Project Appraisal

Topics: Net present value, Depreciation, Corporate finance Pages: 6 (946 words) Published: April 20, 2010
Subject Code: PPA1C


Specific Instructions:
Answer all the four questions.
Marks allotted 100. Each Question carries equal marks.
Word limit is 200 - 300words

General Instructions:
The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept Each Question mentioned in this assignment should be answered within the word limit specified The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers. Failure to comply with the above Five instructions would lead to rejection of assignment. _____________________________________________________

Question No 1

A choice is to be made between two competing projects which requires an equal investment of Rs 50,000 and are expected to generate net cash flow as under:

Project 1Project 2
End of year 1Rs.50,000Rs.20,000
End of year 2Rs.30,000Rs.24,000
End of year 3Rs.20,000Rs.36,000
End of year 4NilRs.50,000
End of year 5Rs.24,000Rs.16,000
End of year 6Rs.12,000Rs.8,000

The cost of capital of the company is 10% .The following are the Present Value Factors @ 10% per annum:

YearP.V .Factors @10% p.a

Which project proposal should be chosen and why? Evaluate the project proposals as under: •Discounted Cash Flow.
Pay back 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.

Question No 2

(A)What is the rationale for NPV Method? Discuss the feature of NPV Method?

(B) Teja international is determining the cash flow for a project involving 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 No 3

a)The management of Parmila Ltd. is considering an investment project costing Rs.1,50,000 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 labour, material and maintenance expenses are estimated to be Rs.15,000, Rs.50,000 and Rs.5,000 respectively. The depreciation and taxes for five years will be —

Calculate the net cash flows for each year and cost of the project. Evaluate the project at 12% rate of interest.

b)How gestation period of an on-going project affects Project financing decisions?

Question No 4(A)

The data concerning a site development project at the end of the 10th week of...
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