EX MBA - SEM IV – PROJECT FINANCE Q BANK

Cost of Projects

1. For a particular project following details are available –

Item Cost Rs. Crore

Imported equipment 24.00 FOB

Indigenous equipment 4.40

Spares – imported 2.40 FOB

Spares – Indigenous 0.22

Building structure 6.40

Erection 3.20

Following further information is also given –

a. GST @ 18 % on all indigenous equipment and spares

b. Inland freight and insurance @2% of Cost of indigenous procurement

c. Ocean freight and insurance @ 10% on FOB

d. Custom duty @ 20% on CIF of imports.

e. Port handling charges @2% on CIF

f. Entire project is expected to complete in two years time

g. Funding of entire estimated cost (incl contingencies) is expected by

borrowing at 12% interest pa

h. Payments are made by borrowing from time to time as under –

Landed cost of imports – in advance at the beginning of year 1

Landed cost of Indigenous 10% in advance at the beginning of year 1,

40% at the end of year 1 and balance at the end of 1.5 year
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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Cost of building structure to be paid 20% in advance and balance at the

end of year 1

Cost of erection charges to be made at the end of year 2

Estimate the total cost of the project showing details, and also interest amount
for 2 years. (Provide for 5% contingency for imported items, 10% for indigenous
items and 20% for building structure, nil for erection cost)

2. A replacement project in a public sector company is estimated at Rs.2165

lacs. Its funding is done 40% by Government equity, 25% Bank Borrowing
at 10.5% pa , 20% Borrowing from FI at 8% pa, and balance 15% from
internal generation.

Additional information is given below –

a. Project is planned for 3 years (commissioning done at the end of year 3)

b. Government equity is to be fully utilized in the first year and rest of the
funding is assumed to be utilized to the extent of 50% during year 2 and
equally for rest of years

c. Total cost of Rs.2165 lacs is expected to phase out as 50% in year 1, 30%
in year 2, 10% in year 3 and balance 10% after year 3

You are required to work out Year wise phasing of the total cost with
various resources, Interest amount year wise for 3 years. (Ignore
Opportunity cost for Internal generation)

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

3. A project requires 3 types of material – Component TP11, Component QT11

and Component ZT11. At the time of beginning of the project costing is
made based on prices of 2020 as under –

Component TP11 – Qty to be used 120 ton at the price of 90.50 per ton

Component QT11 – Qty to be used 85 ton at the price of 110.50 per ton

Component ZT11 – Qty to be used 135 ton at the price of 45 per ton

Project gets completed in time but there was change in the scope in
between, and the prices also gets changed as under

Component TP11 – Qty used 105 ton at the price of 100.50 per ton

Component QT11 – Qty used 115 ton at the price of 100.75 per ton

Component ZT11 – Qty used 150 ton at the price of 52 per ton

Calculate the project cost as budgeted and actual with the variances
analysis as change in scope as well as price change.

4. A project is undertaken to run a textile mill. Budget is prepared for a

particular period and the actual results are compared with the budget. A
project is headed by managing director, under which there is one technical
director and Marketing director. Entire team set up is as under –

Spinning superintendent, weaving superintendent, processing

superintendent report to Mill manager, who along with Chief Engineer
report to Director Technical. Sales manager along with Publicity
Manager report to Director Marketing.

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Following details are extracted from the project file for the year 2020-21(Rs
in lacs

Budget Actual

Sales manager Travelling expenses 40 42

Publicity dept salary and admin 120 130

expenses

Sales commission 250 240

Spinning dept Labour 800 840

Weaving dept labour 600 620

Raw material 2800 2920

Processing house material 700 640

Maintenance stores 200 190

Processing dept labour 500 512

Maintenance dept labour 260 255

Utilities -

Spinning 150 165

Weaving 200 190

Processing 300 350

Maintenance 50 60

Weaving material 100 105

Sales dept salary and admin expenses 100 95

Publicity expenses 200 198

Director Technical – office expenses 175 200

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Director Marketing - office expenses 200 190

MD – office expenses 250 270

Mill manage salary 100 105

Revenue from Operations 10000 8800

Make a detail financial report showing the responsibilities of each project

member along with his achievement against budget

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Capital expenditure – NPV / IRR / Payback

1. From the following data and information provided, find out the missing
values

Project X

Annual cost savings 40,000

IRR 15%

PI 1.064

Useful life 4years

NPV ?

Cost of Project ?

Pay back ?

Salvage value 0

Cost of capital ?

