Project Appraisal, Planning and Control – 12MBAFM425
Answer key:1. (a) Funds used by a company to acquire or upgrade physical assets such as property,
industrial buildings or equipment. This type of outlay is made by companies to maintain or
increase the scope of their operations. These expenditures can include everything from
repairing a roof to building a brand new factory.
(b) Steps in Capital Budgeting are:1. Planning
2. Analysis
3. Selection
4. Financing
5. Implementation
6. Review
( c) Multiple IRR issue arises in certain situations , we get two internal rate of returns where
NPV goes negative.
0
160000
1
1000000
2
(1000000)
Let us form equation from the given information:160000=1000000/(1+r) – 1000000/(1+r)2
Let us assume (1+r) =x
160000=1000000/x-1000000/x2
160000=1000000x-1000000/x2
160000x2=1000000x-1000000
160000x2-1000000x+1000000=0
160000x2-800000x-200000x+1000000=0
160000x(x-5)-200000(x-5)=0
(160000x-200000)(x-5)=0
Let us find x
160000x-200000=0
160000x=200000
x=200000/160000
x=1.25
x-5=0
x=5
1+r=1.25
r=1.25-1
r=.25x100=25%
1+r=5
r=5-1=4
r=4 x 100
r=400%
2 A work breakdown structure (WBS) is a chart in which the critical work elements, called tasks,
of a project are illustrated to portray their relationships to each other and to the project as a
whole. The graphical nature of the WBS can help a project manager predict outcomes based on
various scenarios, which can ensure that optimum decisions are made about whether or not to
adopt suggested procedures or changes.
When creating a WBS, the project manager defines the key objectives first and then identifies the
tasks required to reach those goals. A WBS takes the form of a tree diagram with the "trunk" at
the top and the "branches" below. The primary requirement or objective is shown at the top, with
increasingly specific details shown as the observer reads down.
(b) Demand forecasting seeks to investigate and measure the forces that determine sales for existing and new
products. Generally companies plan their business – production or sales in anticipation of future demand. Hence
forecasting future demand becomes important. The art of successful business lies in avoiding or minimizing the risks
involved as far as possible and face the uncertainties in a most befitting manner.
Methods of Forecasting:
Demand forecasting is a highly complicated process as it deals with the estimation of future demand. It requires the
assistance and opinion of experts in the field of sales management. Demand forecasting, to become more realistic
should consider the two aspects in a balanced manner. Application of commonsense is needed to follow a pragmatic
approach in demand forecasting.
Broadly speaking, there are two methods of demand forecasting.
They are:
1) Survey methods and
2) Statistical methods
( c)
Sources of funds
EBIT
DEP
SECURED LOANS(20-5)
UNSECURED LOANS
Amount
80
20
15
10
125
DISPOSITION OF FUNDS
INTEREST
TAX
DIVIDEND
FIXED ASSETS
INCREASE IN WC
AMOUNT
20
30
10
30
25
115
20
10
30
OPERATING CASH BALANCE
SURPLUS/DEFICIT (A-B)
CLOSING CASH BALANCE
3. Computation of Cash Flow
Years
0
1
Initial
(100)
investment
Revenue
-cost
EBDBT
-DEP
EBT
- TAX
EAT
S.V
P/M
W/C
INV
PAT
+ DEP
+ SAL
CASH
FLOW
120
80
40
12
38
11.4
26.6
2
3
4
5
120
80
40
10.20
29.8
8.94
20.86
120
80
40
8.67
31.33
9.4
21.93
120
80
40
7.37
32.63
9.8
22.83
120
80
40
6.26
33.74
10.12
23.62
30
20
100
26.6
12
20.86
10.20
21.93
8.67
22.83
7.37
38.6
31.06
30.60
30.2
23.62
6.26
50
79.88
Calculation of NPV
Yr
1
2
3
4
5
Cash flow
38.6
31.06
30.60
30.2
79.88
INITIAL INVESTMENT
NPV
10% dis.factor
0.909
0.826
0.753
0.683
0.621
P.V
35.1
25.66
23.04
20.63
49.61
154.04
100
54.04