IV Semester M.B.A. (Day)M Sem. M.B.A. (Eve.) Examination, July/August 2006

(Updated Scheme) MANAGEMENT

F - 6 : Project ~ppraisal and Finance .

Time: 3 Hours Max. Marks: 75

SECTION - A .

I . Answer any six of the following :

a) What is project apprslisal ?

b) What is technical analysis ?

c) Define Internal Rate of return.

d) What is Delphi method of demand forecasting ?

e) What is CAPM ?

f) What is sensitivity analysis ?

. g) Differentiate between financial risk and business risk.

h) What is 'rights issue' ?

SECTION - B

Answer any four of the following : (4x5=20)

2. Explain the B.C.G. product portfolio matrix.

3. Discuss any five important demand forecasting techniques of your choice.

4. Discuss the key issues considered by financial institutions while appraising a 1 project for term financing.

1 5. XYZ Ltd. is considering a project with the following expected cash flows initial

i investment Rs. 1,00,000. Expected cash inflows 1" year Rs. 70,000, 2nd year I I

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

i take up the project. I P.T.O. . I

6. Using capital asset pricing, determine the required return on equity for the following situations.

Situation Expected return a Risk Beta Market portfolio free rate '

1 15% 10% 1 .OO 2 18% 14% .70 3 15% 8% 1.20 4 17% 11% .80 5 16% 10% 1.90

. What generalisation can you make ?

7. A company issues Rs. 1,000, 10% redeemable debentures at a discount of 5%. The floatation costs are 3%. The debentures are redeemable after 15 years. Calculate before tax and after tax cost of debt assuming a tax rate of 50%.

SECTION - C

Answer any three of the following. Each question carries 10 marks : (3x10=

8. Briefly explain the techniques, with one example each, used in evaluating the investment proposals under uncertainty in order to choose the best project.

9. Define venture capital investment. What are the different forms in which venture capital is provided ? Explain the venture capital investment appraisal process and management.

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 :

Required : a) Calculate N.P.U. and I.R.R. of each project. b) State, with reasons, which project you would recommend.

Year

Cash flows (Rs. in lakhs) p,j,t - x hojwt - Y

0

[2001 [200]

1

35 218

3

90 10

2

80 10

4

75 4

5

20 3

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.

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

1 12. A small project is composed of seven activities whose time estimates are listed in

i i

the table as follows :

You are required to

Year 1

Activity

1 - 2

1 - 3

2 - 4

2 - 5

3 - 5

4 - 6

5 - 6

! 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

CFAT

14,00,000

18,00,000

25,OO.OOO

40,00,000

Probability

0.1

0.2

0.4

0.3

Year 2

Estimated duration (weeks)

CFAT

15,00,000

20,00,000

32,00,000

45,00,000

Year 3

Optimistic

1

1

2

1

2

2

3

Probability

0.1

0.3

0.4

0.2

CFAT

18,00,000

25,00,000

35,00,000

48,00,000

'Probability

0.2

0.5

0.2

0.1

Most likely

1

4

2

1

5

5

6

Pessimistic

7

7

8

1

14

8

15

SECTION - D

Case Study

13. This question is compulsory.

The initial investment outlay for a capital Investment project ~ n s i s t s of Rs. 10 lakhs for plant and machinery and Rs. 40 lakhs for working capital.' other detail are surnrnarised below.

Sales volume : I lakh units of output per year for years 1 to 5

Selling price : Rs. 120 per unit of output

Variable cost : Rs. 60 per unit of output

Fixed overheads (excluding depreciation) : Rs. 15 lakhs per year for years 1 to 5 Rate of depreciation on plants machinery : 25% on W.D.V. method

Salvage value of plant and machinery : Equal to the W.D.V. at the end of year 5

Applicable tax rate : 40% Time horizon : 5 years Post tax cut-off rate : 12%

Required : a) InQcate the financial viability of the project by calculating net presen

value. b) Determine the sensitivity of the projects NPV under each of the followin/

conditions.

i) decrease in selling price 5%

ii) increase in variable cost by 10%.

AE - 1652

IV Sem. M.B.A. (Day) / VI Sem. M.B.A. (Eve.) Degree Examination, July/August 2005 (Updated Scheme) .

Paper F6: MANAGEMENT (Finance Specialisation) Project Appraisal and Financing

Max. Marks: 75

(6x2=12)

Time: 3 Hours

PART - A

1. Answer any six of the following:

a) What is risk ?

b) What are social costs ?

c) What is sensitivity analysis ?

d) What is venture capital ?

e) Define the Benefit to Cost Ratio. How is it used in project appraisal ?

f) Define a Project Rating Index.

g) What are the major components of the weighted average cost of capital ?

h) What is the difference between firm risk and industry risk ?

PART - B

Answer any four of the following: (4x5=20)

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.

4. What is the IRR of the following cash flow stream ?

Year Cash flow

AE - 1652 -2-

5. Sumit Electronics Ltd., has a debt to equity ratio of 0.8. Its WACC is 15% and its tax rate is 30%. If the cost of equity is 20%, what is its pre-tax cost of debt ? If the company can issue debt at an interest rate of 13%, what will be its cost of equity ?

