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Question Paper

Project Management – II (242): April 2005


Section D : Case Study (50 Marks)
• This section consists of questions with serial number 1 - 5.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 80 - 90 minutes on Section D.

Case Study
Read the case carefully and answer the following questions:
1. Prepare the projected profitability statement of Reshmi Cement for the first 5 years of its operations.
(18 marks) < Answer >
2. Prepare the projected cash flows of the project from the long-term funds point of view.
(6 marks) < Answer >
3. Appraise the project in terms of the following criteria:
(a) Discounted Pay-back Period.
(b) Net Benefit Cost Ratio.
(c) Modified Internal Rate of Return.
Assume that the intermediate cash flows may be invested in government securities at the rate of 6% p.a.
(4 + 3 + 3 = 10 marks) < Answer >
4. (a) Discuss the positive and negative impacts of the project from the social point of view.
(b) What are the different stages of analysis involved in SCBA as per UNIDO?
(5 + 4 = 9 marks) < Answer >
5. The success of any industrial project like the one described in the given case would depend a lot on the capable
and reliable project manager. According to you what are the specific responsibilities of the project manager?
(7 marks) < Answer >
Promoters and Their Background:
Mr. Samir Rai and Ms. Mandira Rai promoted the company. Mr. Rai, aged about 42 years, is a civil engineer from
IIT, Kharagpur and did his post graduation from MIT. He worked as a production manager in Cemex for fifteen
years after completing his MS. Then he did MBA from Harvard University and joined Lafarge India Ltd. as country
manager. He worked with Lafarge for three years. Now, he plans to venture into his own business. In 1991,
Government of India delicensed the cement industry. Correspondingly the industry also reacted sharply following
such a drastic change in policy measures. It attracted a large amount of capital into the cement industry through
investment not only from the small entrepreneurs, but also from the large corporate houses and the multinational
companies. On one hand, it shifted the position of India from an importer to an exporter while on the other hand, the
black market for cement gradually disappeared. But thereafter, the economy has entered into a recessionary phase
that made the cement industry suffer a lot owing to the reduced level of infrastructure activities. Hence the price of
cement reached a bottom level, taking the top lines of the players in the industry to a sorry state. However, the
government of India has taken some proactive measures in order to boost up the economic growth such as
increasing incentives to the housing sector (the largest consumer of cement) and the development of infrastructure
facilities. Presently, the economy has come out of recession and is in a boom phase while bank financing for the
construction of own house is no longer a difficult task. Considering all these developments in mind, Mr. Rai started
a new company, Reshmi Cement, in May 2004 that will engage in the production and marketing of different grades
of cement.
Ms. Mandira Rai, aged about 36 years, is a chartered accountant and has about 15 years of working experience in
Price Waterhouse and Coopers. She worked in different capacities in her tenure of 15 years, before leaving the job
as a senior consultant.
Management of the Company:
The overall management of the company will be vested with the Board of Directors. The board of the company
consists of experienced and qualified professionals with backgrounds in the fields of finance, management,
accountancy, production, R&D, quality control and projects. The company has roped in Mr. B. A. Thomas from
Cemex to join as Director (Operations). The company has recruited around 10 process engineers with 3 to 4 years of
experience as frontline executives, five managers with more than ten years of experience in cement industry for their
middle level management cadre. Around 10 executives have joined in the finance, administration and personnel
departments.
The Proposed Project:
The company is all set to start a production unit of cement. The installed capacity of the unit would be 1 million tons
per annum. The project is proposed to be located at Amlai, near Bilaspur, Chattisgarh. The estimated cost of the
project is Rs.800 crore. Commercial production is expected to start from April 1, 2005.
Milestone Chart:

