Posted: June 27th, 2021

Project Appraisal

Question 1
Evaluate the project proposals as under:

Discounted Cash Flow
Payback period methods, pointing out their relative merits and demerits
Under what circumstances is the pay back period method and the NPV Method used for evaluating projects.

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Question  2

(A)What is the rationale for the NPV Method? Discuss the feature of the NPV Method?
(B) Teja international is determining the cash flow for a project involving the replacement of an old machine by a new machine. The old machine bought a few years ago has a book value of Rs 800,000 and it can be sold to realize a post-tax salvage value of Rs 900000. It has a remaining life of 5 years after which its net salvage value is expected to be Rs 200,000. it is being depreciated annually at a rate of 25% under the WDV method. The incremental working capital associated with this machine is 500,000. The new machine cost rupees 300,000. It is expected to fetch a net salvage value of Rs 1. 500,000 after five years. The depreciation rate applicable to it is 25% under the WDV method. The new machine is expected to bring a saving of Rs 650,000 annually in manufacturing costs(other than depreciation).

The tax rate applicable to the firm is 30%:

a)Estimate the cash flow associated with the replacement project.
b)What is the NPV of the replacement project if the cost of capital is 14%.

Question 3

a)The management of Parmila Ltd. is considering an investment project costing Rs. ,50,000 and it will have a scrap value of Rs. 10,000 at the end of its 5 years life. Transportation charges and installation charges are expected to be Rs. 5,000 and Rs. 25,000 respectively. If the project is accepted, a spare part inventory of Rs. 10,000 must also be maintained. It is estimated that the spare parts will have an estimated scrap value of 60% of their initial cost after 5 years. Annual revenue from the project is expected to be Rs. 1,70,000; and annual labor, material, and maintenance expenses are estimated to be Rs. 15,000, Rs. 0,000 and Rs. 5,000 respectively. Calculate the net cash flows for each year and cost of the project. Evaluate the project at a 12% rate of interest.
b)How gestation period of an on-going project affects Project financing decisions?

Question 4 (A)
The data concerning a site development project at the end of the 10th week of Implementation is given below: ActivityProgress (%) t the end of 10th week budgeted Cost at Completion (BAC)Actual Cost of work performed (ACWP) PlannedActual(Rs. Lakhs)(Rs. Lakhs).
Question  4 (B)

a)  S Limited has Rs. 10, 00,000 allocated for capital budgeting purposes. The following proposals and associated Profitability Index have been determined. ProjectAmount (Rs. )Profitability Index 1 2 3 4 5 6300,000 150,000 350,000 450,000 200,000 400,0001. 22 0. 95 1. 20 1. 18 1. 20 1. 05 Which of the above investment should be undertaken? Assume that the Projects are indivisible and there is no alternative use of the money allotted for capital budgeting.
b) Project Cost Estimation is a vital factor for starting the business. As a Financial Analyst, you are required to prepare the steps for cost estimation.

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