Project financing and AppraisalQuestion paper patternPart A 1 mark x 20 questions (no choice) 20Part B 3 marks x 5 questions (no choice) 15Part C 7 marks x 5 questions (5 out of 8) 35Part D 15 marks x 2 questions (2 out of 3) 30Total 100Part AObjective type questions – Fill ups, choose from options, True or falsePart BExplain the following with relation to projects: 1. Adjusted Cost of Capital (ACC) 2. Adjusted Present value 3. Benefit cost ratio 4. Capital Asset pricing method (CAPM) 5. Capital rationing 6. Covenants 7. Debt service coverage ratio 8. Dependant projects 9. Domestic Resource Cost ( DRC) 10. Economic Rate of return ( ERR) 11. Environmental Impact Assessment (EIA) 12. Feasibility study 13. Hurdle rate 14. Limited Recourse structure 15. Mutually exclusive projects 16. Net Present Value 17. Options 18. Pay back period 19. Project rating index 20. Public Private Partnerships 21. Risk Free rate 22. Social Cost Benefit Analysis – SCBA 23. Special Purpose Vehicle 24. Weighted average cost of capital - WACC 25. Weighted marginal cost of capital - WMCC
Part C - 7 marks questions (answer 5 out of 8)1. Detail the importance of technical arrangements in projects2. What components constitute the cost of a project if setting up of a manufacturing unit is your project?3. What are the principles of cash flows that have to be considered in projects? Explain with examples how these principles are relevant.4. What are the tax benefits available for projects?5. What are the benefits of mergers and amalgamations in projects?6. What is Public Private Partnership? Explain the different types of PPPs as relevant to projects.7. What are the important ratios that are considered for evaluating viability of projects from the point of view of (a) financial institution (b) share holders8. What are the special issues with regard to financing of infrastructure projects?9. In what ways does strategy help in the different levels of project management?10. Briefly explain specific tools that would help during the stage of (1) projects selection ( 2) projects planning ( 3) projects implementation (4) projects monitoring11. How does Project management software assist in project management? Substantiate your answer with specific instances of support during (1) projects selection ( 2) projects planning ( 3) projects implementation (4) projects monitoring12. Why is Venture Capital as a source of project financing gaining importance in countries like India? How is it different from Private Equity?13. How do financial institutions calculate investment, operating inflows and terminal inflows with respect to projects? How is it different from usual financial projections?14. Calculate the social cost and benefits of the following project Presently, a ferry service, operated privately, is being used to cross a river. The ferry operator charges Rs.3 per person. It costs him Rs.2 per person. 50,000 persons use the ferry service annually. The government is considering construction of a bridge over the river. It is estimated that after the bridge is constructed 2, 50,000 persons will cross the river on the bridge. The bridge is expected to cost Rs 3 million initially and its annual maintenance cost
would be Rs 10,000. It has an indefinitely long life. Once the bridge is constructed the ferry operator is expected to close down the ferry service and sell the ferry boats for Rs.100, 000.15. Your corporate budget has allotted Rs. 32,500 (in ‘000s) for this capital budgeting period. You have the following projects on hand. Project Initial cash outflow IRR NPV PI ( Rs. In 000s) (Rs. In 000s) A 500 18% 50 1.10 B 5,000 25 6,500 2.30 C 5,000 37 5,500 2.10 D 7,500 20 5,000 1.67 E 12,500 26 500 1.04 F 15,000 28 21,000 2.40 G 17,500 19 7,500 1.43 H 25,000 15 6,000 1.24Of the above, what investment opportunities would you undertake? Substantiate yourselection adequately?16. BW is considering a new Rs. 4,25,000 automated machine that will save Rs.1,50,000 on operating expenses per year for the next 6 years. The required rate is 11%. BW can borrow Rs. 180,000 at 7%. Principal of Rs. 30000 and the interest is repaid every year. The firm is in the 30% tax bracket. Should BW go in for this investment? Justify your answer.17. SE’s capital structure of equity to debt is in the ratio of 40:60. The cost of various sources of finance in the different levels is as follows:Source of finance Range of new finance in million (Rs) Cost (%)Equity 0 – 30 18% More than 30 20Debt 0 – 50 10 More than 50 11The company has the following identified projects for investmentProject Amount in million Rs. IRRA 30 18.0%B 20 12.0C 25 15.3D 40 16.5E 10 13.4What in your opinion in the optimal capital budget for SE based on selection of feasible
Projects?18. A project was begun on 1st Sept 2009 and is expected to be completed by 31stAugust 2009. The project was reviewed on 1st April 2010 when the followinginformation has been developed. Budgeted cost for work scheduled (BCWS): 6,000,000 Budgeted cost for work performed (BCWP): 5,500,000 Actual cost of work performed (ACWP): 5,800,000 Budgeted cost for total work (BCTW) : 10,000,000 Additional cost for completion (ACC) : 5,000,000 (a) What analysis can you draw from the above details? (b) What is your comment on the progress of the project? 19. G Ltd has set up a project 4 years ago. The project has a remaining life of 6 years. The cash flows for the remaining 6 years are given below: Year 1 2 3 4 5 6 Cash flow in million Rs. 30 35 45 50 30 25 The initial project outlay was Rs. 180 millions. G Ltd. is not keen to continue the project. The salvage value of the project if terminated immediately is Rs. 130 million. Y Ltd has offered to buy the project at Rs. 165 million. The discount rate currently is 12%. a. Should G Ltd accept Y Ltd’s offer? b. If Y Ltd drops its offer, what should G Ltd do? Substantiate your decisions with numerical figures. 20. What would be the methods of raising finance for the following projects. Substantiate your suggestions with reasons: a. A public limited company with over 25 years standing in the industry, which does not want to dilute its rights b. A company whose financiers are not willing to provide additional working capital finance because of its improper working capital management c. A new company with a novel technology promoted by a group of professionals who have no prior business experience d. An organisation wants to go in for new machinery, for which the financial institutions are not prepared to extend credit on account of the existing high borrowings. e. A very widely held public limited company which has shown very impressive growth in the market and tax payouts are very high.
