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IIPM
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT Project Appraisal - Re-Examination Assignment
Paper Code: IIPM/FIN04/PA003 Max. Marks: 100

General Instructions: The Student should submit this assignment in his/her own handwritten (not in the typed format). The Student should submit this assignment within 2 days from the issue of the assignment. The student should attach this assignment paper with the answered papers. Write legibly and keep the length of the answer as per the weightage (in terms of marks) assigned to each question. DO NOT be unduly short or long in providing the relevant details. The student should only use the Rule sheet papers for answering the questions. Failure to comply with the above instructions would lead to rejection of assignment. Specific Instructions: There are Four Questions in this assignment. The student should answer all the questions along with their subparts. Marks are being assigned to each section of the question as well. Each Question carries equal marks (25 marks) unless specified explicitly Question-1(A)[12 Marks] XYZ Limited has the following capital structure: Equity share capital (2,00,000 shares) 6% preference shares @ Rs 100 each 8% Debentures Rs. 40,00,000 10,00,000 30,00,000 80,00,000

(i)The market price of the companys equity share is Rs. 20. It is expected that company will pay a dividend of Rs. 2 per share at the end of current year, which will grow at 7 per cent for ever. (ii)Preference shares were issued at a discount of 5% with a floatation cost of 4%. Preference shares are redeemable at premium of 10% after 10 years. (iii)Debentures were issued at a premium of 10% with a floatation cost of 6%. Debentures are redeemable at par after 10 years. The tax rate applicable is 50 per cent. You are required to compute the following: (i) Cost of Debt, Cost of Equity and Cost of Preference (ii) Weighted average cost of capital based on existing capital structure. Question-1(B)[13Marks] XL Services is a Business Process Outsourcing (BPO) Company, with interests in outsourcing process like data processing, telesales, customer services. It has current employee strength of 3,500. It currently operates out of a building in gurgaon. It is a fast growing company with strong reputation with its existing Clients. It has recently received a contract of providing voice based services (Customer Service) to a US based Insurance Company.It expects to get more such contracts in future which may increase the headcount by 70-100%. The Company currently operates in 3 Shifts of 8 hours each. To be able to honour the new contract Comapny would need to hire additional 1000 employees. The current building tha XL Services currently uses doesnt have any additional seating capacity. Company is now faced with a challenge of finding a new location. Company is looking at Chennai, Hyderabad and Mumbai as possible locations. All these locations have required infrastructure that the Company needs. Company is not sure as to which location to select. Further, it also needs to decide how much seating capacity should it select for the new building. Company has hired Xpert Consultants to help them with selecting the new location and the capacity of the new location. You are a Manager at Expert Consultants and have been given this new assignment. You need to assist your client on the following: (i)Factors that should be taken into consideration while selecting the new loaction (8 marks) (ii)Considering that your client is a service based organisation, what do you think will be the primary factor which will impact the choice of the new location (3 marks) (iii)Factors that should be taken into consideration while selecting the seating capacity of new building (8 marks) (ivAdvise how much seating capacity should your client select for the new building (3 marks)

Question-2(A)[12Marks] A Company is considering two mutually exclusive investment proposals. Proposal X and Y require investment of Rs 5 Lakhs and 7 Lakhs respectively. Expected Cash Flows are given as follows: Year 1 2 3 4 5 Proposal X (Rs Thousand) 150 150 150 150 150 Proposal Y (Rs Thousand) 100 120 180 200 250

The Company employs risk adjusted discount rate (RADR) method of evaluating risky projects. Current yield on treasury bills is 6% and Company uses this as risk free rate. Following is the risk premium: Project Payback Period Less than 1 year 1-3 years Beyond 4 years Risk Premium 3% 4% 6%

Based on NPV method, you are required to advise the Company, which project should be selected. Question 2(B)[13Marks][8+5] (I)A Company is evaluating 3 projects, namely expected cashflows of the project: Scenario Probability Alpha Scenario 1 0.3 7,000 Scenario 2 0.4 4,000 Scenario 3 0.3 1,200

Alpha, Beta and Gama. Following are the Gama 4,500 4,000 3,700 Beta 9,000 5,500 3,000

(i)Based on the Expected values, advise the Management which project should be selected? (ii)Citing the reasons, also advise which project should be selected in each of the following scenarios: Worst case scenario Optimistic scenario [II]Briefly describe any 2 of the following methods of demand forecasting: Chain Ratio Method

Trend Analysis End Use Method Question-3(A)[10 Marks] Following is the schedule of activities of a Project Harvard. Time estimates (weeks) Most Activity Optimistic Likely Pessimistic 1-2 2 4 6 1-3 4 6 8 2-4 3 5 7 4-5 4 6 14 3-5 3 5 7 2-6 5 9 13 5-7 2 3 4 6-7 5 7 15 You are a Project Assistant and required to: (i)Calculate the expected task duration using PERT methodology (ii)Calculate Earliest Occurrence and Latest Occurrence time of each activity (iii)Calculate Standard Deviation of Critical path (iv)Calculate the Total Float of each activity Question-3(B)[15Marks] Televista is proposing to launch LED televisions in the Indian Market. LED televisions are expected to have a product life cycle of 3 years after which it will be withdrawn from the market. Following further information has been gathered (i)Production of LED televisions would require new plant to be installed which will cost Rs 200 million. Plant will be depreciated @10% per annum as per written down value method. After 3 years, plant is expected to have a post tax salvage value of Rs 20 million (ii)The cost accountant has provided following cost estimates: Raw Material cost 20% of sales Labour Cost 10% of sales Fixed operating Costs Rs 10 mn Overheads 10% of sales (iii)Following are the forecasted sales: Rs Million Year 1 200

Year 2 Year 3

400 300

(iv)The project would require level of working capital to maintained at 10% of sales. At the end of 3 years, working capital will be liquidated at par. Estimated bad debts at the end of year 3 would be Rs 10 million (v)Applicable tax rate is 40% and overall cost of capital is 18% You are required to assess the following: (i)Find the projects initial Cash flows (ii)Find the projects operating and terminal cash flows over its 3 year life (iii)Calculate the Projects payback period (iv)Evaluate the project using NPV Method Question-4(a)[12Marks[ A Company is evaluating two mutually exclusive projects invloving the same amount of investment. Following are the cashflows of the project Project (Rsmn) 20 30 35 40 50 X Probability 0.1 0.2 0.1 0.4 0.2 Project Y (Rsmn) 05 25 30 55 60 Probability 0.2 0.2 0.1 0.2 0.3

(i)You are required to estimate risk based on Standard Deviation Approach (ii)Aslo advise which project should be undertaken based on the risk involved in the project (iii)Briefly describe the Stages of Project Life Cycle Question-4(B)[13 Marks] An electric equipment manufacturing company wishes to determine the weighted average cost of capital for evaluating capital budgeting projects. You have been supplied with the following information: BALANCE SHEET Rs. Rs. Liabilities Assets Equity shares capital 12,00,000 Fixed Assets 25,00,000 Pref. share capital 4,50,000 Current Assets 15,00,000 Retained Earnings 4,50,000 Debentures 9,00,00

Current Liabilities

10,00,000 40,00,000

________ 40,00,000

Additional Information: (i)20 years 14% debentures of Rs. 2,500 face value, redeemable at 5% premium can be sold at par, 2% flotation costs. (ii)15% preference shares: face value Rs. 100 per share redeemable at premium of 10%, 2% flotation costs (iii)equity shares: Market price Rs. 115 per share,

.ALL THE BEST