schemes etc. Discuss the major issues involved while preparing the Environmental Impact
Statement.
( marks) < Answer >
 END OF SECTION C

END OF QUESTION PAPER

 Suggested Answers
Project Management-I (241) : October 2004
Section A : Basic Concepts
1. Answer : (c) < TOP
>
Reason : a. Budgeting and control are easy in the traditional form of organization.
b. b. In the traditional form of organization, technical control is better because the superiors are
generally specialists in their respective fields.
c. In the traditional form of organization, as the managers of each functional department are
concerned with the work of their department only, integrating the functions of all concerned
departments towards the fulfillment of the project objectives is difficult.
d. The lines of communication are well established in the traditional form of organization.
e. It is easy to estimate the staff requirement for each department in the traditional form of
organization.
2. Answer : (e) < TOP
>
Reason : a. The likelihood of entry of competitors into an industry is low when the economies of scale are
high.
b. The likelihood of entry of competitors into an industry is low when the capital required to set up a
venture is high.
c. The likelihood of entry of competitors into an industry is low when the profitability of an
organization depends upon a wide access to distribution channels.
d. The likelihood of entry of competitors into an industry is low when the existing players in the
industry are known to have retaliated strongly any attempt by new competitors to enter the
industry.
e. The likelihood of entry of competitors into an industry is high when there is a low level of product
differentiation in the industry.
3. Answer : (d) < TOP
>
Reason : a. If a firm collects demand estimates from its salesmen, then the demand may be underestimated
because salesmen tend to show low potential sales in order to show their future performance in a
favorable light.
b. Estimation of demand based on users’ expectations requires the deployment of a large staff
because estimates are to be obtained from all the major user firms in the industry.
c. In the Delphi method of demand estimation, the estimates are collected from industry experts.
d. The end use method is a quantitative method of demand estimation.
e. The econometric method of demand estimation considers major economic factors influencing
demand.
4. Answer : (d) < TOP
>
Reason : a. The internal rate of return is not based on the assumption that the intermediate cash flows are
perfectly certain.
b. The internal rate of return is not based on the assumption that the intermediate cash flows are
highly variable.
c. The internal rate of return is not based on the assumption that the intermediate cash flows are
reinvested at the cost of capital of the firm.
d. The internal rate of return is based on the assumption that the intermediate cash flows are
reinvested at a rate equal to the internal rate of return of the firm.
e. The internal rate of return is not based on the assumption that the intermediate cash flows are
 reinvested at the cost of equity capital of the firm.
5. Answer : (c) < TOP
>
Terminal Value
−I
(1 + k) n
Reason : Modified NPV =
12xFVIFA(r, 5)
8.123 = − 36
(1.12)5
or
44.123x(1.12)5
FVIFA(r, 5) = = 6.480(approx)
12
or
From the tables r = 13%
6. Answer : (d) < TOP
>
Reason : The schemes of assistance of the financial institutions can be broadly classified into direct assistance
and indirect assistance. In the direct forms of assistance, the institutions provide the customers with
funds. In indirect forms, the institutions support them by providing guarantees on their behalf.
Different schemes of direct assistance in project financing are (i) Rupee term loans (ii) Foreign
currency term loans (iii) subscription to equity shares (iv) seed capital assistance (v) Risk capital
assistance. In risk capital assistance scheme funds are provided directly to the first generation
entrepreneurs. So, alternative (d) is correct.
Rest other alternatives are different forms of indirect assistance. Different schemes of indirect
assistance in project financing are (i) Deferred payment guarantee, (ii) Guarantee for foreign currency
loan, (iii) Underwriting the public issues, (iv) Bill rediscounting, (v) Supplier’s line of credit, (vi)
Equipment finance scheme.

