MBA III Sem.

Project Management
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Project Management
UNIT-3
Financial feasibility
Determinants of cost of project
Its nancing and deciding optimum capital structure
Cash ows from project and owner’s prospective
Project appraisal

UNIT-4Types of Risk
Techniques of risk evaluation and its mitigation
Sensitivity analysis, Hiller’s model
Scenario analysis
 Project Management Numerical Questions
Performance Analysis
Q-1. A Project begin on 1st Jan., 2000 and was expected to be completed by 30th Sept., 2000 The project is
being reviewed on 30th June, 2000 and following information has been developed.
(i) Budgeted Cost for Work Scheduled (BCWS) Rs. 15,00,000
(ii) Budgeted Cost for Work Performed (BCWP) Rs. 14,00,000
(iii) Actual Cost for Work Performed (ACWP) Rs. 16,00,000
(iv) Budgeted Cost for Total Work (BCTW) Rs. 25,00,000
(v) Addition Cost for Completion (ACC) Rs 12,00,000
Determine the following:
(a) Cost Variance
(b) Schedule Variance in Cost Terms
(c) Cost Performance Index.

For Solution See Video Lecture 1

(Performance Analysis) on the App
Q-2. A BRTS project ( 1,400 crore) was originally planned to be completed in 5 years. A review done after
2 years informed that works worth 250 crores have been completed by incurring 225 crores. The planned
work to be completed in 2 years was ₹ 300 crores. Determine cost and schedule variance, re -estimated time
and cost of project with similar progress. Suggest strategy.

For Solution See Video Lecture 2

(Performance Analysis) on the App
Q-3. A Metro Train Project (Rs. 140 Crores) was planned to be completed in 5 years. A review was done
after 2 years. Works worth Rs. 25 Crores have been completed by spending Rs. 23.4 Crores. The planned
work to be completed by them was Rs. 30 Crores. Determine:
(a) Cost and Schedule Variance.
(b) Re-estimated Cost and duration of project assuming similar performance.
(c) Strategy to match the targets

For Solution See Video Lecture 3

(Performance Analysis) on the App
Q-4. A project was planned to have total cost of Rs. 200 lacs. A review is done on 29th Sept, and work
estimated till date was worth Rs. 100 lacs. The total time estimated to complete the project was 250 days.
The work which has been completed till date was budgeted for Rs. 90 lacs although Rs. 96 lacs have been
spent. Determine:
(i) Cost and Schedule Variance.
(ii) New estimated cost and time for project completion.
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(iii) Strategy to be used.

For Solution See Video Lecture 4

(Performance Analysis) on the App
Project Cash Flow
Q-1. A company wants to invest Rs. 160 Lakhs in xed assets and 40 lakhs in working capital. This project
can generate a revenue of Rs. 300 lakhs every year and raw material requirement will be 55% of sales.
Wages required would be 10% of the sales. Other xed costs would be Rs. 50 lakhs every year. Rate of
depreciation 25% on WDV, Tax rate 30%. The project will fetch a net salvage value of Rs. 35 lakhs and bad
debts in expected to be 10 lakhs during the project. Calculate project cash ows assuming life of the project
5 years.

For Solution See Video Lecture 1

(Project Cash Flow) on the App
Q-2. A company is planning to increase its product range. The new product will require a xed investment
of Rs. 120 lakhs. Working capital requirement will be 25% of sales. The sales revenue of the new product
will be –
Year 1 2 3 4 5
Sales(Rs. in lakhs) 220 240 280 260 220
The variable cost will be 45% of sales xed cost being 30 lakhs per year. There will be a contribution loss of
Rs. 11 lakhs every year because of use of common facilities. Overheads allocation is 10% of sales (only 6%
of actually spent) bad debts expected to be Rs. 14 lakhs during project. Rate of depreciation 25% WDV. Tax
rate 40% net salvage value is 28 lakhs, cost of capital 20%. Find out project cash ows for 5 years.

For Solution See Video Lecture 2

(Project Cash Flow) on the App
Q-3. ABC Ltd. is planning to start a new product line with xed investment outlay of Rs. 80 lacs. The
expected sales of new product is:
I Year II Year III Year IV Year
Sales: 90 lacs 100 lacs 110 lacs 100 lacs
The variable cost is expected to be 45% of sales. Working Capital requirement is expected to be 30% of
sales. Fixed cost is expected to be Rs. 6 lacs/year. The new product line will cause a contribution loss of Rs.
4 lacs/year on old products. Rate of Depreciation is 25% (WDV) and tax rate is 30%. The project will fetch
a Net Salvage Value of Rs. 20 lacs often 4 year.
Determine Project Cash Flow and NPV if 'r' is 10%.