15% 14% 13% 12%

1 year 0.869 0.877 0.885 0.893

2 year 0.756 0.769 0.783 0.797

3 year 0.658 0.675 0.693 0.712

4 year 0.572 0.592 0.613 0.636

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PVAF 2.855 2.913 2.974 3.038

2. From the following particulars calculate NPV

a. Company wants to Select the project based on RADR , given that risk
free return of 10% with risk premium adjustment of 2% for X and 8% for
Y

X Y

1 4,00,000 5,00,000

2 3,50,000 4,00,000

3 2,50,000 3,00,000

4 2,00,000 3,00,000

Both the projects costs Rs.10,00,000.

b. For the cash flows of the above example, if certainty equivalent co-
efficient is estimated as under, state which project is better off

X Y

1 0.90 0.80

2 0.80 0.60

3 0.60 0.60

4 0.50 0.50

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3. Following information is available regarding expected cash flows generated

and their probabilities in respect of project requiring initial investment of
800000

Probability

Cash flows 1 year 2 year 3 year

2,00,000 0.50 0.50 0.70

4,00,000 0.25 0.40 0.30

6,00,000 0.15 0.10 0.00

8,00,000 0.10 0.00 0.00

Compute expected monetary value and by considering discounting factor as

10% calculate NPV of expected cash flow

4. From the following project details calculate the sensitivity of the following
factors independently and answer which variable is more sensitive?

a. Project cost
b. Annual cash flow
c. Cost of capital
Project cost is estimated to be Rs.12,000. The annual cash flow Rs.4500, life
of project 4 years, cost of capital 14% . IRR is 18%.

5. Mr X is considering a project which cost Rs.7000, with an expected life of

two years. Project cash running cost is 2000 and 2500 respectively for year 1
and 2. On the other hand cash cost savings would be 6000 and 7000
respectively. Cost of the project is 8%. Management wants to know which
factor is more sensitive about calculation of NPV.

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6. From the following information ascertain which project is more risky on the
basis of Standard Deviation

X Y

CF Prob CF Prob

2500 0.2 2800 0.1

4800 0.3 4500 0.4

7000 0.3 6300 0.4

8200 0.2 8400 0.1

7. Firm has determined the following expected rates of return in view the
degree of risks involved in the proposals

Degree of risk Expected return

Low 24 %

Medium Low 28%

Medium 32%

Medium High 40%

High 48%

Firm has following proposals with it

High degree risk Expected rate of return

X 44%

Y 30%

Medium degree risk Expected return

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

P 20%

Q 34%

State which of the above proposals would be accepted by firm? (Proposal Q)

8. Firm is considering two alternative proposals for the next season

a. Purchasing and selling air coolers and

b. Purchasing and selling rain coats

From the following further details identify the alternative which is more profitable

Air coolers

Weather Probability % Net return

Hot summer 20 60,000

Normal summer 55 40,000

Cool summer 25 10,000

Raincoats

Heavy rain 20 80,000

Normal rain 60 30,000

Dry Monsoon 20 20,000

(Raincoat gives more profit = 38000)

9. Following is the data regarding six securities

A B C D E F

Return% 8 8 12 4 9 8

Risk 4 5 12 4 5 6

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(S.D)

a. Assuming three have to be selected, state which ones will be picked

Assuming perfect correlation show whether it is preferable to invest 75%
in A and 25% in C or to invest 100% in E

10.Company is considering a project for manufacturing a component which is

being purchased from outside. Manufacturing would call for an investment of
7,50,000 in a new machine besides an additional investment in working
capital of 50,000. Life of new machine is expected to be 10 years with
salvage value of 50,000. Estimated cash savings before tax would be 15,000
pm tax rate is 35%. Company requires minimum return of 10%.
Depreciation on SLM. Should company buy new machine?

11.A company is considering the replacement of existing machine by a new one.

WDV of existing machine is 50,000 and cash salvage value is 20,000.
Removal of this machine would cost 5000. Purchase price of new machine is
20 lacs and expected life is 10 years. Company follows SLM . other expenses
associated with new machines are –

Installation charges 15,000 cost of training workers to handle new machine

5000, additional working capital 10000 (assumed to receive back at the end
of project), fees paid to consultant for his advice about new machine 10000.

Profit before tax estimated to be 200000, tax rate 35%. Company requires
10% minimum rate of return from new machine. Should the new machine be
purchased?