7. Answer : (b) < TOP

>
Reason : As per the value chain analysis the primary activities are
i. Inbound Logistics: Activities like receiving, storing and distributing inputs, transportation of
inputs etc.
ii. Operations: Activities that convert the inputs into the final product.
iii. Outbound Logistics: Activities related to collecting, storing and distributing final product.
iv. Marketing and Sales: Activities relating to creation of customer awareness about the product.
v. Service: Activities aimed at enhancing or maintaining the value of a product
So clearly the option (b) is the answer.

8. Answer : (c) < TOP

>
Reason : The milestone schedule does not include ‘inputs and standard of inputs required for each part of the
project.’
9. Answer : (b) < TOP
>
Reason : Base case NPV = 0
Present value of interest tax shield = Rs.76,000
∴Adjusted NPV = 0 + 76,000 = Rs.76,000
10. Answer : (c) < TOP
>
Reason : Top down approach to project budgeting does not facilitate healthy relationship amongst the
employees.
11. Answer : (e) < TOP
>
Reason : The relationship of the buildings, civil works and the equipments is shown in General Functional
Layout. This layout is designed in such a way that the entire process of receiving raw materials,
processing and the outward movement of the finished goods takes place smoothly and efficiently.
 Organizational layout shows number of people required, their requirement at each part of the project
site, and their hierarchical relationship.
Communication Layout shows the communication lines between the various divisions – the model
and their numbers.
Utilities Layout shows the points of availability and consumption of each utility at each point. Transport
Layout shows the distances between various facilities outside the production line and the modes of
transport between them.
12. Answer : (c) < TOP
>
Reason : Only statement III is the correct answer.
13. Answer : (b) < TOP
>
Reason : Simple investments are those investments in which the cash outflows are followed by cash inflows
whereas non-simple investments are those in which cash outflow (or stream of outflows) occur more
than once. Hence, Project X is a simple investment and Project Y is a non-simple investment.
A project is said to be pure investment if the unrecovered investment balance is either negative or zero
through the life of the project and zero at the end of the project. The following are the unrecovered
investment balances for both the projects:

Project X Project Y
F0 –9 –4
F1 – 9(1.28) – 4.105 = – 15.625 – 4(1.25) + 25 = 20; – 4(1 + 4) + 25 = 5
F2 – 15.625(1.28) + 20 = 0 20(1.25) – 25 =0; 5(5) – 25 = 0
As the unrecovered investment balance in case of X is negative through out and zero at the end of the
project, X is termed as pure investment and in case of Y, the unrecovered investment balance is positive
during the life of the project and hence it is mixed investment. And the answer is (b).
14. Answer : (e) < TOP
>
Reason : Cost over-run (under-run)
ACTW 52, 800
1  1
BCTW 80, 000  0.60
= = 10%
15. Answer : (c) < TOP
>
Reason : Certainty equivalent method is based on the utility of the decision maker for the return obtained by
taking each additional unit of risk. The change in the CEC depends on the degree of correlation among
the cash flows of different years. If the cash flows are highly correlated, the CEC remains the same for
all the years. CEC takes the value of one only when the CF is certain. Hence, I is not correct.
Sensitivity analysis is based on the view that only those projects that can stand the possible changes in
future in the critical elements which have a vital bearing on the costs/benefits of the project need to be
undertaken. In such analysis the factors that are likely to change during the life of the project are first
identified and then the extent of change in the NPV or other criterion chosen for evaluation with change
in the factor is measured. However, the impact of change in only one variable at a time is considered.
Hence, II is not true and the answer is (c).

16. Answer : (d) < TOP

>
Reason : CML shows the relation between return and risk for efficient portfolios and SML represents the return
expected on individual assets or securities. CML can be written as

Rm − Rf
σp
σm
E(Rp) = Rf + .
SML represents the return expected on individual assets or securities and is written as
 E(Rj) = Rf + βj[E(Rm)-Rf].
The measure of risk in case of CML is the standard deviation of return on the security whereas in case
of SML it is the covariance of its return with the market return. Hence, I is not correct.
The measure of risk is the beta of the assets in case of SML whereas in case of CML it is the standard
deviation of return on the market. Hence, II is true.
The slope of SML is E(Rm)-Rf whereas slope of CML is (Rm-Rf)/Standard Deviation of the market. Hence,
III is also true and the answer is (d).