Serial No. Activity Start Finish


1. Contractual formalities May 10, 2004 May 31, 2004
2. Civil work June 1, 2004 August 10, 2004
3. Equipment installation & receiving spares July 1, 2004 October 1, 2004
4. Testing of individual equipment October 1, 2004 November 30, 2004
5. Testing and trials of equipments as an December 1, 2004 December 31, 2004
integrated system
6. Cold commissioning of integrated system January 1, 2005 January 1, 2005
7. First hot trial run of rotary kiln January 15, 2005 –
8. Second hot trial run of the factory February 25, 2005 –
10. Commercial production run April 1, 2005 –
Land:
The company has already acquired non-agricultural land of 500 acres at Amlai, near Bilaspur, Chattisgarh. The state
industrial development body arranged this land for the company. The cost of land and site development including
registration charges, leveling internal roads and external approach roads etc, is considered to be Rs.32.55 crore.
Considering future expansion the land area is sufficient. The land sale deed has already been executed and
correspondingly the Non-agricultural Land Certificate has already been received.
Products and Uses:
The main products from this unit would be Ordinary Portland Cement (OPC) and Portland Pozzolona Cement (PPC)
– the two main varieties of cement comprising of about 90 percent of the total cement market in India. These are
widely used in the construction activities. Housing sector is the largest consumer of cement, sharing about more than
60 percent of total sales. While, about 40 percent of total cement produced is used to meet the demand for the
industry as well as the government sector.
Manufacturing Processes:
Cement may be manufactured by three different types, namely, wet process, semi-dry and dry process. In the wet
process, limestone is crushed and ground and mixed with water to form slurry that is fed into the rotary kiln. The
slurry has water content of 30 to 40 percent. Prior to the commencement of the mineralogical processes, the water
content in the slurry has to be evaporated. Hence, this process consumes a lot of energy in comparison to the dry
process. On the other hand, in dry process, the raw materials are dried in a combined drying and grinding plant to
reduce the moisture content to less than one percent. Hence, this process is much more energy efficient.
Manufacturing cement consumes a lot of energy and hence, in order to reduce the power bill, the cement
manufacturers in India are gradually switching from the wet and semi-dry processes to dry process. It helps the
manufacturers to save the power consumption by as much as 50 percent. Being a technocrat, Mr. Rai has chosen the
dry process for manufacturing cement.
Raw Materials
Limestone is the main raw material for manufacturing cement. It has been estimated that for the production of each
ton of cement, nearly 1.60 tons of limestone is required. In order to reduce the cost of its transportation as well as to
get the regular supply, the location of cement plants is chosen near the limestone deposits. Madhya Pradesh has a
very high reserve of limestone deposits that is one of the reasons for the selection of the location of the plant. Apart
from limestone, coal is also another important constituent for the production of cement. It is used both as an energy
source and as a raw material for cement production. It was observed that for the production of each ton of cement,
about 300 kilograms of coal is consumed and 100 kilograms of gypsum is required.
Power
The cement industry is very much energy intensive. Production of cement is a continuous process and hence
uninterrupted power supply not only helps the continuation of the production process but also for the protection of
the refractory lining of the rotary kiln, as the kiln cannot sustain violent fluctuations in thermal load. It has been
observed that the average power consumption is 120 units/ton. The estimated power requirement of this project is 3
MVA. The company has already applied to the state electricity board, stating their requirement and has received in-
principle the approval letter from them.
As a standby measure to power failures the company has decided to keep a DG set of 75 KVA.
Manpower
The requirement of manpower for this project is estimated as hereunder:
Operations Maintenance Administrative
Skilled 9 6 9
Semi-skilled 18 15 22
Unskilled 25 22 8 The
company is in the process of recruiting manpower.

Marketing
The company’s policy is to sell directly to the user companies as well as through dealer network. They are already in
touch with some existing cement merchants in different parts of the country. The activity in relation to the
appointment of dealers is expected to be completed by March 2005.
Cost of the Project (Rs. in crore)
Particulars Amount
Land 32.55
Building 88.48
Plant & Machinery 409.00
Miscellaneous Fixed Assets 20.80
Contingencies 105.00
Preliminary Expenses 20.00
Pre-operative Expenses 51.17
Margin money for Working Capital 73.00
Total 800.00
Means of Finance: (Rs. in Crore)
Particulars Amount
Share Capital
Promoters 230.00
Public 220.00
Term Loan from IFCI 350.00
Total 800.00 Additional Information
1. The capacity utilization is expected to be 80% during the first year of its operation. It is expected to be 90
percent during the second year and 100 percent in the successive years.
2. The current selling price is Rs.3,600 per ton of the finished product. The management projected that the price
may go up at a rate of 5 percent every year for the next five years.
3. Currently the cost of limestone is Rs.500 per ton, while the cost of coal is Rs.1,500 per ton and for gypsum it
is Rs.800 per ton. The prices of these raw materials are increasing at an annual rate of 4% per annum and the
same trend is expected to continue for the next five years. The prices are inclusive of the cost of
transportation.
4. Repairs and maintenance will cost 1% of the gross block excluding land in the first year of its operations and
thereafter, it is considered to go up by 2% every year.
5. Wage bills are expected to be 1% of sales value while the estimated amount of salary would be Rs.264 lakh
in the first year and is expected to increase by 10% every year.
6. Selling and distribution expenses are likely to be 7% of sales.
7. The production process will be uniform throughout the year and the expenses will be incurred evenly.
8. The current asset requirements are expected to be as follows:
Particulars Month(s)
Raw materials 2.00
Stock-in-process 0.10
Finished goods 1.00
Receivables 1.50
Cash Requirement 1.00
9. Term loan from IFCI is availed at an interest rate of 12% p.a. Interest is to be calculated on half-yearly
outstanding balance but it is paid at the end of every year. Repayment of principal amount is to be carried out
in five half-yearly installments where the first installment is to be paid by the end of the third year.
10. The risk free rate is 6%. Equity stakeholders of the company expect a market risk premium of 8%. Average
equity beta of the company in first five years is 1.20.
11. Depreciation rates applicable to different categories of fixed assets are as follows:
Assets Company law purposes (SLM) Income tax purposes (WDV)
Buildings 3.33% 10%
Plant & Machinery 10% 25%
Misc. Fixed assets 8% 25%
12. Income tax rate applicable to the company is 40 percent.
13. The useful life of the project is ten years. At the end of five years, the company may be sold as going concern
at a price of Rs.1,000 crore.
14. The estimated amount of electricity expenses will be as follows:
Capacity Utilization Up to 60 percent 65 to 85 percent 85 to 95 percent 100 percent
Cost of Power/Unit Rs.5.50 Rs.6.00 Rs.7.00 Rs.8.50
15. Punjab National Bank (PNB) has agreed to finance the working capital requirements in excess of
working capital margin at an interest rate of 12.5% p.a.

