ASSIGNMENT -2

1. Difference between PERT and CPM ?

PERT means Program Evaluation and Review Technique is an important
quantitative techniques of network analysis with the help of complex
business problem can easily be solved & object can be achieved within
stipulated time.
CPM means Critical Path Method is used for an algorithm used for
planning, scheduling, coordination and control of activities in a project.

Basis PERT CPM

PERT is a project CPM is a satistical

management technique of project
technique used to management that
manage uncertain manages well
activities of a defined activities of a
Meaning project. project.
Orientation Event Oriented Activity Oriented
Model Probabilistic Deterministic
focuses On Time Time-cost Trade Off
Estimates 3 time 1 time

2. Nature of jobs Non Repetitive Repetitive Elaborate ARR

and IRR methods
of capital budgeting ?
Capital budgeting is a process by which investors determine the value of a potential
investment project.
ARR (Average rate of return )
The ARR capital budgeting technique is one of the most widely used budgeting
techniques. This method is also known as the Average Rate of Return method and it
calculates what return the investment will generate in terms of net income to the
organization over the lifespan of the investment. This method represents the return as a
percentage of the original investment.
Formula of ARR :
Average rate of return : Average annual profit / initial investment
Where:

 Average Annual Profit is calculated by working out the annual cash inflow generated
by the project minus depreciation.
 Initial Investment is equal to the investment required for the project.

This formula therefore requires us to calculate the depreciation of the asset, as well as
calculating the cash flow generated by the project. The formula for depreciation can be
expressed as:
Depreciation : Initial value – scrap value / life of estimated years

IRR (Internal Rate of return )

The internal rate of return (IRR) is a metric used in capital budgeting to estimate the
profitability of potential investments. The internal rate of return is a discount rate that makes
the net present value (NPV) of all cash flows from a particular project equal to zero.

To calculate IRR using the formula, one would set NPV equal to zero and solve for the
discount rate (r), which is the IRR.

IRR : LDR + P – Q / P2 – Q2 *(HDR – LDR )

Where : LDR is Lower discount rate

P – P.v at lower discount rate
P2 – P.v at higher discount rate
Q – Initial investment
HDR – higher discount rate

3. (a) Calculate Pay back period

Pay back period : Initial investment ÷ Cash inflows

Proposa Investment Inflows(B Ranking of

l (A) ) A÷B Project
5.22
A 31300 6000 yrs 3
4.87
B 97400 20000 yrs 2
3.92
C 98075 25000 yrs 1
6.80
D 27200 4000 yrs rejected
Note : as per given in question pay back period is not exceed from 6 yrs so Project D
will be rejected.
(b) Calculate NPV

NPV : P.V of cash inflows – P.V of cash outflows

Proposa Investment P.V @ 20% Accept/

l (A) CFAT (B) NPV (A-B) Reject
A 31300 6000 4.192 -6148 Reject
B 97400 20000 4.87 0 Reject
C 98075 25000 4.192 6725 accept
D 27200 4000 4.675 -8500 Reject
Note : Only Project C will be accepted because its NPV is in positive.

Q4. Investment Avenues

Investment avenues are FD, Bonds and debentures, mutual funds, real estate ,Gold
 FD : this is the most secured investment avenues.in this one thing is that the more you
are able to take the risk the more you get the the return. Risk and return factor always go in
the same direction in the financial market.

Bonds and debentures : bonds and debentures are the most well known security options in
india, they are issued by corporations and institutions. Generally bonds are issued by PSUs,
hence, the risk is quite low here in comparison to other options. Bonds is like a loan, secured
by specific assets while debentures is not secured by an asset.

Mutual Funds : Mutual funds carries medium risk and moderately high return with it. Field
of the mutual funds is quite vast. According to the risk and return factors there are thousands
of plans or schemes under it.

Equity : it is the most valuable volatile and most risky market of all but with highest
profitable return capacity. Like mutual funds equity field also the biggest one. There are the
various options available in the market. Aggressive investors who have knowledge and
experience in the stock market may earn millions of money from it.

Real estate : property rates are increasing day by day which has made real estate a hot
investment alternative. Through buying, selling and holding of property, investors can make a
huge profitable return. Appericiation of property makes real estate a profitable investment
tool in comparison to others.

Gold : investment in gold is an ancient avenue of investment. Gold price is gradually

increasing day by day with the increasing value of gold investors take profit from it.

According to Question, if I have a savings of Rs. 75000 then I invest some part of it in
purchasing gold and some part of it in FD. And some part invest in Equity because it is the
most risky market but with the highest profitable return capacity.