Code: 561A

Subject:

Project Appraisal

Specific Instructions:
There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks (25 marks) unless specified explicitly.

General Instructions:
The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept The student should only use the Rule sheet papers for answering the questions.

The student should attach this assignment paper with the answered papers. Failure to comply with the above four instructions would lead to rejection of assignment

Question No 1:
Lucky Computer Stores is making a business plan for the next five years. Sales growth over the past 2 years has been good. Sales would grow substantially if a major electronics firm is established in the vicinity as proposed by an investor. Lucky Computers see 3 options:(i) to enlarge the current store. (ii) to relocate it at a new site and (iii) to simply wait and do nothing. The decision to expand or move would take little time and therefore, the stores would not lose revenue. If nothing were done in the first year and strong growth occurred, then the decision to expand would be reconsidered. Waiting longer than one year would allow competition to move in, making expansion no longer feasible.

The assumptions and conditions are: Strong growth, emanating from the new electronics firm has a probability of 55%. Strong growth with new site would give annual returns of Rs. 1,95,000 p.a. Weak growth with site would mean annual returns of Rs. 1,15,000 p.a. Strong growth with expansion would yield annual returns of Rs. 1,90,000 p.a. Weak growth with expansion would mean annual returns of Rs. 1,00,000 p.a. There would be returns of Rs. 1, 70,000 p.a. at the existing store with no changes in case of strong growth and returns of Rs. 1, 05,000 if growth is weak. Expansion at current site would cost Rs. 87,000. A shift to the new site would cost Rs. 2, 10,000. In case of strong growth, if existing site is enlarged during the 2nd Year, the cost would still be Rs. 87,000. Which option should Lucky Computer Store take, if operating costs for all options are equal?

Question No2
a) Explain Venture Capital Funding of Projects b) What are the major causes for delays and cost overrun in completion of projects? c) What is 'pay back period'? Under what situations investment decisions are mainly guided by pay-back period method? d) What are the main differences between PERT & CPM? a) Brown Field Project

Question No 3
a) S Limited has Rs. 10, 00,000 allocated for capital budgeting purposes. The following proposals and associated Profitability Index have been determined.

Project 1 2 3 4 5 6

Amount (Rs.) 300,000 150,000 350,000 450,000 200,000 400,000

Profitability Index 1.22 0.95 1.20 1.18 1.20 1.05

Which of the above investment should be undertaken?

( Assume that the Projects are indivisible and there is no alternative use of the money allotted for capital budgeting ).

b) How gestation period of an on-going project affects Project financing decisions? c) An Investor wants to invest in a profitable project considering the opportunities available and business environment. As a Financial Advisor , suggest some sources for Project identification d) What is Feasibility Study? e) What are the main objectives of pre-feasibility Study?

Question No 4
a) A company is considering two mutually exclusive projects X and Y. Project X costs Rs. 30,000 and Project Y Rs. 36,000. You are given below the net present probability Project X NPV Estimate (Rs.) 3,000 6,000 12,000 15,000 Profitability 0.1 0.4 0.4 0.1 Project Y NPV Estimate (Rs.) 3,000 6,000 12,000 15,000 Profitability 0.2 0.3 0.3 0.2

1) Compute the expected net present value of projects X and Y 2) Compute the risk attached to each project, i.e. Standard deviation of each probability distributions 3) Which project do you consider more risky and why? 4) Compute the probability index of each project. b) Commercial aspects of the Project to be considered by the institutions: Explain