END OF SECTION D

Section E : Caselets (50 Marks)


• This section consists of questions with serial number 6 - 11.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 80 - 90 minutes on Section E.

Caselet 1
Read the caselet carefully and answer the following questions:
6. As mentioned in the caselet, there are many challenges that are unique to healthcare project management. The
project management in healthcare organizations involves dealing with diverse stakeholders. Discuss the
challenges that are unique to the healthcare project management.
(8 marks) < Answer >
7. In the caselet, it has been felt that it is beneficial for the healthcare organizations to have their own project
management. What could be the benefits of having own project management offices in healthcare
organizations? Discuss.
(9 marks) < Answer >
What do you think when you hear the word “healthcare”? Is it a hospital or a medical clinic? Actually, healthcare is
a broad term that describes a field concerned with the maintenance or restoration of the health of the body or mind.
Healthcare organizations provide a variety of services to maintain or restore the health of patients. The size and
scope of services varies depending on the organization’s business model. Each organization is unique. Common
patient care sites include outpatient medical clinics, hospitals, ambulatory care centers, nursing homes, and patient
homes.
Healthcare has its own set of regulations, which makes the industry unique from other types of industries. Those
who work within healthcare organizations need a complete and thorough understanding of these regulations. The
regulations differ for each area of healthcare. For example, the state boards of pharmacy, the Drug Administration,
Drug Enforcement Agency, Bureau of Narcotics and Dangerous Drugs, Medicare, and Medicaid regulate the
medication management system within a hospital. In addition, accreditation agencies such as the Joint Commission
of Healthcare Organizations (JCAHO) have their specific criteria that must be met by the healthcare organization in
order to achieve accreditation.
There are many challenges in healthcare project management. Probably, one of the most significant challenges for
healthcare projects is working with the diverse stakeholders, and in particular, the patient care providers such as
physicians, pharmacists, nurses, and therapists. Their time is limited, while patient care activities continue on a 24hr
x 7days a week schedule, and there is a high risk of harm to the patient with any organizational change.
It is not common to have internal project managers in healthcare organizations managing projects. Frequently,
individuals are assigned to be the liaison to the vendor during the implementation of the project. The liaisons have
primary responsibilities in various areas of the organization that makes the project a secondary priority. As
mentioned earlier, in many cases, the vendors dominate the project and utilize their standard project plan to guide
the healthcare organization.
Should the project management offices be used in healthcare? Project offices are utilized in many organizations to
standardize practices, processes, and operations, which leads to repeatable results and a greater probability of
successful projects. There have been many articles in the PM literature that discuss the pros and cons of project
offices and the types of project offices. What types of project offices currently exist in healthcare? One of the most
prevalent types is an individual project office such as an IT department project office. Organizational and enterprise
project offices are becoming more frequent. An organization-wide project office is necessary for healthcare
organizations to successfully reach their project outcomes. The pros far outweigh the cons for this approach in
healthcare. The primary pro for healthcare would be alignment of all projects to the organization’s strategic goals.
The primary con would be increased bureaucracy by creating another department in the organization specifically
addressing the organization’s project management; however, this may be a pro as well.

