Part -1:
Q1.) Precision Engineers Ltd. Is considering a proposal to replace one of its machines. The following data is available regarding the same:
a. The machine was purchased 4 years ago for Rs.15 lacs and has been depreciated at 25% p.a. as per the WDV method. The machine has a remaining life of 5 years, after which its salvage value is expected to be Rs.0.80 lacs. Its present salvage value is Rs.6.0 lacs.
b. The new machine costs Rs.22lacs, and would be depreciated at 40% p.a. as per WDV method. Its expected life is 8 years and after 5 years it is expected to fetch Rs.6 lacs. The installation of this machine will increase the annual revenue by Rs.5 lacs, apart from decreasing the operational costs by Rs.1.10 lacs per annum.
Assume no change in the depreciation rate if old machine is continued to be used. If the company uses a discounting factor of 17% p.a. for calculating the present value of future cash flow, should it go for the replacement of existing machine with the new machine? Marginal tax rate of the company is 20%. Show all your workings.
Q2). Matrix pharma Ltd. Is considering investing in a new line of pharmaceuticals. The Company has a plan that after five years it will sell the unit at a good profit to a pharmaceutical major. The project outlays are as follows:
Particulars Rs. In lacs.
Land 80
Building 100
Plant & machinery 500
Other fixed assets 100
Technical know-how fees 160
Gross working capital 450
The project to be financed is as follows:
Rs. In lacs.
Equity share capital 500
12% Preference share capital 250
16% term loan 300
18% Bank loan for working capital 340
The Unit is expected to generate sales value of Rs.10 crores in the first year, Rs.12 crores in the second year and Rs.15 crores for the next 3 years. The cost of production excluding depreciation would be to the extent of 70% of the sales. The applicable rate of depreciation on building is 4% on straight line method and 33%
written down value method on plant and machinery and other fixed assets. The technical know-how fees will be written-off over the period of five years. The salvage value of plant and machinery after five years would be 20% of the acquisition cost, nil for other fixed assets and book value for land and building. The term loan for the project will be repaid after 5 years when the project would be sold. The effective tax rate for the company is 30%.
You are required to :
a. Define the cash flows for the investment proposal from the long term funds point of view.
b. Calculate the net present value at a cost of capital of 20%.
c. Calculate the internal rate of return for the investment period.
d. Comment on the investment proposal of Matrix Pharma Ltd. Will your recommendation change, if an additional cash flow of Rs.5 crore arise by disposing off the project? Explain.
Q3). Conservative Industries Ltd. Is considering a proposal for the purchase of a new machine requiring an outlay of Rs.1500 lacs. Its estimate of the cash flow distribution for the three years life of the machine is given below: Rs. In lacs
Year 1 Year 2 Year 3
|
cash flows
|
probability
|
cash flows
|
probability
|
cash flows
|
probability
|
|
800
|
0.1
|
800
|
0.1
|
1200
|
0.2
|
|
600
|
0.2
|
700
|
0.3
|
900
|
0.5
|
|
400
|
0.4
|
600
|
0.4
|
600
|
0.2
|
|
200
|
0.3
|
500
|
0.2
|
300
|
0.1
|
The probability distribution is assumed to be independent. The risk-free rate of interest is 5%.
From the above information, determine the following:
a. The expected NPV of the project
b. The standard deviation of the probability distribution of NPV
c. The probability that the NPV will be zero or less.
Q4). Following are the details related to M/S GLOBAL SPICES, who wants to set up spices manufacturing unit in India which is estimated to cost Rs.2500 crores:
a. Estimated sales Rs.1500 crores
b. Estimated input costs Rs. in crores
Raw material 700
Consumables 150
Other production overheads 100
Repairs and maintenance 44
Administration overheads 110
Selling overheads 60
c. International prices for spices are about 25% greater than domestic prices on an average.
d. Raw materials and consumables if imported would cost about Rs.600 crores and Rs.200 crores respectively at current prices.
e. Current Re./$ exchange rate is Rs.45/-
You are required to compute the Effective rate of Protection (ERP), if any, enjoyed by the project as well as its Domestic Resource Cost (DRC). Interpret the figures computed by you clearly stating the assumptions you need to make.