17. Answer : (d) < TOP

>
Reason : In Integration, the property and functions of the project are absorbed into the parent, and are
distributed among the existing departments. Hence the answer is (d).
Extinction may take place when the project has been completed and hence there is nothing more to do,
or when the project is considered a failure beyond redemption.
Inclusion or absorption is to include a project as a part of the organization. Inclusion is the method used
when a project is a success and can be institutionalized as a part of the parent, say as a new division or
department.

18. Answer : (d) < TOP

>
Reason : Life cycle costs are the total cost of acquiring and maintaining (ownership) of the system for the
organization. Life cycle system is a method of evaluating alternative courses of action early in the life
of a project, so that the resources can be committed to the best, however:
i. Life cycle costing is expensive to perform and is hence suitable only for large projects.
ii. The entire exercise will have to be repeated whenever the requirements change.
iii. It assumes that the life of the products is finite and is known.
Hence, I and II are true and the answer is (d).

19. Answer : (b) < TOP

>
Reason : If project R cannot be accepted unless at least two projects from the projects. P, Q, S and T are accepted
then the corresponding project interdependency constraint can be represented as
2XR ≤ XP + XQ + XS + XT
20. Answer : (e) < TOP
>
Reason : The various situations and its corresponding term in the objective function while formulating that in a
goal programming problem are:
Nature of Achievement Desired Term to be used
Do not exceed a given goal Minimize (d+)
At least reach the given goal Minimize (d–)
Minimize the achievement relative to a given goal Minimize (d+ – d–)
Maximise the achievement relative to a given goal Minimize (d– – d+)
Reach as close as possible to the given goal Minimize (d+ + d–)
21. Answer : (e) < TOP
>
Reason : Cost, time and performance of a project can be easily monitored by comparison of works with
schedules. But qualitative factors such as the morale of the employees and the attitude of the client can
not be monitored by comparison of works with the schedules.
< TOP
22. Answer : (a) >
Reason : In network diagram critical path is the path with longest duration.
< TOP
23. Answer : (d) >
 Reason : In product form of organisation, a division is set up for each product. Within each division, different
departments are set up for each of the different functions, engineering, manufacturing etc. The task of
each division is to manage projects relating to that product. The biggest advantage of this form of
organisation structure is that one person, designated as project manager exercises full control over the
project. Cost of maintenance is the biggest disadvantage of this type of organisation. Cost of
maintaining in this structure is very high due to duplication of equipment, skills etc. in each division.
24. Answer : (c) < TOP
>
Reason : In linear programming model decision variables are continuous in nature.
25. Answer : (b) < TOP
>
Reason : The factors which contributes in enhancing the competitive pressure or intensifying the competitive
rivalry are:

