Q Sample Question

What is the decision criteria for profitability index (PI) to reject

1 a project?

2 IIPDF was setup with an initial corpus of:

Which of the following MS Excel function allows you to model

3 reinvestment of cash flows at a rate different than IRR?

4 Which of them cannot be a project sponsor?

Project A NPV is $1000 and IRR is 15%. Project B NPV is $500

and IRR is 18%. Which project should be selected given there is
5 conflict between NPV and IRR?

What is the NPV of the project (in Rs.) with a 3-year life and a
cost of Rs.32000 and a working capital requirement of Rs. 2500
generates cash flows of Rs.8000 in year 1 Rs.12000 in year 2 and
6 Rs.17000 in year 3. Discount rate is 5%.

7 Which of the following agreement reduces revenue risk?

The NPV of a project with a 3-year life is $14079.64. The cost of

8 capital is 10.0%. What is the EAA payment?

Which of the following delivers the project site to the private

9 developer?

If the profitability index for a project is 0.90 and the investment

10 in the project is 11111 what is the present value of cash inflows?
11 EPC contract:

12 Which of them is an example of an offtake agreement?

The contractor is contractually obliged to return to the

construction site to repair defects that have appeared in the
13 contractor’s work. This is known as:

Which agreement specifies bonus payments to the contractor

for exceeding predetermined performance parameters and
14 penalties for underachievement.

15 Project Financing is appropriate for which kind of projects?

What is the payback period (in years) for a project that costs Rs.
120000 and would yield after-tax cash flows of Rs. 20000 the 1st
year Rs. 22000 the second year Rs. 25000 the third year Rs.
27000 the fourth year Rs. 31000 the fifth year and Rs. 37000 the
16 sixth year.

17 What is the following is not a disadvantage of payback period?

The down-factor value in a Binomial is 1.9. What is the value of

18 the up factor?

19 Which of the following relationship is valid?

20 Interest during construction period is:

21 Under the VGF up to 20% of the total ________ is provided.

22 Which of them is not an objective of VGF?

In case a project seeks assistance under the IIPDF the

contribution from the IIPDF and Sponsoring Authority are: (India
23 Infrastructure Project Development Fund (IIPDF)

24 Pipavav Railway Corporation Limited is a:

25 TOT models are applicable to:

Under HAM projects NHAI releases what percent of total

26 project cost?

BOT projects started seeing lower interest from private players

27 due to:

A TOT Project with a 3-year life has following cash inflows: Year
1 - $5000 Year 2 - $10000 Year 3 - $15000 and needs an
investment of $10000. The cost of capital is 10%. What is the
NPV of the project under the LCM method if the sponsor opts to
28 repeat the project to match a 6-year life.

29 HAM is a mix of:

30 Abandonment options are similar to:

Option 1 Option 2

PI > 1 PI < 1

Rs. 100 Crore Rs. 50 Crore

IRR XIRR

Government Domestic company

Project A Project B

848.23 3348.23

Shareholder agreement Offtake agreement

$5661.6 $4560.8

Shareholder agreement Offtake agreement

1111 9000
 Fixes the responsibility of the
contractor to rectify the plant if it fails
to meet guaranteed performance
parameters and penalties or liquidation Helps the banker in clearly resolving
damages if the plant fails to meet disputes between shareholders once the
performance parameters. SPV starts getting profits.

Fuel supply agreement O&M Agreement

Defects liability period Liquidation damages

O&M Contract Shareholder Agreement

Labor intensive Capital intensive

4.75 4.08

Ignores cash flows beyond the first year Ignores time value of money

1.9 0.53

Payback period < Discounted payback Payback period = Discounted payback

period period

Capitalized Expensed
Project Cost Operation and Maintenance Cost

Prioritizing PPP projects to improve the

Mobilizing additional finance to meet efficiency of service delivery control timing
India’s infrastructure needs more and cost and attract private sector
rapidly. expertise.

75% and 25% respectively 25% and 75% respectively

BOO Project BOT Project

Water Filter Projects Sanitation Projects

0.4 0.5

Unavailability of financing from banks

which were burdened with NPA Lower IRR

$24658 $23582

EPC + BOT O&M + BOT

Call Options Put Options

Option 3 Option 4 Correct Answer

PI = 1 PI = 0 2

Rs. 1000 Crore Rs. 500 Crore 1

MIRR NPV 3

Foreign multinational Bank 4

Both Reject both projects 1

-1311.36 1118.64 1

Concession agreement Financing agreement 2

$5830.9 $4925.8 1

Concession agreement Financing agreement 3

10000 12345 3
 Defines maintenance obligations that
will ensure that the project or the
facility is maintained as per the Details the equity and debt needed to fund a
industry best practices. project. 1