12.Company is forced to choose between two projects A and B. both the projects
are designed differently but have identical capacity and can do exactly the
same job. Project A cost 1,50,000 and will have a life of 3 years. Project B
would cost 1,00,000 but will have a life of 2 years. It will require 40,000 pa

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to run Project A and 60,000 pa to run Project B. ignore tax. Opportunity cost
is 10% . Suggest the best Project.

13.Dry Twigs and fresh limited is always discarding old items and introducing
new lines of products and is at present considering three alternative
promotion plans. Various combinations of prices and development
expenditure are involved under these plans. High medium and low forecast of
revenues under each plan have been formulated and their respective
probabilities occurrence have been estimated as under – Rs lacs

Plan I Plan II Plan III

Budgeted revenue (pa) and

probability

High 30(0.3) 24(0.2) 50(0.2)

Medium 20(0.3) 20(0.7) 25(0.5)

Low 5(0.4) 15(0.1) 0(0.3)

Variable cost ratio 60% 75% 70%

Initial investment 25 20 24

Life in years 8 8 8

Company’s cost of capital is 12% and income tax 40%. Depreciation is to be

provided on SLM with no salvage value. Present value of annuity at 12% for
8 years is 4.967

Make detail analysis and suggest which plan is more profitable under NPV
method. Also state which plan is suitable if worst event happened.

14.A Project expects following Cash flows for next 4 years

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Year Cash flow

0 -10,000

1 3,000
Inflation rate is expected at 7%. Firm’s opportunity
cost of 2 3,000 capital in nominal terms is 14%. Should
the project be 3 3,000 accepted? Justify

15.Company is 4 3,000 considering a project for purchase of

new computer system to be used for its R&D division.
It would cost Rs.35,00,000. Operation and maintenance cost (excluding
depreciation) is expected to be Rs.7,00,000 pa.. it is estimated that the useful
life would be 6 years at the end of which the disposable value to be
Rs.1,00,000

The tangible benefits in the form of reduction in the design and

draftsmanship cost would be Rs.12,00,000 pa.

Initially if the investment is made, there would be disposal of used drawing

office equipment and furniture, which would get an income of Rs.9,00,000

Capex for R&D would attract 100% tax write off at the end of the first year
itself. Gain arising from disposal of used assets would be tax free. Company
pays 50 % tax and its cost of capital is 12%.

Analyze the capital expenditure and advice the management by using NPV
method

16.Calpal Manufacturing co uses a component in its final assembly. Annual

requirement of component is 30,000 units. Either it can be manufactured or
procure from outside supplier at 12 per unit. However if it is to be
manufacture in house, it would require an investment of Rs.1,00,000 to
purchase machine (life 4 years) with a salvage value of Rs.10,000 subject to
depreciation 25% pa on WDV basis.

The cost to manufacture would be as under –

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Material 3 per unit, labour Rs.5 per unit and fixed expenses if manufactured
Rs.90,000 pa. Further to buy machine company take a loan which is to be
repaid in four equal installments of Rs.25,000 (ignore interest part on loan).
Machine repairs cost would be Rs.14000, Rs.10500, Rs.7000 and Rs.3,500
respectively for four years.

Consider 35 % tax rate and 14% required rate of return. Evaluate the
proposal under NPV.

17.A firm has investment proposal requiring cash outflow of Rs.35000. life of
the project is 2 years. The expected cash flows are given below –

There is probability of 0.4 to get CF Rs.20000 during year 1, and in that case
the expected CF of 10,000 or 15,000 or 20,000 with probability of
0.2,0.3,0.5 respectively.

There is probability of 0.6 to get CF Rs.25,000 during year 1, and in that

case the expected CF of 20,000 or 25,000 or 20,000 with probability of
0.4,0.5,0.1 respectively.

Firm expect rate of return of 10%. Calculate Expected NPV.

What is the NPV if worst outcome is realized? What is the prob of such
NPV?

What is the NPV if Best outcome is realized? What is the prob of such
NPV?

18.Unitech is considering proposal of investing in a project which would need

immediate expense of Rs.40,000. Sales from the project are estimated as
under along with their probabilities

Sales units 2000 6000 8000 10000 14000

Probability 0.10 0.30 0.30 0.20 0.10

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Once the sales are established at certain volume in first year they will
continue at same volume in subsequent years. Selling price is 12 per unit and
variable cost is 8 per unit. Cash fixed cost amounting to Rs.20,000. Life of
project is 6 years at the end of which scrap value estimated at Rs.3000.
Company expects 10% rate for discounting CF. Calculate NPV, and also
state minimum volume of sales pa to justify the project. Ignore depreciation
and taxation.