• • The relative sizes of the players. If all are of equal size then competition will be high.
• • Stagnation, i.e., the industry is not growing very fast.
• • No product innovation i.e., lack of differentiation in product or service offerings.
• • High fixed costs, leading to a scramble to sell the break-even quantity.
• • Due to high exit barriers, reluctant players can not leave the competition and continue to
remain in the fray to make it more intense.
So, alternative (b) is the answer.
26. Answer : (d) < TOP
>
Reason : Price elasticity is always negative. Here it is –1.41. We can write from the formula of price elasticity of
demand that
x − 3350 (6 + 4) / 2
×
( x + 3350) / 2 (6 − 4)
= 1.41.
x − 3350
x + 3350
Or = 0.282.
3350 × (1 + 0.282)
(1 − 0.282)
Or x= = 5981 ≅ 5980 billion hours.
So, the alternative (d) is the answer.
27. Answer : (a) < TOP
>
Reason : In case of a call option if the exercise price is more than the stock price, the holder of the option will
not exercise the option and the writer of the option does not incur any liability. Hence, III is correct and
the answer is (a).
A call option is in the money if the market price at the time of exercise is greater than the exercise price.
Hence, II is not correct. When an option is in the money the option, if exercised will provide the holder
with a profit. A put option is said to be in the money if the exercise price is greater than the stock price
at the time of the option. Hence, II is also not correct
28. Answer : (b) < TOP
>
Reason : The study of impact of variation in one factor at a time, holding other factors constant, is called
sensitivity analysis. In this analysis typically one variable is varied at a time. If variables are inter-
related as they most likely to be, then it is helpful to look at some plausible market scenarios or market
conditions where each scenario represents a consistent combination of variables. This type of analysis
is called scenario analysis. The objective of such scenario analysis may be to get a feel of what happens
under the most favorable or the most adverse configuration of key variables, without bothering much
about the internal consistency of such configurations. Monte Carlo simulation is used for developing
the probability profile of a criterion of merit by randomly combining values of variables which have a
 bearing on the chosen criterion. So the scenario analysis is the most appropriate to analyze the fate of
project in different scenarios or market conditions. So, alternative (b) is the answer.
29. Answer : (c) < TOP
>
Reason : If they are mutually exclusive projects then that is represented as XA + XB ≤ 1 (p)
Had they been complementary in nature then that would have been represented as
XA + XB + XAB ≤ 1
(q)
When project A is contingent on project B then that is represented as XA ≤ XB (r)
Otherwise if project B is contingent on project A,
then that is represented as XB ≤ XA
(s)
In the question we find that the constraint in the problem formulation is represented as XA less than or equal
to XB which is same as inequation (r). So we can certainly conclude that project A is contingent on
project B.
30. Answer : (b) < TOP
>
Reason : In integration, the property and functions of the project are absorbed into the parent, and are distributed
among the existing departments.
Inclusion is the method used when a project is a success and can be institutionalized as a part of the
parent, say as a new division of department. Extinction may take place when the project has been
completed and hence there is more to do or when the project is considered a failure beyond redemption.
So, alternative (b) is the answer.

Section B : Problems
1. (a) NPV = –20 + 5/ 1.10 + 8/(1.10) + 10/ (1.10)3 2

= –20 + 4.545 + 6.6115 + 7.5131 = – 1.330

(b) The call value = – 1.330
  5 / 1.10  8 / 1.10 2
 10 / 1.10
3
 x 5 
Asset value = PVIF (10,3) = 70.1337
Exercise price = Rs.20x6 =120
70.1337
3
120 /1.05
Asset value / Pv. of exercise price = = 0.68
Let call value / asset value = x
X x 70.1337 = 1.330 Or, X = .01896 = 1.89% = 1.90%

Let a = share price divided by PV ( exercise price )

b = standard deviation times square root of time
and x = Value of call option as percentage of share price.
From the table we get the following values of x.
 a 0.65 0.75
b

0.30 1.2 2.0

0.35 2.3 3.3

When a is 0.68 ,and b is 0.30 then x can be find out by following
interpolation
(x-1.2)/(0.68 – 0.65) = (2 – 1.2)/(0.7- 0.65)
x = 0.48 + 1.2 = 1.68 ------- I
When a is 0.68 and b is 0.35, then x can be find out by following interpolation
(x- 2.3)/( 0.68-0.65) = (3.3 -2.3)/(0.70- 0.65)
x = 0.6 + 2.3 = 2.9 -----------II
When a = 0.68 and x = 1.9 ,then the value of b can be calculated by following interpolation
(b – 0.30)/(1.9 – 1.68) = (0.35 – 0.30)/(2.9 – 1.68)
b = 0.009016 + 0.30 = 0.309 = 0.31
T 3
Standard deviation x = x = 0.31
σ