PART D15 marks questions 1. Explain risk w.r.t projects? What are the various risks that can affect projects and how can they be managed? (3, 12) 2. Explain briefly the various aspects on which projects are appraised by financial institutions? Explain technical appraisal of any specific project of your choice. ( 10,5) 3. What are the key features of project finance? What are the various sources of project finance? ( 5,10) 4. Discuss the pre-requisites of successful project implementation? What do you think are the qualities of a Project Manager in ensuring successful project management? (8,7) 5. What are the means of infrastructure financing? Distinguish between leasing and HP as sources of finance. (10,5) 6. Who are the major parties to a project and what their responsibilities are. Explain the various contracts/ agreement entered into with each party to ensure compliance (10,5) 7. A builder owns a plot of land that can be used either for 8 or 12 apartment units. Cost of 8 apartment block is Rs. 36 lakhs and 12 apartments is Rs. 62 lakhs resp. The current market price of a apartment is Rs. 6 lakhs. The yearly rental per apartment is Rs. 50,000 and risk free interest rate is 12% p.a. If the market is buoyant, the apartment sells at Rs. 7.5 lakhs or else at Rs. 5.4 lakhs. Assuming construction cost to be pegged for the next 2 years, substantiate whether the builder should construct apartments or leave the land vacant.8. Given are project details of A and B. Which project would you select and why? ANNUAL CASH FLOWS: YEAR 1 of Project A State Probability Cash Flow Deep Recession .05 $ -3,000 Mild Recession .25 1,000 Normal .40 5,000 Minor Boom .25 9,000 Major Boom .05 13,000
ANNUAL CASH FLOWS: YEAR 1 – Project B State Probability Cash Flow Deep Recession .05 $ -1,000 Mild Recession .25 2,000 Normal .40 5,000 Minor Boom .25 8,000 Major Boom .05 11,000 9. A machine has a book value of Rs. 4, 00,000 after depreciating it annually under 25% WDV. Cost of operating the machine is Rs. 4, 00,000. It can be sold now at a post tax salvage value of Rs. 5, 00,000. It has a remaining life of 5 years with a net salvage value of Rs. 1, 60,000. It is proposed to install a new machine at Rs. 16,00,000 which has a life of 5 years and a net salvage value of Rs, 8,00,000. Rate of depreciation is the same as that applicable to the old machine. The net working capital requirement is Rs.5,00,000. A saving of Rs. 3,00,000 ( other than depreciation) is expected after the new machine installation. Tax rate applicable is 30%. According to you, do you think this replacement project is feasible? 10. Five projects A, B, C, D, E are available to the company. A B C D EInitial Investment 20000 50000 75000 100000 150000Annual Cash flow 6000 8000 15000 15000 25000Life in yrs 5 10 8 12 7Salvage value Rs. 5000 - - 15000 50000Additional information:Project B is a pre requisite for Project E. Project C and D are mutually exclusive.Otherwise the projects are independent. The cost of capital of the firm is 10%. Thedecision criterion is the NPV.Which projects have to be chosen at the following budget levels(a) Rs. 1,50,000 (b) Rs. 2,00,000
11. The following details are given to you:Project Activity Optimistic Most likely Pessimistic Total Cost of Time in months Time in months Time in months the activityA 1-2 9 12 21 2,600,000B 1-3 6 12 18 6,000,000C 2-4 1 1.5 5 2,000,000D 3-4 4 8.5 10 2,000,000E 2-5 10 14 24 1,500,000F 4-5 1 2 3 1,500,000The funds will be released in the following mannerYear 1 6,900,000Year 2 6,800,000Year 3 1,900,000The annual capital budget if not drawn within the year will lapse. Suggest how theProject activities can be scheduled to ensure completion of projects within the least timepossible without lapsing the annual budget.12. The scientists at Hero have come up with an electric moped. The firm is ready forpilot production and test marketing. This will cost Rs.20 million and take six months.Management believes that there is a 70 percent chance that the pilot production and testmarketing will be successful. In case of success, Hero can build a plant costing Rs.150million. The plant will generate an annual cash inflow of Rs.30 million for 20 years if thedemand is high or an annual cash inflow of Rs.20 million if the demand is low. Highdemand has a probability of 0.6; Low demand has a probability of 0.4.What is the optimal decision strategy Hero should take? Substantiate your views usingthe Decision Tree Analysis.