M.B.A. 2014 Q. 5 For Solution See Video

Lecture 3 (Project Cash Flow) on the App
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Q-4. ABC Ltd. is planning to start a new project with a xed investment of Rs. 7 Crores. The expected sales
in various years is:
I Year II Year III Year IV Year V Year
Rs 7 crore Rs 8 crore Rs 9 crore Rs 8 crore Rs 7 crore
The raw material cost is expected to be 45% of sales. Working capital requirement is 30% of sales to be
acquired at the preceding year. Fixed Cost is Rs. 50 Lacs per year. Depreciation 25% on WDV and Tax rate
is 30%. The project will fetch net salvage value of Rs. 1.7 Crore after 5 years.
Determine project cash ows and NPV if = 10%

M.B.A. 2019 Q. 5 For Solution See Video

Lecture 4 (Project Cash Flow) on the App

Capital Budgeting
Q-1. Project costs Rs. 10,00,000 and yields an annual cash inow of Rs. 2,00,000 for 8 years. Calculate its
pay-back period.

For Solution See Video Lecture 2

(Capital Budgeting) on the App
Q-2. Determine the pay-back period for a project which requires a cash outlay of Rs. 1,00,000 and generates
cash inows of Rs. 20,000, Rs. 40,000, Rs. 30,000 and Rs. 20,000 in the rst, second, third and fourth year
respectively

For Solution See Video Lecture 2

(Capital Budgeting) on the App
Q-3. Anurag Ltd. is considering the purchase of a new machine for its immediate expansion programme.
There are three possible machines suitable for the purpose. Their details are as follows :
Machines

1 2 3
(Rs.) (Rs.) (Rs.)
Capital Cost 30,000 30,000 30,000
Sales (at standard prices) 50,000 40,000 45,000
Net Cost of Production :
Direct Material 4,000 5,000 4,800
Direct Labour 5,000 3,000 3,600
Factory Overheads 6,000 5,000 5,800
Administration Costs 2,000 1,000 1,500
Selling and Distribution Costs 1,000 1,000 1,000
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The economic life of machine no. 1 is 2 year, while it is 3 years for the other two. The scrap values are Rs.
4,000 Rs. 2,500 and Rs. 3,000 respectively.
Tax to be paid is expected at 50% of the net earnings of each year. Interest on capital has to be paid at 8%
per annum.
You are req uested to show which machine would be the most protable investment on the principle of “pay-
back method.”

For Solution See Video Lecture 3

(Capital Budgeting) on the App
Q-4. A Ltd. is considering the purchase of a new machine which will carry out operations performed by
labour. X and Y are alternative models. From the following information you are required to prepare a
protability statement and work out the pay-back period in respect of each machine.

Taxation is
Machine „X Machine „Y
to be
Estimated life of machine (years) 5 6
regarded as
Cost of Machine Rs. 15,00,000 Rs. 25,00,000
50% of
Cost of Indirect materials (p.a.) 60,000 80,000
prot.
Estimated savings in scrap (p.a.) 1,00,000 1,50,000
Which
Additional cost of maintenance (p.a.) 1,90,000 2,70,000
model
Estimated savings in direct wages :
would you
Employees not required (number) 150 200
recommend
Wages per employee 6,000 6,000 ? State your
reasons.

For Solution See Video Lecture 4

(Capital Budgeting) on the App
Q-5. Determine the average rate of return from the following data of two machines A and B.