Caselet 2
Read the caselet carefully and answer the following questions:
8. The caselet is very much concerned with the emergence of chaos in the execution of any project. What could
be the different factors responsible for chaos in the projects?
(10 marks) < Answer >
9. The caselet highlights a few instances of project chaos. In the given scenario, discuss the important factors
responsible for the success of a project.
(7 marks) < Answer >
Why should we avoid chaos in our projects? To answer this question, it is necessary to define the concept of chaos.
Chaos may be defined as a state of the (project) system where the future development of the system is not
predictable, or only poorly predictable. Depending on the angle of consideration, we may distinguish between
chaos-in-the-small and chaos-in-the-large. Chaos-in-the-small refers to a most common situation in construction,
where the short-term developments (acts by different parties) cannot be accurately predicted, due to the joint impact
of interdependence and variability. However, regarding the progress of the project as a whole, we can pretty well
predict its development such as: The building will be finished at due time or almost. Thus, the amount of earned
value is more or less constantly increasing.
On the contrary, chaos-in-the-large means a situation where the progress of the whole project cannot be predicted.
Often the question is about a situation where the progress is not proportional to the effort, about the Mythical Man-
month. In such a situation the amount of earned value, at least in retrospect, is not increasing —it may seem to
increase, but later developments may show that the work accomplished was not usable, and had to be substituted by
rework. Uncertainty about the probable finishing date and the total cost is a hallmark characteristic of chaos-in-the-
large. However, the impacts of such chaos may also be channeled into reduced value and functionality, instead of
cost and duration.
Chaos-in-the-small is a nuisance that adds to costs and decreases the quality of the output. Construction
professionals have learned to live with it, and recently methods have been devised for stemming this form of chaos.
However, chaos-in-the-small—which they name “firefighting”—can turn into chaos-in-the-large, possibly spreading
out over the project’s boundary to neighboring projects. And as could be expected, chaos-in-the-large is not only a
big nuisance, but may be fatal for the participating organizations. It adds vastly to cost, it may jeopardize the whole
rationale of the project.
However, chaos-in-the-small may escalate to chaos-in-the-large, and so the focus cannot be restricted to the latter
only. There are different explanations to the question, why chaos emerges in projects. Three interrelated factors are
highly related to the dynamics of a project: the rework cycle, feedback effects on productivity and quality impacts,
and knock-on effects from upstream phases to downstream phases. Two different instances may be cited for
describing the occurrence of chaos as shown below:

• The project budget for Sydney Opera House escalated from AUS$7 million to AUS$107 million and the
construction time from 4 years to more than 14.
• The opening of the Denver International Airport had to be delayed four times due to problems in the baggage
handling system. The total delay was 16 months in comparison to the scheduled time of 4 years. The total costs
were US$4.5 billion against an initial estimation of US$1.7 billion.
Caselet 3
Read the caselet carefully and answer the following questions:
10. Project scheduling may be considered to be an important task for the project planners. Discuss about the
different methods of developing project schedules. What are the important factors to be considered during the
preparation of project schedules?
(9 marks) < Answer >
11. As a project consultant, how do you adopt an effective time management strategy through project scheduling?
(7 marks) < Answer >
Organizations pursue different initiatives as part of their ongoing growth strategies. In order to achieve the desired
business objectives, the initiatives are handled in the form of projects. Organizations that handle projects follow
project management principles in order to achieve their target within a cost and time frame. The success of a project
to an extent depends on the identification of activities, their duration and cost involved.
Each initiative of an organization, which is treated as a project, consists of many sub-activities that are interlinked.
The sub-activities need to be performed in a specific order to achieve the desired outcome. Through project
planning, organizations plan their initiatives, schedule their activities, monitor their progress and take corrective
actions if the deviation is beyond acceptable limits. While project managers develop a good working environment
and rapport with the group involved in the project, planning the activities of team members and creating a sense of
ownership about the project among the team members is accomplished in the planning phase.
During the planning phase, activities to complete the project are identified. However, once the project commences,
the activities planned initially may undergo a change. With the revised plan of action and the objectives of the
project stated clearly, a detailed activity schedule is developed. The activity schedule, referred to as project
schedule, is nothing but a stipulated set of tasks in which the start time and end time, along with the resource
requirements is clearly indicated. The project is guided and monitored with the help of the schedule till its
completion.
Scheduling of activities is critical for successful completion of projects because it helps project managers resolve a
wide variety of problems or conflicts encountered while implementing the projects. Scheduling involves estimation
of efforts through a detailed work-breakdown structure, clearly outlining the major activities to be accomplished in
the project, detailed tasks associated with the activities and dependencies and relationships between tasks and
activities. It is also a comprehensive calendar that indicates the time duration or estimates for all tasks and activities
along with the start and finish times for the tasks, persons responsible for the completion of the task and status of the
task and activities.
By developing a schedule for the project, the progress can be effectively tracked and monitored on a regular basis.
While it is difficult to exactly predict the completion duration of an activity, the schedule indicates the probable time
duration required to complete the activity by taking into consideration the probability of rework in some activities.
In the absence of a proper schedule, sometimes the time required is overestimated or underestimated leading to
confusion and significant delays. Also the project manager will not be in a position to know about the activities to be
completed, the persons responsible for completing them and what structural adjustments need to be made to
complete the project successfully. A proper scheduling plan identifies the requirement of resources, the extent of
resources required and the duration for which the resources are required.
It sets expectations for project progress. Work is broken down into small, more manageable pieces and reduces the
overall complexity of the project. Creating a project schedule also provides a tool for performing critical path
assessments and hence a more effective analysis of problematic areas. A project schedule is developed during the
planning phase. However, the schedule is not static and has to be updated on a regular basis to reflect the correct and
up-to-date picture of the project. Once the project enters the execution phase, the initial schedule should be updated
in the light of the changes in the project. While developing and revising the schedule, it is important to build a
contingency plan to cope up with any unforeseen problems.