Q5). A project is subjected to a preliminary evaluation before a detailed appraisal is done. What is the criteria that are usually applied for such preliminary evaluation? Give brief details.
Part -2:
Q1.) Following are the details related to Ten Investment projects:
Rs. in lacs.
|
Project Value
|
cash outflow in Year 1
|
cash outflow in cash outflow in Net present
Year 2 Year 3
|
|
1
|
20
|
40
|
0
|
12
|
|
2
|
25
|
35
|
0
|
19
|
|
3
|
23
|
28
|
5
|
20
|
|
4
|
30
|
24
|
4
|
22
|
|
5
|
34
|
21
|
0
|
10
|
|
6
|
38
|
26
|
10
|
32
|
|
7
|
19
|
45
|
7
|
14
|
|
8
|
12
|
20
|
35
|
24
|
|
9
|
10
|
33
|
10
|
9
|
|
10
|
6
|
44
|
9
|
15
|
The budget constraints for years 1, 2 and 3 are Rs.150 lacs Rs.200 lacs and Rs.80 lacs respectively.
The following project interrelationships exist:
a. Of the set of projects 3,4 and 8, at most two can be accepted.
b. Projects 5 and 9 are mutually exclusive, but one of the two must be accepted.
c. Project 6 cannot be accepted unless both projects 1 and 10 are accepted.
d. Project 2 can be delayed by a year. Though the cash flows required will be the same, the net present value will drop by 50%.
e. Projects 3 and 7 are complimentary. If the two are accepted together, the total cash flows will be reduced by 10% and net present value will be increased by 12%.
You are required to develop Integer Linear Programme from the above information.
1. Why Conflicts arise between two or more mutually exclusive projects? Analyse the situations where conflicts may arise and suggest how these conflicts can be resolved.
2. Write a note on lending norms and policies of the institutions.
Q2.) Case Study
A new company incorporated recently in Andhra Pradesh is in the processing of setting up a 10 million tones per annum capacity cement project and has appointed a new project manager to study various aspects of project appraisal in respect of the proposed cement project. Put yourself in the place of the project manager and present the appraisal process covering all the aspects.
Part-3:
1. The importance of capital expenditure decisions stems from inter-related reason(s) like
a. Long-term effects
b. Substantial Outlays
c. Measurement problems
d. Both (a) and (b) above
e. Both (b) and (c) above
2. Which of the following is/are correct?
a. Accept when Benefit Cost Ratio is greater than one
b. Reject when Payback Period is greater than target period.
c. Reject when Accounting Rate of Return is less than target rate
d. Both (a) and (c) above
e. All of (a), (b) and (c) above
3. Which of the following is false?
a. A capital project involves a current outlay of funds which give a stream of benefits extending far into future.
b. A capital project represents a scheme for investing resources that can be analyzed and appraised reasonably independently.
c. Capital Budgeting is a simple process which may be divided into five broad phases of planning, analysis, selection, implementation and review.
d. Capital expenditure decisions pose difficulties such as uncertainty and temporal spread.
e. Both (b) and (d) above
4. Which of the following is not an investment strategy?
a. Capacity expansion
b. Vertical integration
c. Modernization
d. Conglomerate Diversification
e. Merger
5. Which of the following is/are not the method(s) of measuring individual creativity?
a. Attribute listing
b. Brainstorming
c. Nominal Group Technique
d. Black Box
e. Both (b) and (c) above
6. Which of the following is not an entry barrier, which results in positive NPV?
a. Economies of scale
b. Product differentiation
c. Technological edge
d. Low tariffs
e. Marketing reach
7. Which of the following is not a causal method?
a. Chain Ratio Method
b. Moving Average Method
c. Leading Indicator Method
d. Econometric Method
e. End Use Method
8. When the income level was Rs.1000, the quantity demanded was 50 last year. In this year, the demand went up to Rs.55, when the income rose to Rs.1020. What is the income elasticity of demand this year?
a. 4.81.
b. 1.122
c. 0.25
d. 4.10
e. 4.00
9. The choice of technology is influenced by a variety of considerations. Which of them is/are not such consideration(s)?