19.There is 40% chance that a patient admitted to the hospital is suffering from
cancer. Doctor has to decide whether to operate or not. If the patient is
suffering from cancer and operation is performed, chance to recover is 70%
otherwise (if suffering from cancer but operation not done) it is 35%.

On the other hand if patient is not suffering from cancer and operation
performed, chance to recover is 20% otherwise it is 100%. Assuming death
and recovery are the only possible result, advice doctor whether to operate or
not.

20.An investment banker has a client, who has an option to invest in either real
estate, shares, corporate bonds or Govt. bonds. Investment is to be made for
one year. Yields and its chances are given as under –

a. Real estate – 25% chance of 10% decrease in value, 30% chance that
value will remain stable, 45% chance that value increase by 15%

b. Corporate bonds - 40% chance of 5% increase in value, 60% chance that

value will remain stable. They yield 12%

c. Shares - 25% chance of 20% increase in value, 10% chance that value
will remain stable, 20% chance that value increase by 30%,40% chance
that value increase by 10%, and 5% chance of 5% decrease in value

d. Govt Bonds – Expect to yield 8.5% with no change

Advice as to which option is better to invest by calculating EMV of each

option (assume no dividend on shares)

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Capital Asset Pricing Model (CAPM) –

21.Mercury holding limited an investment company has invested in equity

shares of blue chip company. Its risk free return (R f)is = 10% Expected total
return (Rm) = 16% Security Index (ß) = 1.50 Calculate expected rate of return
on that security

22.Calculate Beta factor of security under consideration from the following data

Return on security Market Return

1 20 22

2 22 20

3 25 18

4 21 16

5 18 20

6 2 8

7 17 4

8 19 5

9 3 6

10 20 11

23.From the following information calculate expected rate of return of portfolio

Expected market return 15%

Risk free return 9%

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Standard deviation of security under consideration 2.4%

Standard deviation of market return 2.0%

Correlation coefficient of security with market 0.90

24.You are analyzing beta for ABC computers and have divided the company
into its four SBU’s . following data reveals the market value of equity and its
beta factor

SBU Market value (Rs lacs) Beta

Mainframes 100 1.10

PC’s 100 1.50

Software 50 2.00

Printers 150 1.00

Estimate Beta of a company as a whole. If Government bond rate is

7.5%estimate cost of equity of each SBU and company as a whole, also
recommend cost of equity to be consider for printer division if it goes for
expansion.

25.From the following figures related to Beta limited, calculate ß and cost of
equity

Year Market return Security return Risk free return

1 15% 12% 10%

2 14% 11% 12%

3 17% 19% 8%

4 16% 18% 8%

5 10% 12% 10%

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26.Beta coefficient is 1.4. company has maintained 8% rate of growth in

dividend and earning . last dividend paid was 4 per share. Return on risk free
securities is 10%. Return on market portfolio is 15%. Would you recommend
to purchase the share if priced at a)36 b)50

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

LEASING OPTION –

1. ABC limited needs an asset for which following two options are under
consideration

Option 1 – An asset can be acquired on lease basis on a payment of annual

lease rent of Rs.18,000 p.a for 4 years

Option 2 – Asset is available of Rs.60,000 for which funds can be raised by

issue of 13% loan payable in four equal annual installments

Company provides depreciation on Straight line method and applicable tax rate is
25%. Suggest with proper working which option is better for the company

2. Firm can purchase an asset for Rs.2500 having life of 5 years, after which
the salvage value expected Rs.500. Depreciation is on SLM. Use of such
asset would increase the revenue by Rs.1500 pa and will raise operating cash
expenses by Rs.700 pa Tax rate is 50%. Cost of capital is 10%

Option is to take the asset on yearly lease rental of Rs.650. Incremental

revenue remain the same as above but operating cash expenses would be
Rs.600 pa

Evaluate with proper working.

3. XYZ limited needs an asset for which following two options are under
consideration

Option 1 – An asset can be acquired on lease basis on a payment of annual

lease rent of Rs.15,000 p.a for 4 years

Option 2 – Asset is available of Rs.50,000 for which funds can be raised by

issue of 12% pa loan payable in four equal annual installments

Company provides depreciation on Straight line method and applicable tax rate is
30%. Suggest with proper working which option is better for the company

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

4. Company wants to install computers, have an option to buy it at 15% interest

rate or acquire it on lease rental. Computers costs Rs.20,00,000. Tax rate is
40%, other details as under

Buy Computers –

Annual maintenance Cost Rs.50,000 to be paid in advance, Expected

life 6 years, Depreciation on SLM with salvage value of 200000, repayment
of loan in 6 equal annual installments to be paid at the end of each year.