END OF SECTION E

END OF QUESTION PAPER


Suggested Answers
Project Management – II (242): April 2005
Section D : Case Study
1. Profitability Statement for first five years (in Rs. crore)
I II III IV V
Sales 288.00 340.20 396.90 416.70 437.60
Raw material 106.40 124.49 143.87 149.53 155.61
Electricity 57.60 75.60 102.00 102.00 102.00
Repairs & Maintenance 6.74 6.87 7.02 7.15 7.30
Wages 2.88 3.40 3.97 4.17 4.38
Salaries 2.64 2.90 3.19 3.51 3.87
Selling and distribution cost 20.16 23.81 27.78 29.17 30.63
Depreciation 59.22 59.22 59.22 59.22 59.22
Interest – IFCI Loan 42.00 42.00 42.00 29.40 12.60
Interest – WC Loan 0.55 2.40 4.55 5.07 5.62
Preliminary expenses 4.00 4.00 4.00 4.00 4.00
Total Expenses 302.19 344.69 397.60 393.22 385.23
Profit before tax – 14.19 – 4.49 – 0.70 23.48 52.37
Tax 0.00 0.00 0.00 0.00 0.00
PAT – 14.19 – 4.49 – 0.70 23.48 52.37
Less: Dividend: 0.00 0.00 0.00 0.00 0.00
Retained profit – 14.19 – 4.49 – 0.70 23.48 52.37
Add: – Depreciation 59.22 59.22 59.22 59.22 59.22
– Preliminary expenses 4.00 4.00 4.00 4.00 4.00
Net cash Accruals 49.03 58.73 62.52 86.70 115.59
Working notes:
Sales:
Items\Years I II III IV V
Capacity Utilization (in percentage) 80 90 100 100 100
Production (in ‘000 tons) 800 900 1000 1000 1000
Sales Volume (in ‘000 tons) 800 900 1000 1000 1000
Unit Selling Price (Rs. per ton) 3600 3780 3969 4167 4376
Sales (in Rs. crore) 288.00 340.20 396.90 416.70 437.60
Raw materials:
Volume of Raw Materials Required: (in ‘000 tons)

Year 1 2 3 4 5

Limestone 1280 1440 1600 1600 1600

Coal 240 270 300 300 300

Gypsum 80 90 100 100 100

Prices of Raw Materials: (Rs. per ton)


Year 1 2 3 4 5

Limestone 500 520 541 562 585

Coal 1500 1560 1622 1687 1755

Gypsum 800 832 865 900 936


Costs of
Raw materials: (in Rs. crore)

Items\Years 1 2 3 4 5
Limestone 64.00 74.88 86.56 89.92 93.60
Coal 36.00 42.12 48.66 50.61 52.65
Gypsum 6.40 7.49 8.65 9.00 9.36
Total 106.40 124.49 143.87 149.53 155.61
Allocation of Pre-operative
and Contingencies (Rs. in crore)

Asset Basic cost Pre operative cost Contingencies Total


Buildings 88.48 8.74 17.93 115.15
Plant & machinery 409.00 40.38 82.86 532.24
Miscellaneous fixed assets 20.80 2.05 4.21 27.06
Total 518.28 51.17 105.00 674.45
Computation of Depreciation :
(a) Straight Line Method: (Rs. in crore)

Item Depreciation

Building@ 3.33 percent 3.83

Plant and machinery @ 10 percent 53.23

Miscellaneous fixed assets 2.16


(b) Written Down Value Method
(Rs. in crore)

1 2 3 4 5
Buildings @ 10%
Opening balance 115.15 103.63 93.27 83.94 75.55
Less: Depreciation 11.52 10.36 9.33 8.39 7.56
Closing balance 103.63 93.27 83.94 75.55 67.99
Plant & machinery and Miscellaneous Fixed Assets @ 25%
Opening balance 559.30 419.47 314.60 235.95 176.96
Less: Depreciation 139.83 104.87 78.65 58.99 44.24
Closing balance 419.47 314.60 235.95 176.96 132.72
Total Depreciation 151.35 115.23 87.98 67.38 51.80
Interest on term loan: (Rs. in
crore)
Years Half-years Opening Interest Annual Repayment Closing
balance (semi-annual) interest balance
1st 350.00 21.00 0.00 350.00
I 42.00
2nd 350.00 21.00 0.00 350.00
1st 350.00 21.00 0.00 350.00
II 42.00
2nd 350.00 21.00 0.00 350.00
1st 350.00 21.00 0.00 350.00
III 42.00
2nd 350.00 21.00 70.00 280.00
1st 280.00 16.80 70.00 210.00
IV 29.40
2nd 210.00 12.60 70.00 140.00
1st 140.00 8.40 70.00 70.00
V 12.60
2nd 70.00 4.20 70.00 0.00
Working Capital Requirement: (Rs. in crore)
Month 1 2 3 4 5
Raw material 2.00 17.73 20.75 23.98 24.92 25.94
Work-in-process 0.10 1.45 1.75 2.14 2.19 2.24
Finished goods 1.00 14.68 17.77 21.67 22.20 22.76
Debtors 1.50 36.00 42.53 49.61 52.09 54.70
Working expenses 1.00 7.50 9.38 12.00 12.16 12.35
Total 77.36 92.18 109.40 113.56 117.99
Working capital margin 73.00 73.00 73.00 73.00 73.00
Bank borrowings 4.36 19.18 36.40 40.56 44.99
Interest @ 12.5% 0.55 2.40 4.55 5.07 5.62
Tax calculation: (Rs. in crore)
I II III IV V
Profit Before Tax – 14.19 – 4.49 – 0.70 23.48 52.37
Add: Depreciation for company law purposes 59.22 59.22 59.22 59.22 59.22