a. Plant capacity
b. Investment outlay
c. Production costs
d. Product prices
e. Ease of absorption
10. Pre-operative expenses do not include
a. Company flotation expenses
b. Interest during construction period
c. Brokerage and commission on capital
d. Both (a) and (c) above
e. Both (b) and (c) above
11. To meet the cost of project, which of the following is not a means of finance?
a. Deferred Credit
b. Debenture Capital
c. Margin money for working capital.
d. Both (a) and (c) above
e. Both (b) and (c) above
12. The break-even point in percentage terms, for the data (Optimum Capacity: 90%, Sales at 100% Capacity: Rs.1,80,000, Variable Cost: 60% of Sales, and Fixed Costs: Rs.36,000) would be
a. 55.56%
b. 50.00%
c. 45.00%
d. 33.33%
e. 30.00%
13. Which of the following statements is/are true?
a. Accept when BCR is greater than 1 and NBCR is greater than 0.
b. Indifferent when BCR is equal to 1 and NBCR is equal to 0.
c. Accept when BCR is less than 1 and NBCR is less than 0.
d. Both (a) and (b) above
e. All of (a), (b) and (c) above.
14. Which of the following is/are correct?
a. Scenario analysis looks at some plausible scenarios and examines how the NPV behaves.
b. Monte Carlo Simulation is a flexible and versatile tool for generating
probabilities of NPVs.
c. Decision Tree Analysis analyses risk free situations in decision making
d. Both (a) and (b) above
e. All (a), (b) and (c) above
15. Which of the following is/are true in respect of ‘doubling the period by using the more accurate Rule of Thumb'?
a. At 10% interest rate, the doubling period is 7.25 years
b. At 15% interest rate, the doubling period is 4.95 years
c. At 10% interest rate, the doubling period is 7.20 years
d. Both (a) and (b) above
e. Both (b) and (c) above
16. Capital recovery factor is the
a. Inverse of future value interest factor for annuity
b. Inverse of future value interest factor
c. Inverse of present value interest factor for annuity
d. Inverse of present value interest factor
e. Same as present value interest factor for annuity
17. During the current year, ABC Ltd paid a dividend of Rs.20, which is expected to grow at a rate of 5% indefinitely. If the current market price of ABC Ltd is Rs.84, the cost of equity will be
a. Rs.23.8%
b. Rs.25%
c. Rs.30%
d. Rs.28.8%
e. 16.8%
18. The investment required for creating a capacity of 5,000 units for a product is Rs.9 crore. What is the investment required for creating a capacity of 20,000 units, if the capacity cost factor is 0.5?
a. Rs. 36 crore
b. Rs. 18 crore
c. Rs. 4.5 crore
d. Rs. 13.5 crore
e. Rs. 22.5 crore
19. Which of the following is not a step in Decision Tree Analysis?
a. Identifying the problem and alternatives
b. Evaluating various decision alternatives
c. Delineating the decision tree
d. Grouping of probabilities
e. Specifying probabilities and monetary outcomes.
20. Which of the following is/are false?
a. Capital projects like securities are usually divisible
b. Capital projects are assessed in terms of NPVs whereas financial securities are assessed in terms of rate of return.
c. All the points lying on a given risk-return indifference curve offer the same level of satisfaction.
d. Both (a) and (c) above
e. Both (b) and (c) above
21. Social Cost Benefit Analysis (SCBA) focuses on social costs and benefits, but these often tend to differ from the monetary costs and benefits of the projects. The principal sources of discrepancy are:
a. Taxes
b. Market imperfections
c. Internalities
d. Both (a) and (c) above
e. Both (a) and (b) above
22. Which of the following is/are false?
a. The extent of which a project is sheltered is measured by Domestic Resource Cost.
b. The difference between the selling price and input costs is the value added.
c. Economic Rate of Return is simply the Internal Rate of Return of the stream of social costs and benefits.
d. If the value of Domestic Resource Cost is more than the exchange rate, it is favorable.
e. Both (a) and (d) above
23. Which of the following is/are false?
a. Because of constraints like project dependence, capital rationing, and project indivisibility, investment projects can be viewed in isolation.
b. Capital projects are generally indivisible, which means that projects can be accepted partially.
c. Capital rationing exists when funds available for investment are inadequate.