Or, standard deviation = 0.1789

< TOP >

2. a. Calculation of UAEs for various years of usage (Rs.

in lakhs)
 UAE of O & M costs
A. Year (t) 1 2 3 4 5 6
B. O & M costs 6 7 8 10 13 17
C. Post tax O & M Costs = B (1-0.36) 3.84 4.48 5.12 6.40 8.32 10.88
D. PVIF (12%, t) 0.893 0.797 0.712 0.636 0.567 0.507
E. Present Value of C 3.429 3.571 3.645 4.070 4.717 5.516
F. Cumulative of E 3.429 7.000 10.645 14.715 19.432 24.948
G. PVIFA (12%, t) 0.893 1.690 2.402 3.037 3.605 4.111
H.UAE (OM) 3.84 4.14 4.43 4.85 5.39 6.07
UAE of initial out lay
I. Initial Outlay 30.00 30.00 30.00 30.00 30.00 30.00
J. PVIFA (12%, t) 0.893 1.690 2.402 3.037 3.605 4.111
K. UAE (IO) 33.59 17.75 12.49 9.88 8.32 7.30
UAE of DTS
L. Depreciation 9.00 6.30 4.41 3.087 2.161 1.513
M. Tax shield: L × 0.36 3.24 2.27 1.59 1.11 0.78 0.54
N. PVIF(12%, t) 0.893 0.797 0.712 0.636 0.567 0.507
O. PV of M 2.89 1.81 1.13 0.71 0.44 0.27
P. Cumulative of O 2.89 4.70 5.83 6.54 6.98 7.25
Q. PVIFA(12%. t) 0.893 1.690 2.402 3.037 3.605 4.111
R. UAE (DTS) 3.24 2.78 2.43 2.15 1.94 1.76
UAE of Salvage value
S. Salvage value 20 17 13 8 5 3
T. PVIF(12%, t) 0.893 0.797 0.712 0.636 0.567 0.507
U. PV of S 17.86 13.55 9.26 5.09 2.84 1.52
V. PVIFA(12%, t) 0.893 1.690 2.402 3.037 3.605 4.111
W. UAE (SV) 20 8.02 3.86 1.68 0.79 0.37
1. UAE (OM) 3.84 4.14 4.43 4.85 5.39 6.07
2. UAE (IO) 33.59 17.75 12.49 9.88 8.32 7.30
3. UAE (DTS) 3.24 2.78 2.43 2.15 1.94 1.76
4. UAE (SV) 20 8.02 3.86 1.68 0.79 0.37
5. UAE(TC) = 1 + 2 – 3 – 4 14.19 11.09 10.63 10.90 10.98 11.24
From
above we can see that the UAE (TC) is minimum for a usage of 3 years. Hence the machine should be replaced after 3 years
of usage.
< TOP >
3. The goal programming formulation of the above problem is given below:
Goal Function:
P1
 ( 3d −
1
+2d −
2
+d 3−) +P2 ( 4d −
4
+2d 5− +d 6−)+P3 (d −
7
−d 7+)

Min Z =
Economic Constraints:
120x1 + 140x2 + 150x3 + 160x4 + 110x5 + 230x6 + 200x7 + S1 = 550 (Capital budget constraint)
+ s2 = 1
+ s3 = 1
+ s4 = 1
+ s5 = 1
 + s6 = 1
+ s7 = 1
+ s8 = 1
0 (j = 1,2 …7)
0 (i = 1,2 …7)
Goal constraints:
d−1 d1+
+ 6x2 + 5x3 + 8x4 + 4x5 + 11x6 + 9x7 + – = 32 (Contribution to net income in year 1)
d −2 − d +2
+ 7x2 + 6x3 + 7x4 + 3x5 + 8x6 + 9x7 + = 35 (Contribution to net income in year 2)
d −d
− +