Machine A Machine B
Original Cost Rs. 5,61,250 Rs. 5,61,250
Addl. Investment in net working capital 50,000 60,000
Estimated life in years 5 5
Estimated salvage value 30,000 30,000
Average income-tax rate 55% 55%
Annual estimated income after depr. And tax
1st year 33,750 1,13,750
2nd year 53,750 93,750
3rd year 73,750 73,750
4th year 93,750 53,750
5th year 1,13,750 33,750
3,68,750 3,68,750
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For Solution See Video Lecture 5

(Capital Budgeting) on the App
Q-6. Z Ltd. has under consideration the following two projects. Their details are as under :
Project „X Project „Y
Investment in Machinery Rs. 20,00,000 Rs. 30,00,000
Working Capital 10,00,000 10,00,000
Life of Machinery 4 years 6 years
Scrap value of Machinery 10% 10%
Tax Rate 50% 50%
Income before depreciation and tax at the end of year :
1 Rs. 16,00,000 Rs. 30,00,000
2 16,00,000 18,00,000
3 16,00,000 30,00,000
4 16,00,000 16,00,000
5 ------- 12,00,000
6 ------- 6,00,000
You are required to calculate the Accounting Rate of Return and suggest which project is to be preferred .

For Solution See Video Lecture 6

(Capital Budgeting) on the App
Q-7. The following is the relevant information for two Mutually Exclusive Projects 'X' and 'Y' being
evaluated by a rm:
Year Cash Flow „X Cash Flow „Y
0 -10000 -30000
1 5000 14000
2 6000 19000
3 4000 10000
Evaluate and rank these proposals as per NPV and IRR Techniques. Given that minimum required rate of
return is 10%

For Solution See Video Lecture 7

for NPV & Lecture 8 for IRR
(Capital Budgeting) on the App
Q-8. Phoenix Company is considering two projects P & Q. The expected cash ow of these projects are as
follows:
Year Project P Project Q
0 (10,00,000) (10,00,000)
1 2,00,000 1,00,000
2 2,00,000 1,50,000
3 3,00,000 3,00,000
4 3,00,000 3,50,000
5 3,50,000 3,50,000
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What is the NPV of both the projects if discount rate is 10% for both the rms?

For Solution See Video Lecture 7

for NPV & Lecture 9 for IRR
(Capital Budgeting) on the App
Q-9. A machine co sting Rs. 110 lakhs has a life of 10 years, at the end of which its scrap value is likely to be
Rs. 10 lakhs. The rm's cut-off rate is 12%. The machine is expected to yield an annual prot after tax of
Rs. 10 lakhs, depreciation will be changed on straight line basis. At 12% p. a the present value of the rupee
received annually for ten years is Rs. 5.650, and the value of one rupee received at the end of the 10th year
is Rs. 0.3222. Ascertain the net present value of the project.

M.B.A. 2022 Q.5

For Solution See Video Lecture 10
(Capital Budgeting) on the App

Q-10. A. Ltd. is evaluating a project with expected CFATs are as follows :

Year CFATs (Rs.)
0 (1,00,000)
1 20,000
2 30,000
3 60,000
4 30,000
Determine the NPV of the project if discount rate is 10% and 14%. Give your comment about the feasibility
of the project:
Year: 0 1 2 3 4 5
D.F(14%): 1.000 0.877 0.769 0.675 0.592 0.519
D.F(10%): 1.000 0.909 0.826 0.751 0.683 0.621

M.B.A. 2013 Q.5

For Solution See Video Lecture 11
(Capital Budgeting) on the App
Q-11. A rm is considering the following project:
Cash Flows (Rs)
C0 C1 C2 C3 C4 C5
-50,000 +11,300 +12,769 +14,429 +16,305 +18,421
Calculate the NPV for the project if the cost of capital is 10%. What is the project s IRR?
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M.B.A. 2015 Q.9
For Solution See Video Lecture 12
(Capital Budgeting) on the App
Q-12. Compare the two mutually exclusive projects using (a) PBP (b) ARR (c) NPV (d) IRR. Which project
should be selected and why? Assume = 10%:
Project A Project B
Fixed Investment Rs 3,00,000 Rs 2,00,000
Working Capital Rs 50,000 Rs 80,000
Project Life 15 Years 12 Years
CF/ Year Rs 80,000 Rs 60,000
Salvage Value Rs 40,000 Rs 30,000

M.B.A. 2016 Q.5

For Solution See Video Lecture 13
(Capital Budgeting) on the App
Q-13. (a) Compare two projects A and B (usin g NPV method only) from the following information:
Project A
Investment on Project : Rs 10,00,000
Life of the project : 5 Years
Period of Implementation : 1 Years
Cost of Capital : 15%
Year : 1 2 3 4 5
Cash In Flow (lakhs Rs) : 2 3 4 3 1
Project B
Investment on Project : Rs 10,00,000
Life of the project : 5 Years
Period of Implementation : 1 Years
Cost of Capital : 13%
Year : 1 2 3 4 5
Cash In Flow (lakhs Rs) : 3 4 4 3 2