d. Both (a) and (b) above
e. Both (b) and (c above
24. If a project has Effective Rate of Protection (ERP) of 38% and if the Exchange Rate is Rs.40 to a Dollar, then the Domestic Resource Cost (DRC) of the project is
a. Rs. 55.00
b. Rs. 67.00
c. Rs. 55.20
d. Rs. 53.20
e. Rs. 15.20
25. In respect of a project A, you are given that the Initial Investment is Rs.1,30,000, the terminal value is Rs.2,14,720, the annual cash inflow is Rs.40,000 and the project life is 4 years, the reinvestment rate assumed for the above project is
a. 20%
b. 5.37%
c. 4%
d. 1.34%n
e. 7.5%
26. Domestic Resource Cost is associated with
a. The cost of raising resources within the country
b. The opportunity cost of depleting the domestic resources
c. The cost of environmental benefit
d. The usage of domestic resources vis-à-vis saving/earning of one unit of foreign exchange
e. Rate of Protection offered to domestic industries
27. Which of the following is/are false?
a. Detailed Project Report (DPR) is generally prepared for submission to the Financial Institutions (FIs)
b. The format of DPR and the application form for the All-India FIs are one and the same.
c. There is a set pattern in which the DPR has to be presented.
d. There is no set pattern in which the DPR has to be presented.
e. Both (b) and (c) above
28. Which of the following is/are not major reason(s) for the failure of a project?
a. Inefficiency of staff managers
b. Poor project planning
c. Wrong choice of technology
d. Both (b) and (c) above
e. All of (a), (b) and (c) above
29. Which of the following is/are true in respect of a project?
a. A project is a complex of routine activities
b. A project has specific starting and ending points
c. A project is a permanent endeavor to create a unique product
d. Both (a) and (c) above
e. All of (a), (b) and (c) above.
30. Delphi Method is a
a. Technique in which the executives are asked to forecast demand subjectively.
b. Technique in which salesmen of different territories are asked to collect information regarding buying plans of users.
c. Technique in which estimates are called from a group of experts in the field. But the group is not allowed to debate each other's opinion independently.
d. Technique in which a group discussion is conducted to pool up creative ideas.
e. All of (a), (b) and (d) above.
31. Which of the following is a time series model of demand forecasting?
a. Exponential smoothing method
b. Leading indicator method
c. Consumption level method
d. Chain ratio method
e. End use method
32. Which of the following is not a characteristic of a project?
a. Specific goals
b. Unique activities
c. Specified time
d. Sequence of activities
e. Unspecified activities
33. Which of the following methods is/are qualitative for demand forecasting?
a. Field sales force method
b. Jury of executive opinion method
c. Delphi method
d. Both (a) and (b) above
e. All of (a), (b) and (c) above
34. Generation of project ideas based on individual creativity does not include
a. Attribute listing
b. Black box
c. Directed dreaming
d. Brain storming
e. Checklist
35. Which of the following has/have impact on the plant location?
a. Government policies/regulations.
b. Raw material availability and their proximity
c. Availability of infrastructure
d. Both (a) and (c) above
e. All of (a), (b) and (c) above
36. Which of the following is not included in the estimation of cost of the project?
a. Margin money for working capital
b. Technical know-how fees
c. Contingencies on firm costs
d. Expenses on foreign and Indian technicians
e. Both (a) and (b) above.
37. Pre-operative expenses do not include
a. Insurance during construction
b. Interest during construction period
c. Company floatation costs
d. Both (a) and (b) above
e. Both (b) and (c) above
38. Which of the following statements is/are false?
a. Pre-operative expenses are allocated only to depreciable assets
b. Cost of land and site development costs go together
c. Margin money for working capital is included under cost of capital.
d. Contingency need to be provided for all assets both already purchased and
yet to be purchased
e. All of (a), (b) and (c) above.
39. The break-even point in percentage terms, if sales are Rs.2000 crore, variable cost is 60% of sales, and fixed cost is :Rs.400 crore, would be
a. 50.00%
b. 20.00%
c. 30.00%
d. 33.33%
e. 08.00%
40. Which of the following appraisal techniques help(s) in achieving the objective of shareholder's wealth maximization?
a. IRR
b. NPV
c. BCR
d. NBCR
e. Both (a) and (b) above