+ 7x2 + 7x3 + 6x4 + 4x5 + 8x6 + 8x7 + = 38 (Contribution to net income in year 3)
3 3

d −4 − d +4
1.1x1 + 1.3x2 + 1.4x3 + 1.2x4 + 1.3x5 + 1.5x6 + 1.3x7 + = 5 (Contribution to sales growth in year 1)
d 5− − d 5+
1.2x1 + 1.5x2 + 1.4x3 + 1.5x4 + 1.3x5 + 1.6x6 + 1.4x7 + = 7 (Contribution to sales growth in year 2)
d −6 − d +6
1.2x1 + 1.7x2 + 1.5x3 + 1.8x4 + 1.3x5 + 1.7x6 + 1.3x7 + = 9 (Contribution to sales growth in year 3)
d −7 − d +7
1 + 50x2 + 60x3 + 80x4 + 40x5 + 90x6 + 70x7 + = 400 (NPV of projects)
It may be noted that in the goal constraint of NPV, it is arbitrarily set equal to 400. In the objective function, the NPV goal, set at
(d −
7 − d +7 )
priority level 3, is defined as minimize
This has the effect of striving for maximum possible deviation from the target value – this means NPV is sought to be
maximized.
< TOP >
4. The critical path is 1-3-4-5
The project duration is 38 weeks and the total direct cost is Rs5,42,000.

The time cost slopes of the different activities are as follows:

Activity Time in weeks Cost to expedite per week
Normal Crash (Rs)
1-2 12 6 10,000
1-3 10 6 11,000
2-4 4 2 24,000
3-4 20 12 7,000
2-5 6 4 18,000
4-5 8 4 12,000 Crashing
 Path Duration Critical Direct cost Indirect cost Total Cost
in weeks path (Rs) (Rs) (Rs)
a. 1-3-4-5 38 1-3-4-5 5,42,000 3,99,000 9,41,000
b. 1-2-4-5 24
c. 1-2-5 18
Crash activity (3 – 4) by 8 weeks)
a. 1-3-4-5 30 1-3-4-5 5,98 ,000 3,15,000 9,13,000
b. 1-2-4-5 24
c. 1-2-5 18
Crash activity (1 – 3) by 4 weeks
a. 1-3-4-5 26 1-3-4-5 6,42,000 2,73,000 9,15,000
b. 1-2-4-5 24
c. 1-2-5 18
Crash activity (4 – 5) by 2 week
a. 1-3-45 24 1-3-4-5 6,66,000 2,52,000 9,18,000
b. 1-2-4-5 24 1-2-4-5
c. 1-2-5 18
Crash activity (4 – 5) by 2 week
a. 1-3-4-5 22 1-3-4-5 6,90,000 2,31,000 9,21,000
b. 1-2-4-5 22 1-2-4-5
c. 1-2-5 18 a. As
there is no further possibility of crashing, the minimum project duration is 22 weeks and the associated cost is Rs 9,
21,000.
b. If the objective is minimum project cost then the cost is Rs 9, 13,000and the duration is 30 weeks.
< TOP >