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:

What is the expected return and risk of a portfolio of projects consisting of 40% of funds invested in A, 30% funds invested in B and 30% funds in C ?

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:

8. Discuss the steps involved in project formulation and implementation.

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.

Economic scenario Probability Returns - X Y A

Strong economic growth 0.3 0.2 0.07 0.21

Moderate economic growth 0.5 0.15 0.14 0.12

Weak economic growth 0.2 0.08 0.22 0.05

Compute the expected return, standard deviation and co-variance terms.

-3- AE - 1652

11. Draw the network diagram and determine the critical path activities of a project.

Activity Time Cost

h: Normal Crash Normal Crash 1-2 6 4 8,000 10,000

F 2-4 7 3 9,000 12,000 1-3 8 4 10,000 1 3 .OOO r 3-4 7 5 8,000 1 1,000 3-5 5 3 7,000 10,000

Find the minimum cost project schedule if the indirect costs are:

It": a) Rs. 1,500 per week

r b) Rs. 2,000 per week.

)r: 12. A project involves an outlay of Rs. 1,00,000. Its expected cash inflow at the end

B: of year 1 is Rs. 40,000. Thereafter, it deci-eases every year by Rs. 2,000. It has 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: PART - D

13. This question is compulsory. 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.

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OE - 2027

M.B.A. IV Semester Examination, October 2004 (Updated Scheme)

Paper F-6: MANAGEMENT -

Project Appraisal and Finance

Time: 3 Hours

SECTION -A

Max. Marks: 75

1 . Answer six questions. Each question carries two marks.

a) What is security market line ?

b) What is social profit ?

c) What is key factor in project appraisal ?

d) What is social - cost benefit analysis ?

e) What is efficient frontier ?

f) What is beta ?

g) What is venture capital ?

h) What is working capital ?

SECTION - B

Answer four quzstions. Each question carries 5 marks. (4x5 = 20)

2. What is IRR and how is it calculated ? Discuss problems associated with it.

3. W ~ a t are the three elements of the cash flow stream of a project and three components of the cash flcw steam of a replacement project ?

4. What factors do influence market risk premium ? Suggest an appropriate measure for the market risk p r e ~ i u m and justify it.

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)

8. X Ltd. is considering a capital project about which the following information in available. 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 be liquidated at its book value.

c) The project is expected to increase the revenue of the firm by Rs. 500

i I million per year. The increase in costs on account of the project is expected

1 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 equipment ? Assume that the cost of capital is 13%. 1

b) How much be paid for a machine which brings in an annual cash inflow of I

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

1.

2.

3.

Project h1 Project P1'

Rs. 11 million 38 million

19 million 22 million

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 cos~ 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 - D (13 Marks)

Case Study

13. An all-equity firm is evaluating the following projects:

The risk-free rate is 1 I%, and the expected market risk premium is 6%.

The firm's cost of capital is 16%.

Project beta expected return (%)

A 0.5 15

B 0.8 16

C 1.2 2 1

D 1.6 22

E 1.7 23

a) Which projects should be accepted ?

b) If the firm's cost of capital is used as a handle rate, which projects will be accepted or rejected incorrectly ?

iV Semester M.B.A. (Day and Evening)M Sem. M.B.A. (Evening) Degree Examination, SeptJOctober 2003

MANAGEMENT F - 6 : Project Appraisal and Finance

L. 'I l [oun Max. Marks : 50

Irzstruiclior!~ : Ar~.r~verull Sections. Specific instructio)zs are given in each Section.

SECTION - A ijtc : .Ansu:er any three questions from this Section . Each question carries

2 17;al.k~. I

3) I1,'hat is project rati.ng index ? 55 b;) \V!lar are social costs ? C) M%at is sensitivity analysis ? 2 . 6) Define adjusted present value method.

ej LVhat is risk ?

SECTION - B -<ate : A I ~ S W C T any 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.

3. Discuss the contents of project report.

4. Cn tlcally ci1:;iuare the NI'V and IRR methods of project appraisal. i $? 4 \? 4 ,

c(1 -- - 5. What are the various risks lo be considered while appraising foreign projects ?

3 . How docs i~~fraslructurc financc differ from inidstrial finance ?

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

K!. - 8. Discuss tllc 'various aspccts Lo be consldcred in technical analysis of projects.

. .. '18 ~ - . .-~

3 9 . Discuss L ~ C S ~ C ~ ) S involvcd 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. i t can initially insstall a 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 i f 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 pe rce~ t chance that demand in the subsequent years will be high. If it t~lrns out 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~nated to yicld net cash flows , ~ f Ks. 4 lakh in ycur ! iSdcrnalid is higt, and Rs. 2 lakh if denland is low. If the initial dcmancl is high, L ~ I C colnpany will cxpa11(1 its capacity and it is expected to generate net cash flows of Ks. 20 lakh in per-pcl~rity i f rllc subsequent dcmand is high ar~d Rs. 8 lakh iS the st~bsccli~cnt d c r n a ~ ~ d is :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 ? . . - - -- --