Less: Depreciation for tax purposes 151.35 115.23 87.98 67.38 51.80

106.32 –60.50 –29.46 15.32 59.79
Less: Unabsorbed depreciation of earlier years 0.00 106.32 166.82 196.28 180.96
Gross total Income 0.00 0.00 0.00 0.00 0.00
Tax @ 35% 0.00 0.00 0.00 0.00 0.00
< TOP >
2. Project cash flows relating to Long term fund :
Operating Cash flow : PAT + Depreciation + Interest on term loan × (1 –tax rate)
Terminal Cash flow : Expected realization by selling the company as a going business concern.
We can say the cash flow in five years are as follows: (in Rs. crore)
Years 0 I II III IV V
Initial Outlays (800.00)
Operating Cash Flow
PAT – 14.19 – 4.49 – 0.70 23.48 52.37
Depreciation 59.22 59.22 59.22 59.22 59.22
Interest × (1 – T) 25.20 25.20 25.20 17.64 7.56
Prel. Exp. Written Off 4.00 4.00 4.00 4.00 4.00
Increase in WC margin 0.00 0.00 0.00 0.00 0.00
Terminal Cash Flow 1000.00
Total Cash flow (800.00) 74.23 83.93 87.72 104.34 1123.15 < TOP >
3. a. Discounted Pay-back Period: (in Rs. crore)
Year 1 2 3 4 5
Cash flow 74.23 83.93 87.72 104.34 1123.15
(Rs. crore)
Discounted 66.32 66.99 62.55 66.48 639.30
Cash flow
@ 11.93%
Cumulative 66.32 133.31 195.86 262.34 901.64
value Therefore, the entire amount of
investment will be recovered by the end of fifth year. Hence, the discounted pay-back period is = 5 years. Hence,
the project may be accepted.

b. NPV:
Cost of equity = 6 + 1.20 × 8 = 15.60%
Post tax cost of debt = 12 × (1 – 0.40)= 7.20%
450 350
×15.60 + × 7.20
800 800
Therefore cost of capital is = = 8.78 + 3.15 = 11.93%
74.23 83.93 87.72 104.34 1123.15
−800 + + + + +
1.1193 (1.1193) 2 (1.1193)3 (1.1193) 4 (1.1193)5
So the NPV =
= –800 + 66.32 + 66.99 + 62.55 + 66.48 + 639.30 = – 800 + 901.64 = Rs.101.64 crore.
Therefore, the NPV of the project has been obtained as Rs.100.30 crore. Since of the project is positive, it may be
accepted.

c. Modified Internal rate of Return:


Terminal value of the cash flows = 74.23 × (1.06)4 + 83.93 × (1.06)3 + 87.72 × (1.06)2 + 104.34 × 1.06 +
1123.15 = 93.68 + 99.96 + 98.56 + 110.60 + 1123.15 = Rs.1525.95 crore.
Let, the modified internal rate of return be = r
 1525.95 
5 −1 ×100
 800 
Hence, we may write that, r = = 13.79 percent.
As the modified IRR is more than the cost of capital associated with the project, the project may be
accepted.
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4. a. Positive Impacts:
i. As it is a profitable business it will contribute to the growth of our economy.
ii. As it is a labor-intensive project this project will create job opportunity.
iii. Economy of an under developed area will be improved.
iv. The project will fulfill the need for a commodity that is primarily used for the core sector like,
infrastructure, housing, etc. The project may be expected to meet the demand of the housing sector in
relation to its growth.
v. Being a part of the core sector industries, it will influence the development of various types of
ancillary activities.
Negative Impact:
i. It may contribute for a higher level of air pollution on the environment.
ii. Inhaling cement dust for a longer period may affect the human health severely.