5. a. To calculate the weighted average cost of equity we need to calculate the cost of equity of each division.
Equity Beta of confectionaries division:
Estimated equity Beta of Britania= 0.75
Debt to equity = 1:4
Estimate beta of debt = 0.2
Tax = Nil
E  D 
βE . +βD  
E +D E +D 
βA of Britania =
= 0.75 × 0.8 + 0.2 × 0.2
= 0.6 + 0.04 = 0.64
As Beta of debt in case of Ajay Industries is zero, equity beta of confectionaries division
 D 
βA 1 + ( 1 − T ) 
 E 
=
= 0.64 [1 + 0.3 × 0.7]
= 0.774.
Similarly, equity beta of computers divisions is calculated as follows:
E  D 
βE +βD  
E +D E +D 
βA of Satyam =
= 1.8 × 0.6 = 1.08.
As Beta of debt in case of Ajay is zero,
βE = βA[1 + D/E (1 – T)]
 = 1.08 [1 + 0.3 × 0.7] = 1.307.
Equity beta of confectionaries division = 0.774
Weight in the firm value = 0.7
Equity beta of computers division = 1.307
Weight in the firm value = 0.3
Average equity Beta of firm = 0.774 × 0.7 + 1.307 × 0.3 = 0.9339.
Cost of equity = Rf + (Rm – Rf)βE
= 0.075 + (0.14 – 0.075) 0.934
= 0.136
Average cost of capital of the firm = 0.3 × 0.1 × 0.7 + 0.7 × 0.136
= 0.021 + 0.0952 = 0.1162
b. Required rate of return on cosmetics division
= 0.1162 + 0.02 = 0.1362 = 13.62%
NPV of cosmetics division
0.1 0.2
+ + 0.5 PVIFA13.62,3 PVIF13.62,2
1.1362 ( 1.1362 ) 2
= –1 +
= –1 + 0.0880 + 0.1549 + 0.906
= Rs.0.147897 crores
As NPV is (+) ve, the new division can be taken up.
< TOP >

Section C: Applied Theory

6. The preparation of detailed project report (DPR) is the preliminary phase of a project life cycle. The outline and content of
DPR is similar to the techno-economic feasibility report. All the vital aspects of location and site, process technology, market
demand, plant capacity, project revenue, manufacturing or construction costs, profitability, economic benefits etc, are covered
in much greater detail. The basic difference between the feasibility report and DPR is the level of accuracy and degree of
detail.
Some of the differences between FR and DPR are as follows:
 Features Feasibility Report
Objective Its aim is to serve the top
management in arriving at feasible
and viable project alternatives.
Scope of information The interests of the management can
management be met by collecting relevant
information in vital areas of technical,
economic, commercial and
environmental areas at the onset.
However, about 70–80% information
may be collected and analyzed in
feasibility studies based on which
certain reliable forecasts are made
and decisions are taken by the
management.
Time span These studies are subjected to an
exploratory type of research and
hence consume a span of 6 to 15
months.
Costs involved The cost of feasibility studies varies
on the type of project. As an average
for any project the costs may range
approximately between 1.5-3% of the
project costs.
Reliability These studies are reliable for a short
period of time (till the decisions are
made about a project). In the long run
they serve only as a data bank as the
information stinks.
Depth of analysis The depth and magnitude of the
feasibility studies are obviously
reflected through costs and time
consumed in conducting studies. The
level of information furnished in
these reports is clear, yet some
secondary issues are perfunctorily
managed.
Detailed Project Report
Its focus is to communicate formally
about the project sponsor’s decision
on a specific project to the
government departments and financial
institutions for seeking their approvals
and funding.
It is compulsory for any project
sponsors to provide full and final
information including a provision for
contingencies of any sort on a project
proposal. These reports are supposed
to equip with total (100%) available
information on the proposed project.
However, there may be probable
variation of 5% down the line due to
unwarranted conditions while making
future projections.
A lot of care and diligence is
inevitable on the part of the estimator
while preparing the official document
and hence may consume time within
the range of 1 year to 2 years after the
decision is taken by the top
management.
The cost of preparing a detailed
project report is little higher than that
of feasibility studies. The total costs
may range between 5-7.5% of the
expected investment.
The detailed reports help in guiding
the entire project and even if any
variation is there in the project data it
can be compared and observed.
However, this acts as a major signpost
for all practical purposes in the project
development and for future reference.
The depth and magnitude is perfectly
maintained by furnishing intricate
details of the project. The report is
prepared with diligence taking all
precautions to avoid ambiguity and
mystery concerning issues of the
project.
< TOP >