Power Purchase Agreement Financing agreement 3

Maintenance obligation period Update period 1

EPC Contract Security Agreement 1

Office Party Retirement scheme 2

4.56 4.84 4

Ignores cash flows beyond the

payback period Ignores incremental cash flows 1

0.1 0.9 2

Payback period > Discounted

payback period No relationship between the two variables 3

Not calculated Ignored 1

Procurement Cost Wages 1

Developing projects through an

inclusive approach that does not Managing the projects to avoid cost over-runs or
neglect geographically or delays on account of poor execution of the
economically disadvantaged regions. project. 4

20% and 80% respectively 80% and 20% respectively 1

TOT Project DBFO Project 1

Road Projects Dam Projects 3

0.3 0.2 1

Commercially unviable Too much competition 1

$26058 $25159 1

EPC + BOO BOT + Design 1

Swaps Forwards 2
₹ 848.23 848.234531907998
 0.52631579 up factor =1/down factor

1/1.9
 6 Year 1 Year 2 Year 3

Cash Outlow -32000 1 -32000

Inflows 1 8000 0.9524 7619.2
2 12000 0.907 10884
3 17000 0.8638 14684.6
4 -2500 0.8638 -2159.5
-971.7

14079.64
0.909091
0.826446
0.751315
2.486852 5661.632

6 Cash FlowDF DCF

-34500 1.00 -34500
8000 0.95 7619.05
12000 0.91 10884.35
19500 0.86 16844.83
5% 848.23

NPV(B6,B
₹ 848.23
3:B5)+B2
$848.23
Year 1.1
0 1
8 1 0.909090909091
2 0.826446280992
3 0.751314800902
4 0.683013455365
5 0.620921323059
5661.632

NPV 14079.64
N -3
R 10%
5661.632 5661.63167371601

10 PI 0.9
Returns 11111
PV 9999.9
12345.5555555556
16 -120000
1 20000 20000
2 22000 42000
3 25000 67000
4 27000 94000
5 31000 125000 26000 10.06452 0.83871
37000 162000

18 0.526316 up factor =1/down factor

28 Year 0 1 2 3 4 5

Cash Flow - (10,000) 5,000 10,000 15,000

Cash Flow - Project B - Repeated (10,000) 5,000 10,000
Net Cash Fl (10,000) 5000.00 10000.00 5000.00 5000.00 10000.00

PV Factors 1 1 1 1 1
0.91 0.826446280992 0.751315 0.683013 0.620921

dcf (10,000) 4550.00 8264.46 3756.57 3415.07 6209.21

Calculate the project NPV without the option and add the estimate
Overall NPV = Project NPV (usual methods) - option cost + option value

Certainty equivalent models or risk neutral valuation

§(p x V+ + (1-p) x V-)/(1+risk free rate)

§If the project is a success, the probability of which is 50% we will receive
§However, if the project is a failure with equal probability, we will receive
§The project’s expected NPV with the abandonment option is:
NPV = 50% x 393 + 50% x (-254) = $69.5
§The value of the option is:
Overall NPV = Project NPV – Option Cost + Option Value
$69.5 = – $71.35 + Net value of the abandonment optio
Net value of the abandonment option = $69.5 – (– $71.35)
-32000 1 -34500
8000 0.95 7600
12000 0.9 10800
17000 0.86 14620
-2500 0.86 -2150
₹ -6,290.94
 6

15,000
15000.00

1
0.564474

8467.11

d add the estimated value of the real option

t + option value

e rate)

0% we will receive $600 at the end of each of the three years in the net present value in
ity, we will receive $200 at the end of 1st year plus the salvage value of $650 at the end
ption is:
54) = $69.5

+ Option Value
bandonment option
$69.5 – (– $71.35) = $140.85
present value in this scenario will be $393.
$650 at the end of 1st year, and the NPV will be -$254.
CAPM Capital Asset Pricing Model
Rf = Government bond yield WACC = wt. d x cost of debt + wt. e x cost of equity + wt. p x
+
Beta BASIC CAPM CAPM = Rf + Beta x (Rm - Rf)
x Cost of equity
(Rm-Rf) CAPM (Capital Asset Pricing Model) = Risk fre

Pure Play Method:

Unlevering the beta removes any bene
1. Unlevering Beta - remove the leverage risk gained by adding debt to the firm's cap

Unlevered Beta/Pure Beta/Asset Beta = Equity Beta or Levered Beta / (1+(1-Tax Rate) x (Debt/Equit
Unlevering the beta removes any beneficial or detrimental effects gained by adding debt to the
2. Relevering Beta - reintroduce the leverage risk

Relevered Beta/Project Beta = Unlevered Beta/Asset Beta x (1+(1-Tax Rate) x (Debt/Equity)) - All da

Amazon Flipkart
Tax Rate 25.0% 25.0%
Debt % 15.0% 30.0%
Equity % 85.0% 70.0%
Levered Beta 1.15 Ex: NSE/BSE/Financial Reporing Website/Yahoo Finance
Project Beta 1.34

Tata Steel may be different on each website.