Computers on lease –

Annual lease rent of Rs.450000 to be paid in advance, maintenance

cost of Rs.50000 to be borne by lessor

Advice about debt financing or lease financing. Also state how much lease
rent can be made to have indifference between two options?

5. Mr Anand, a lessor, want to purchase an asset and give it on lease rent. Cost
of asset is 2500. Expected life is 4 years at the end of which it can be sold at
100. Cost of capital is 7% (after tax). Tax rate is 30%. Annual maintenance
cost is expected at Rs.500 (40% to be borne by lessor as per agreement).
Asset to be depreciate by SLM. Calculate minimum acceptable lease rent for
this agreement to be set by lessor.

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

1. Reconstruction / Revaluation – Case of Garib Limited

Following is the balance sheet of Garib limited

Liabilities Amt Assets Amt

6 lacs of equity shares of 100 each 600 L&B 200

2 lacs 14% pref shares of 100 each 200 P&M 300

13% debentures 200 Furniture 50

Accrued interest on debentures 26 Inventory 150

Loan from bank 74 Receivables 70

Trade payables 300 Cash 130

Prel expenses 15

P&L Debit bal 485

Total 1400 Total 1400

Company did not perform well and suffered losses during last few years. Board
of directors are of the opinion that company can be nursed back to healthy
business by proper financial restructuring, proposes following scheme -

a. Equity shares FV to reduce to 25 per share fully paid up

b. Preference shares are to be reduced with coupon rate of 10% to equal

number of shares of 50 each fully paid up

c. Debenture holders agree to forego accrued interest, they also agree for new
coupon rate of 9%

d. Creditors agree to forego 25% of their claim, for the balance amount they
have agreed to convert their claim into equity shares of 25 each.
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e. For making payment of bank loan, company issues 6 lac new equity shares
of 25 each. Existing shareholders agreed to subscribe new shares and make
payment immediately.

f. Land building to be revalued at 250 lacs, while plant machinery to be written

down to Rs.104 lacs

g. Provision to be made for bad debts for Rs.5 lacs, preliminary expenses to
write off

You are required to show effect of such reconstruction decisions and

prepare new balance sheet assuming reconstruction take place

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

NETWORK ANALYSIS

1. Lift Irrigation project is undertaken with the following activities with the
respective duration in days

Sr No Activity Symbol Duration

1 Site selection A 7

2 Digging well B 3

3 Laying field channels C 15

4 Procurement of pump D 7

5 Installation of pump E 3

6 Test run F 2

Determine logical sequence and draw network diagram, find out Total time
with critical activities

2. Following details are available for a particular project

Activity Immediate Predecessor

B A

C A

D C

E C

F B,D

G F

H E
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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

I G,H

Draw network diagram

3. Following details are available for a particular project

Activity Immediate Predecessor

A -

B -

C A

D A

E A

F B,C

G D

H E,F,G

I H

Draw network diagram

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

4. Following details are available for a particular project

Activity Immediate Predecessor

A -

B -

C B

D A

E A

F D

G E

H D

I C,F

J H,G

K I

Draw network diagram

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

5. Following details are available for a particular project

Activity Immediate Predecessor

A -

B -

C A

D A

E B

F B

G C

H D

I E

J F

K G,H

L I,J

Draw network diagram

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

6. Following details are available for a particular project

Activity Immediate Predecessor

A -

B -

C -

D A

E C

F A

G B,D,E

H B,D,E

I C

J G,F

K G,F

L H,I,J

M I

Draw network diagram

7. From the Following details available for a particular project, Draw network
diagram and find out total duration with critical path

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 EX MBA - SEM IV – PROJECT FINANCE Q BANK

Activity Immediate Optimistic Most Pessimistic

Predecessor time likely time time

A - 8 10 18

B - 9 10 23

C - 5 7 9

D A 4 8 42

E C 5 6 37

F B,D,E 4 9 32

G A 8 8 14

H A 1 3 11

I G 9 10 35

J C 10 15 26

K J 10 14 30

L H,F,I,K 16 20 60

M J 5 9 19

N M 4 4 4

O G 8 9 28

P O 4 5 12

Q O 2 6 40

R Q 7 7 19

S M 10 13 46

T L,P,N 15 20 31

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