b. The stages of SCBA as per UNIDO are:


i.Calculation of financial profitability at market prices.
ii.Shadow pricing of resources to obtain the net benefit at economic prices.
iii.Adjustment for the project’s impact on savings and investment.
iv.Adjustment for the project’s impact on income distribution.
v.Adjustment for the project’s production or use of goods whose social values are less than or greater than
their economic values.
vi.Each of the above stages is based on modifications of integrated standard analytical tables which along
with the graphical analysis help the analyst to a complete economic evaluation of a project and its
quantifiable social impacts.
vii.Again each of the stages is designed to throw light on the project’s desirability from a different angle. No
single stage of the UNIDO method can provide sufficient information for judging the merit of a project.
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5. Generally the project manager is responsible for planning and organizing the activities. Normally he is
specifically responsible for the following:
• Coordinating the efforts of the project team members and functional departments.
• Project scheduling and achieving the scheduled performance, to complete the project without overruns.
• Mobilization of resources.
• Monitoring performance and reporting to the top management.
• Obtaining policy decisions from top management and passing down to the team members.
• Coordinating and liaisoning with all the external agencies.
• Forecasting problems and making contingency plans.
• Quality assurance and quality control.
• Project cost control.
• Risk management, environmental care and safety.
• Management of project personnel.
• Control over the assets under his charge.
• Project office administration.
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Section E: Caselets
Caselet 1