(b) Compare two projects by PI (Protability Index Method):

Project A Project B
(Rs) (Rs)
Initial Value of invest ment (cash outow) 5,00,000 11,00,000
Present value of Cash Inows 6,00,000 12,50,000
NPV 1,00,000 1,50,000
M.B.A. 2017 Q.9
For Solution See Video Lecture 14
(Capital Budgeting) on the App
Q-14.(a) Compare projects A and B using net-present value method assuming discount rate of 11% per
annum:
Year Project A Project B
(Cash Flow) Rs (Cash Flow) Rs
0 -10,00,000 -10,00,000
1 8,00,000 4,00,000
2 6,00,000 4,00,000
3 - 3,00,000
4 - 3,00,000
5 - 2,00,000
Note: (Where Negative gure indicated cash outow)

(b) Also compare two projects by IRR method (assuming IRR-of 19%. 25%, 21%, 26%, 27% and 28%).

M.B.A. 2017 Q.8

For Solution See Video Lecture 15
(Capital Budgeting) on the App
 Risk Analysis in Capital Budgeting
Q-1. The Beta Company Ltd is considering the purchase of a new investment. Two alternative investments
are available (A and B) each costing Rs. 1,00,000. Cash inows are expected to be as follows :
Cash Inow
Year Investment A Investment B
1 40000 50000
2 35000 40000
3 25000 30000
4 20000 30000
The company has a target return on capital of 10%. Risk premium rates are 2% and 8% respectively for
investments A and B. Which investme nt should be preferred?

For Solution See Video Lecture 1

(Risk Analysis) on the App
Q-2. A rm is considering three mutually exclusive projects A, B and C. Basis information is as follows:
Cost of Capital = 16%
Risk free rate of return = 12%
Tax rate = 45%
Cash ows and risk index are estimated as follows:
Project A Project B Project C
Initial Cash Outlay 25 30 35
Cash inow year 1 10 14 10
Cash inow year 2 10 10 12
Cash inow year 3 10 8 15
Cash inow year 4 10 6 18
Risk Index 1.5 1 0.5
Calculate risk adjusted NPV for each project using the risk adjusted discount rate method. Which project
should be selected away A,B and C?

M.B.A. 2018 Q.7

For Solution See Video Lecture 2
(Risk Analysis in Capital Budgeting) on the App
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Q-3. There are two projects X and Y. Each involves an investment of Rs 40,000. The expected cash inows
and the certainly coefcients are as under:
Project X Project Y
Year Cash Inow Certainly Coefcient Cash Inow Certainly Coefcient
1 25000 0.8 20000 0.9
2 20000 0.7 30000 0.8
3 20000 0.9 20000 0.7
Risk-free cut off rate is 10% Suggest which of the two projects should be preferred.

or Solution See Video Lecture 3

(Risk Analysis in Capital Budgeting) on the App
Q-4. From the following information:
Initial outlay of Project A is Rs. 1,70,000
Initial outlay of Project B is Rs. 1.50,000
The certainty-equivalent approach is employed in evaluating Risky Investments. The current yield on
Treasury Bills is 5% and company uses risk less rate. The expected value of net cash ows are:
Project A Project B
Year Cash Inow Certainly Equivalent Cash Inow Certainly Equivalent
1 90 0.8 90 0.9
2 100 0.7 90 0.8
3 110 0.5 100 0.6
(a) Which project should be accepted?
(b) Which project is Riskier and why?
(c) If company was to use the Risk Adjusted Discount Rate Method, then which project would be analysed
with higher rate?

M.B.A. 2022 Q.8

For Solution See Video Lecture 4
(Risk Analysis in Capital Budgeting) on the App

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Q-5. A company used Risk Adjusted Discount Rate Method. Certain CFAT and Certainty Equivalents for
two projects Project X and Project Y are given as follows :

Project X Project Y
Year Certain CFAT Certainly Equivalent Certain CFAT Certainly Equivalent
0 (40,00,000) 1.00 (45,00,000) 1.00
1 14,25,000 0.95 22,50,000 0.90
2 15,30,000 0.85 16,00,000 0.80
3 14,00,000 0.70 17,50,000 0.70
4 13,00,000 0.65 10,80,000 0.60
Which project should be accepted if risk free rate of return of company is 9%, cost of capital is 13% and risk
adjusted discount rate (for Project X and Project Y) is 16% ?