Statistically, beta can be calculated using covariance (stock price, market price) / variance (marke

Timeframe 3 year/4 year/5 year

Frequency Daily/Weekly/Monthly
PnC Deloitte - 5yrM
Yahoo - 3yrW

Cost of Debt

Pre Tax Cost of Debt x (1-Tax Rate) = Post-Tax Cost of Debt

 + wt. e x cost of equity + wt. p x cost of preferred shares

Asset Pricing Model) = Risk free rate (Rf) + Beta x (Expected return from equity markets (Rm) - Rf)

he beta removes any beneficial or detrimental effects

dding debt to the firm's capital structure.

/ (1+(1-Tax Rate) x (Debt/Equity)) - All data will belong to a comparable company

ined by adding debt to the firm's capital structure.

ax Rate) x (Debt/Equity)) - All data will belong to your project

Levered Beta = Sector Risk + Financial Risk

1. Unlevering - removed financial risk

Pure beta - includes sector risk 1.02
ring Website/Yahoo Finance
2. Relevering - reintroduce financial risk
Project beta 1.34

market price) / variance (market price)

Lease:
1. Operating Lease (off balance sheet financing)
2. Finance Lease (on balance sheet financing)

Ind AS 116 - modifications ====> operating lease will be recorded on the balance sheet ----> lessee

Lessee Takes up the asset on lease

Lessor Giving it on lease

As per AS 116 - right-of-use-asset on the balance sheet ----> depreciation

income statement ----> interest expense

Lessee

Term of the lease 3.00 years

Lease payments 12,000
Discount rate 8%
Depreciation method SLM
Scrap value -

1. Operating lease - earlier he used to show an expense of 12,000 on P&L ----> lead to lower PAT

2. Finance lease or Operating lease (new rules)

Payments Disc. Rate PV Factors PV of

Payments
Year 1 1 12,000 8.0% 0.9259 11,111
Year 2 2 12,000 8.0% 0.8573 10,288
Year 3 3 12,000 8.0% 0.7938 9,526
Present value of all future lease payments 30,925

Liability Year 1 Year 2 Year 3

A Beginning value of the liability 30,925 21,399 11,111
EMI Annual lease payments 12,000 12,000 12,000
Principal Amortization of liability 9,526 10,288 11,111
Interest Interest Expense (A x 8%) 2,474 1,712 889
Closing value of the liability 21,399 11,111 -

Asset Year 1 Year 2 Year 3

Beginning value of the asset 30,925 20,617 10,308
SLM Depreciation 10,308 10,308 10,308
Closing value of the asset 20,617 10,308 -
Lessor

Finance Lease - the seller of the asset basically treats it as a loan

Mercedes - selling the asset to you - so you will depreciate it

receive some money from you over the next 5-7 years - receivable asset

finance the car for you - loan on the balance sheet (providing you the financing for the car)

Assets Year 1 Year 2 Year 3

Beginning value of the receivable 30,925 21,399 11,111
Annual lease payments received 12,000 12,000 12,000
Amortization of receivables 9,526 10,288 11,111
Interest Income 2,474 1,712 889
Closing value of the receivable 21,399 11,111 -

However, if this would have been an operating lease in earlier scenario (without the rule changes
the owner of the asset is the lessor
Lease income 12,000 12,000 12,000
(-) Depreciation 10,308 10,308 10,308
Net profit 1,692 1,692 1,692
 sheet ----> lessee

ad to lower PAT

Debt-like item (D/E ratio)

BS
P&L (Interest coverage ratios)

P&L
 LEASE RECEIVABLES

5,075

nario (without the rule changes) - which means

5,075
 Investment = $80
Value of investment opportunity = $100
180 UP FACTOR (u) = 1.8
100 DOWN FACTOR (d) = 0.6
60 True Probability of an up move = 50%
True Probability of a down move = 50%
Discount rate = 20%

100 120 is at the end of 1 year

Key thing - the risk has been incorporated in the denominator ( 1 / (1 + r)^n)

You can also factor in the risk in the numerator by using Risk Neutral Probability
Certainty equivalent models or risk neutral valuation

(50% x 180 + 50% x 60) / (1 + 20%) = 100 = (p x 180 + (1-p) x 60) / (1 + risk free rate)
p represents the risk neutral probability which may be different than true probabilities

Let's take an assumption of risk free rate of 4%

§p x 180 + (1 – p) x 60]/(1+4%) = 100

180p - 60p + 60 = 100 x 1.04
120p 44
p 36.7% 104.00
100.00

For a scenario where there is a truncation of payoff - you will have to use risk neutral valuation

Favourable development = value of the asset = 180

Payoff = 100 decision to invest
Unfavourable development = value of the asset = 60
Payoff = 0 decision to not invest

Option value = $ 35.26

tral valuation