St. Joseph’s College of Commerce (Autonomous)
End Semester Examination – April 2011
M.Com – IV SEMESTER
PROJECT APPRAISAL AND FINANCE
Duration: 3 Hours Max. Marks: 100
SECTION – A
I)Answer ALL the questions. Each carries 2 marks. (10×2=20)
- Why are capital expenditure often the most important decision taken by a Firm?
- Mention any four sources to identify Project ideas.
- What is Project rating Index?
- Mention any four factors leading to error & uncertainty.
- Mention the key steps in sample survey.
- Give any four Project Charts that are prepared for a Project.
- Why does money have a time value?
- List any four techniques of Risk Analysis.
- What is shadow Price of traded goods?
- What is PERT activity & event?
SECTION – B
II)Answer any FOUR questions. Each carries 5 marks. (4×5=20)
- Explain Porter Model as a tool for identifying investment opportunities.
- Explain various methods of Demand Forecasting.
- What is weighted average cost of capital? How do you compute this & what is its relevance?
- Bring out the difference between NPV & IRR as a technique of evaluating Capital budgeting decision.
- Explain Project Life Cycle.
- What are the problems faced as a Project Manager. How would you administer them?
SECTION – C
III)Answer any THREE questions. Each carries 15 marks. (3×15=45)
- How would you evaluate Indian Venture Capital Industry.
- Explain in detail the Facets of Project Analysis.
- Explain the various components of Costs of a Project.
- Naveen Enterprises is considering a capital project about which the following innformation is available. The investment outlay on the project will be Rs. 100 million. This consists of Rs. 80 million on plant and machinery and Rs. 20 million on net working capital. The outlay will be incurred at the beginning of the project.
The project will be financed with Rs. 45 million of equity capital, Rs. 5 million of preference capital, and Rs. 50 million of debt capital. Preference capital will carry a dividend rate of 15 percent; debt capital will carry an interest rate of 15 percent. The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a net salvage value of Rs. 30 million whereas net working capital will be liquidated at its book value. The project is expected to increase the revenues of the firm by Rs. 120 million per year. The increase in costs on account of the project is expected to be Rs. 80 million per year. (This includes all items of cost other than depreciation, interest, and tax). The effective tax rate will be 30 per cent. Plant and machinery will be depreciated at the rate of 15 percent per year as per the written down value method. Hence, the depreciation charges will be:
First year : Rs. 12.00 million
Second year : Rs. 10.20 million
Third year : Rs. 8.67 million
Fourth year : Rs. 7.37 million
Fifth year : Rs. 6.26 million
Given the above details, Prepare the project cash flows.
- You have identified the following activities, events and their interdependence.
| Activity Predecessor Successor Estimated Crash Crash
Time(weeks) Time Cost per week |
|||||
| A (1-2) | start | d | 4.0 | 3.2 | Rs. 1,250 |
| B (1-3) | start | c, e | 3.0 | 2.5 | 2500 |
| C (3-6) | b | h | 6.5 | 5.3 | 3000 |
| D (2-4) | a | f | 3.5 | 3.0 | 2400 |
| E (3-5) | b | g | 4.2 | 3.5 | 1850 |
| Fx (4-6) | d | h | 0.0 | —– | —– |
| G (5-6) | e | h | 3.3 | 3.0 | 1100 |
| H (6-7) | g | finish | 2.5 | 2.1 | 1700 |
You are required to prepare a network daigram with time activities and events. Identify different paths for the completion of the project. Identify critical path . identify EST, EFT, LST, LFT . Also calculate total slack and free slack.
SECTION -D
- IV) Compulsory question. (15 marks)
- Sona Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically.
You have recently joined Sonal limited as a financial analyst reporting to Suresh Gopal, the CFO of the company. He has provided you the following information about three projects, A, B and C that are being considered by Executive Committee of Sona Limited: Project A is an extension of an existing line. Its cash flow will decrease over time. Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time. Project C is concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed by a huge benefit for one year. However, in the year following that a substantial cost will be incurred to raze the pavilion. The expected net cash flows of the three projects are as follows:
| Year | Project A | Project B | Project C |
| 0 | (5000) | (5000) | (5000) |
| 1 | 3500 | 1000 | 15000 |
| 2 | 2500 | 3000 | (10000) |
| 3 | 1500 | 4000 | – |
Suresh Gopal believes that all the three projects have risk characteristics similar to the average risk of the firm and hence the film’s cost of capital, viz. 12 percent, will apply to them. You are asked to evaluate the projects.
- What is payback period and discounted payback period? Find the payback periods and discounted payback periods of Projects A and B.
- Calculate the NPVs of projects A, B, and C.
- Calculate the IRRs of Projects A, B, and C.
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