6. The challenges that are unique to the healthcare organizations are listed below:
• Special demand of a patient care environment for 24 hours a day and 7 days in a week.
• Communicating the status of the project with the diverse stakeholders associated with the project.
• Managing uncertainty (risk) in the healthcare projects.
• Managing relations with the physicians and other clinical personnel
• Different approaches are required for private, public and university systems. All these approaches are unique
in their own.
• Liasoning with the different regulatory bodies
• Special demands of biomedical informatics (paperless healthcare) projects
• Special demands of healthcare research projects that are direly required to meet the newer types of healthcare
problems being faced by the modern civilization.
• Aligning medical technology projects with business and clinical needs
• Aligning clinical projects with sponsor, provider are patient needs.
• Aligning IT projects with sponsor, provider are patient needs.
• Aligning projects with insurance, public funding and the payment system.
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7. A healthcare organization may enjoy the following benefits by having its project office:
• Effective project portfolio management and hence improved risk management
• Alignment of the projects to the healthcare organizations’ strategic goals
• More efficient utilization of resources
• Helps the organization to be more responsive in relation to the changes in the external environment
• Standardization of the use of the best practices in project management
• Utilization of the clinical processes and business best practices
• Centralization of the project administrative tasks
• Centralized organizational reporting structure-direct reports to the administrative leader e.g. CEO.
• Consistently standardized reporting system to the higher authority
• Provide equal voice to all stakeholders on the project instead of having one stakeholder leading the project.
• Improved accountability for project completion
• Improved coordination and use of cross functional/cross departmental teams as well as with the vendors or
suppliers for the successful completion of the projects
• Effective coordination of multiple projects
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Caselet 2
8. The different facts that may cause to the emergence of chaos in projects are:
(a) The conventional project management does not acknowledge rework. Customarily, more or less rework
emerges in any project. At least part of rework lies undiscovered for a considerable time, and after its
discovery, it is rushed to completion, competing with other work assigned to the specialists in question.
(b) Feedback effects on productivity and quality refer especially to the situation where there is managerial
corrective action after deviation from the plan. Bringing more resources, using overtime or exerting schedule
pressure will usually reduce productivity and quality. Reduced quality will, in turn, lead to more rework.
(c) When a project consists of several phases, the availability and quality of upstream work can impact the
productivity and quality of downstream work. Thus, the rework cycles and feedback effects in one phase
extend their influence to the next phases. There may be a tipping point above which the effects accelerate
whereas they die out below this point. Chaos thus occurs as a phase change when the project passes this
point.
(d) To quantify the amount of rework (in the case of design projects) leading to turbulence in information flow
(which can be associated to chaos). The important factors like, the probability of errors in tasks, the degree
of task interdependence and the level of centralization, the value of which predicts when the system will slip
into a chaotic condition.
(e) If in a design project interrelated parts are designed in parallel activities, this causes the activities to last
longer, due to the added effort of capturing input data from other activities. This leads to more parallelism,
but also to other loops. More work has to be done on unfrozen items, there is more competition on limited,
trained resources, and inevitably, increased delay results. Thus parallelism, motivated by time pressure, is
liable to cause delay.
(f) Chaos may also be described as a situation where a project cannot be based on reasonably stable
assumptions and goals. The basic structure of the project plan may be uncertain, and the project may end up
with results completely different from the original intent. Thus, in this case chaos refers to situational factors
of the project.
(g) Chaos may also be caused due to the consideration of the two strategies jointly for projects chaos, namely:
Learning and selectionist strategy. Learning strategy comprises of scanning for unforeseen uncertainty and
related original problem solving to modify policy or goal. Selectionist strategy comprises of multiple trial
and error, and selection of the best candidate.
(h) Lastly, it may be due to the several other factors like, the complexity of the project, the existence of many
interrelated variables, dynamic nature of the systems etc. It is not enough to manage the system at a single
moment, but over time.
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9.   In order to strive for better project management strategies, the following two factors must be considered:
• A clear understanding that project management is a tool
• Implementing organization-wide discipline related to the management and practice of the tool
The tool exists for providing value to the organization. If it is used correctly, the tool can provide improved
product time-to-market resulting in better project cost and schedule performance. However, in order to use the
project management tool correctly, the principles are to be adopted by the project manager:
• Continuous focus on time budget and quality all through the project
• Systematic and continuous planning
• Observing a sense of urgency by project managers as projects have limited resources and time
• Following time tested and proven project life cycle
• Clear communications of project deliverables and activities
• Deliverables must come gradually and in subsequent approximations
• Projects requires strong support of sponsors and clear-cut approvals
• Clear analysis of project deliverables to ensure project success
• Active participation of the stakeholders and project sponsors in the project
• Priorities must be clearly defined by the top management
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Caselet 3
10.  The different methods of developing project schedules are as follows:
(a) Work Breakdown Structure (WBS) can be used as the initial starting point for developing an effective
schedule. With the WBS, the entire project is divided and sub-divided into discrete set of manageable
tasks. These tasks are referred to as work packages. While dividing the activities in consultation with
work groups who are likely to handle the tasks should be done so as to ensure that the estimated
durations and resources are as realistic as possible. Once the tasks and persons responsible for
completing the tasks are identified, the dependencies and relationships between tasks should be
ascertained. Before arriving at the final schedule for the project, project managers need to ensure that
the schedule is reflecting the real calendar by including a provision for holidays, flexible work
schedules and any other workload on the resources. With the technological advancement, there are
many software packages available which assist the project managers in developing a schedule and
tracking the progress.
(b) Another method of developing a schedule can be through the use of Gantt chart. While this method is
quite appropriate for small projects, complex engineering and software development projects where
task interdependencies are higher, Gantt chart becomes an indicator of the progress achieved.
Developing a project schedule includes, defining the type of schedule, defining precise and measurable
milestones, estimating task duration, defining priorities, defining the critical path, documentation of
assumptions, identifying the risks and reviewing the results.
The important factors to be taken into account for the preparation of project schedules are as follows:
(a) The key to developing a schedule lies in the effectiveness of defining the milestones for the project. It
is solely on the basis of milestones that the Gantt chart or the WBS can develop the detailed schedule.
The milestones differ significantly from project to project and also within the project. Since the
milestones are the end point of the tasks, they serve as the measurable item. The cost of achieving the
milestone should also be ascertained.
(b) The next important aspect of scheduling is the estimation of time period of the project. This is a highly
challenging task for a project manager since the exact duration of completing a task cannot be
ascertained. Nonetheless, it helps in resources allocation and cost estimation. Inaccurate estimation of
task duration can lead to confusion in prioritization and conflicts among the work groups, resulting in
excessive overtime, and escalation of costs and poor quality output. Time estimation is a complex
activity because it takes into account many variables like staff availability, skill levels, efficiency of the
staff, unforeseen events and the need to rework in the event of change in the design. Project managers
normally use historical data of similar tasks performed earlier. Based on the historical data, the time
estimates are developed by building in contingency and other time variables. In the absence of
historical data, it is advisable to obtain the estimates from other sources.
(c) The third important point is the time estimates; the project management or schedule planner should
ensure that the task priorities are clearly defined. Clearly defined priorities help to avoid any
scheduling or resource conflicts. During the development of the schedule, the critical path of the
project should be determined. Once the critical path is identified, the progress of the project can be
managed without any slippage. If the project slips from the critical path, the outcome of the project is
always going to be delayed.
(d) Lastly, the schedule planner should always remember to document the important assumptions. Since
the schedule is not static, at the time of revising the schedule these assumptions play an important role.
Without documentation of the assumptions, the modifications may sometimes be difficult and prove to
be risky. Risk is an inherent part in almost all the activities and tasks in the project. In order to mitigate
the risks, the planner has to make allowances for the risks. Risks can be mitigated either through
allocating higher financial reserves or by adding additional time to complete those tasks where risks are
inherent.
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11. Time management is the process of predicting and controlling the time of the project to ensure project
delivery within the stipulated schedule. Several areas of time management include decomposition of the
several activities of the projects, listing of the activities to be performed, analysis of the constructability of
the individual activities and updating the work break down structures. All of these areas are to be studied
properly. On the basis of the above study, the jobs should be recognized as: mandatory, discretionary and
with external dependency. Simultaneously, the activity durations, resource requirements, project calendars,
activity leads and lags etc are also to be estimated. Thereafter, the project manager should consider the issues
like, mathematical analysis techniques to be adopted, possibility of duration compression to be explored,
requirements of resource leveling, etc. While the project is in progress, the project manager should prepare
and use the progress monitoring curves as well as estimate the percentage of jobs that have been completed.
All these activities will help him to plan for and to implement the project schedule as well as any corrective
measure that is warranted for the successful completion of the project within the time schedule. In this way,
an effective time management strategy may be adopted by using the technique of project scheduling.
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