7. Some major issues in the Preparation of EIS/EIA:

The following are the major issues reported to be encountered commonly while conducting and preparing the EIS/EIA. Some
of the issues cannot be resolved. In the absence of better alternatives, the analyst has to accept the issues as they are.
(i) Determining the Environmental Impacts: This is the central theme in any EIS / EIA. It is a very complex process. At the
environmental attributes. Our interest is on the “impacts” and not on the ‘changes’ which normally take place even
without the project. The determination of environmental impacts involves: (a) identification of impacts in environmental
attributes of environmental attributes or the ER / Vs, (b) measurement of impacts on attributes, and (c) aggregation of
impacts on attributes to reflect the total impact on environment.
(ii) With and Without the Project: The environmental impacts are measurement of attributes with and without the project or
activity at a given point in time. But the changes in the attributes take place over time without the activity. Therefore the
impact must be measured in terms of “net” change in the attribute at a given point in time.
(iii) Identifying the impacts: The number of attributes to be evaluated is practically infinite because any characteristic of the
environment is considered to be an attribute. Therefore, they have to be reduced to manageable numbers. Thus,
duplicative, redundant, difficult to measure, and obscure attributes may be eliminated in favour of those that are more
tractable. This implies that some attributes which are difficult to measure or conceptualize, may still remain to be
examined. In this case, bias and subjectivity are likely to be crept in.
(iv) Characteristics of the Base: Conditions Prior to the Activity: The nature of the impact is determined by the conditions of
the environment existing before the project. The assessment of the characteristics of the base is a critical factor.
(v) Role of Attributes: Though the impacts are considered to be the effects on the definite discrete attributes of the
environment, the actual impacts are not correspondingly well categorized. Nature does not necessarily respect man’s
discrete categories. Rather, the actual impacts may be the effects of varying severity on a interrelated attributes. The
issue is one of identifying and assessing the cause-condition-effect in order to work out the remedial measures.
(vi) Measurement of Impact: Ideally, all impacts must be translatable into common units. However, this is not possible
because of the difficulty in defining impacts in common units (eg. On income and on water quality). In addition, the
quantification of some impacts may be beyond the state of the art.
(vii) Aggregation Problem: After measuring the project impacts on various individual attributes or ER/Vs, one encounters the
problem of how to aggregate all impacts (quantitative and qualitative) thus assessed to arrive at a single composite
measure to represent the ‘total activity impact’. This would involve expressing the various impact measures in common
units which is very difficult. Some use a weighting procedure to accomplish this which is again subjective. There is
another associated problem of summing up and comparing with the impact of an alternative activity.
(viii) Secondary Impact: Secondary or indirect impacts on environment should also be considered particularly in relation to
the infrastructure investments that stimulate or induce secondary effects in the form of associated investments and
changed patterns of social and economic activity. Such induced growth brings significant changes in the natural
conditions. Similarly, there can also be significant secondary impacts in the biophysical environment.
(ix) Cumulative Impacts: Here, cumulative refers to the similar activities spread over in an environmental setting like hotels,
beach resorts, surface or underground mines, industrial estates, etc. A single individual activity may produce significant
cumulative effect on certain aspects of environment. This raises the question of how to deal with these significant
cumulative effects. Therefore, it is suggested to prepare an environmental impact assessment (EIA) on broad
programmes rather than on a series of component actions (e.g industrial estates, mining sector, tourism industry, etc). or,
alternatively, one can prepare on EIA for a particular geographical area where a series of similar activities are located
(eg. Mining areas, coastal line for beach resorts, etc)
(x) Report Findings: The results should be displayed in such a way that it makes easy and clear to comprehend the total
impacts of an activity from a brief review. It is suggested to display the impacts on a summary sheet in a matrix form.
The knowledge about the issues as explained above, however complex they are, will be useful in understanding the processes
and complexities involved in preparing an EIS / EIA. Such an awareness will help improve the understanding of EIS, leading
to more objective, informed and unbiased decision-making on activities/ projects.
< TOP >

< TOP OF THE DOCUMENT >