M.B.A. 2022 Q.9

For Solution See Video Lecture 5
(Risk Analysis in Capital Budgeting) on the App
Q-6. Two mutually exclusive investment proposals are being considered. The following information is
available:
Project X Project Y
Cost 6,000 6,000
Year Cash Inow Probability Cash Inow Probability
1 4,000 0.2 8,000 0.2
2 8,000 0.6 9,000 0.6
3 12,000 0.2 9,000 0.2
Assuming cost of capital at 10%, advise the selection of the project.

For Solution See Video Lecture 6

(Risk Analysis in Capital Budgeting) on the App
Q-7. From the following information, ascertain which project is more risky on the basis of standard
deviation:
Project A Project B
Cash Inow Probability Cash Inow Probability
2,000 0.2 2,000 0.1
4,000 0.3 4,000 0.4
6,000 0.3 6,000 0.4
8,000 0.2 8,000 0.1

For Solution See Video Lecture 7

(Risk Analysis in Capital Budgeting) on the App
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Q-8. A project involving an initial outlay of Rs 10,000 has the fo llowing benets associated with it:
Year 1 Year 2 Year 3
Net Cash Probability Net Cash Probability Net Cash Probability
Flow Rs. Flow Rs. Flow Rs.
3,000 0.3 2,000 0.2 3,000 0.3
5,000 0.4 4,000 0.6 5,000 0.4
7,000 0.3 6,000 0.2 7,000 0.3
Calculate: (a) Expected Net Present Value and (b ) Standard Deviation of net present value, assuming that i=
6 per cent.

M.B.A. 2019 Q.5

For Solution See Video Lecture 8
(Risk Analysis in Capital Budgeting) on the App
Q-9. Determine expected NPV and probability of making no loss with following information if Initial
Investment = Rs. 10 Cr. And r= 12%. No salvage value.
Year 1 Year 2 Year 3
NCF Probability NCF Probability NCF Probability
Rs 5 Cr. 20% Rs 6 Cr. 30% Rs 7 Cr. 50%
Rs 4 Cr. 50% Rs 4 Cr. 30% Rs 5 Cr. 30%
Rs 3 Cr. 30% Rs 3 Cr. 40% Rs 2 Cr. 20%

M.B.A. 2019 Q.6

For Solution See Video Lecture 9
(Risk Analysis in Capital Budgeting) on the App
Q-10. An investment project involves a current outlay of ₹10,000. The mean and standard deviation of cash
ows, which are perfectly correlated, are as follows:
Year t
1 5,000 1,500
2 3,000 1,000
3 4,000 2,000
4 3,000 1,200
Calculate ̅ ̅ ̅ ̅ ̅ ̅ and assuming a risk free interest rate of 6 percent.

For Solution See Video Lecture 10

(Risk Analysis in Capital Budgeting) on the App
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Q-11. ABC Ltd. is considering a project with following cash ows:
Year Purchase of Plant (Rs) Running Cost (Rs) Saving (Rs)
0 (7,000) - -
1 - 2,000 6,000
2 - 2,500 7,000
The cost of capital is 8%
Measure the sensitivity of the project to changes in the levels of Plant value, costs, and savings (Considering
each factor at a time) such that the net present value becomes zero. What factor is most sensitive to affect the
acceptability of the project. The present value factor at 8% are: 0.93 (at year-end 1) and 0.86 (at year-end 2)

M.B.A. 2019 January Q.1

For Solution See Video Lecture 11
(Risk Analysis in Capital Budgeting) on the App
Q-12. Following are the data regarding a project. Compute and interpret sensitivity of various variables:
Expected Variation
Sales 10,000 units/ year 10%
Selling Price Rs 600/ unit 5%
Variable Cost 2/3 of S.P. -
Fixed Cost Rs 5,00,000/ year -
Tax Rate 30% -
Cost of Project Rs 40,00,000 -
Project Life 8 Years 1 year
Expected Return 15% 2%
Depreciation (SLM) 10% -
Salvage Value Rs 8,00,000 -

M.B.A. 2016 Q.6

For Solution See Video Lecture 12
(Risk Analysis in Capital Budgeting) on the App

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