PROJECT MANAGEMENT IMPORTANT QUESTIONS

Q.1 Explain Project Life Cycle in details.

The project life cycle is a systematic process that defines the stages a project goes through
from its initiation to its closure. Understanding the project life cycle is essential for effective
project management as it provides a framework for organizing and managing tasks,
resources, and timelines throughout the project's duration. The project life cycle can be
divided into several phases, each with its own set of activities, deliverables, and objectives.
In this document, we will define the project life cycle and discuss its various phases in
detail.
Definition of Project Life Cycle
The project life cycle refers to the series of phases that a project goes through from its
initiation to its completion. Each phase is a distinct stage that involves specific activities
aimed at achieving the project objectives. The project life cycle provides a structure for
managing the project and helps project managers and stakeholders ensure that all
necessary tasks are completed on time and within budget. The project life cycle is
commonly divided into the following phases:
Phases of Project Life Cycle
1. Initiation Phase
The initiation phase is the first phase of the project life cycle. This phase focuses on
defining the project at a high level and obtaining authorization to proceed with the
project. During this phase, the project manager works closely with stakeholders to
understand the project’s objectives, scope, and overall vision. Key activities during this
phase include:
• Identifying the project’s goals and objectives.
• Conducting feasibility studies.
• Developing a project charter that formally authorizes the project.
• Identifying stakeholders and determining their interests.
• Establishing the initial project scope and constraints.
The output of this phase is typically a project charter, which is a formal document that
outlines the project’s objectives, scope, risks, stakeholders, and approval to proceed.
2. Planning Phase
Once the project is officially authorized, the planning phase begins. The planning phase
is critical because it lays out the roadmap for how the project will be executed. During
this phase, the project manager and team members work to define the project’s scope,
schedule, resources, and budget in detail. Key activities during this phase include:
• Defining detailed project scope and objectives.
• Developing a comprehensive project management plan.
• Identifying and allocating necessary resources (human, financial, and material).
• Creating a detailed project schedule and timeline.
• Identifying potential risks and creating risk management plans.
• Setting project milestones and key performance indicators (KPIs).
The output of this phase is the project management plan, which serves as a guide
throughout the execution phase. This plan should address all aspects of the project,
including scope, schedule, budget, quality, resources, and risks.
3. Execution Phase
The execution phase is where the bulk of the work takes place. During this phase, the
project plan is put into action, and the project team begins performing the tasks
necessary to meet the project’s objectives. This phase is typically the longest and most
resource-intensive phase of the project. Key activities during the execution phase
include:
• Coordinating people and resources to carry out project tasks.
• Managing team performance and ensuring quality control.
• Communicating with stakeholders and providing updates.
• Conducting status meetings to monitor progress.
• Managing risks and addressing issues as they arise.
• Monitoring and controlling project changes and deviations from the plan.
The output of this phase is the completion of the project deliverables, which are the
tangible or intangible results of the project.
4. Monitoring and Controlling Phase
The monitoring and controlling phase occurs simultaneously with the execution phase.
The purpose of this phase is to track and measure the project’s progress, ensuring that
it remains aligned with the project plan. The monitoring and controlling phase involves
continuous oversight and adjustments to keep the project on track. Key activities during
this phase include:
• Monitoring project performance using key performance indicators (KPIs).
• Comparing actual progress with the planned schedule and budget.
• Identifying and resolving project issues and risks.
• Ensuring quality assurance and controlling project changes.
• Reporting project status to stakeholders.
• Adjusting the project plan as necessary to meet objectives and deadlines.
The output of this phase is typically project performance reports, which provide
stakeholders with information about the project’s progress and performance relative to
its goals.
5. Closing Phase
The closing phase is the final phase of the project life cycle. During this phase, the
project is formally completed, and the project team transitions out of the project. This
phase focuses on finalizing all project activities, obtaining formal acceptance of the
project deliverables, and closing the project. Key activities during this phase include:
• Finalizing all project deliverables and obtaining formal acceptance.
• Closing out contracts and releasing project resources.
• Documenting lessons learned and sharing insights for future projects.
• Conducting a post-project evaluation to assess the project’s success.
• Archiving project documents and records for future reference.
The output of this phase is the formal closure of the project, including a project closure
report that outlines the final outcomes and lessons learned.
In conclusion, the project life cycle provides a structured approach to managing projects,
helping project managers navigate the complexities of project execution. Each phase
serves a specific purpose and contributes to the overall success of the project. By
understanding and following the phases of the project life cycle, project teams can better
control timelines, costs, and quality, ultimately ensuring that the project meets its
objectives and is completed successfully.
Q.2 Discuss the Technical Analysis and its process
Technical analysis is a critical process used to evaluate the technical aspects of a project,
especially when choosing a solution or technology to implement. This analysis helps
ensure that the chosen approach or technology meets the project's objectives and
requirements. It involves assessing various factors such as feasibility, risks, technical
requirements, and resource availability. The process is essential for making informed
decisions that can affect the overall success of the project.
Technical Analysis Process
The technical analysis process generally follows these steps:
1. Identifying Requirements: Understanding the project’s technical needs and goals.
2. Exploring Potential Solutions: Researching available technologies and solutions.
3. Evaluating Feasibility: Assessing the technical feasibility of each option.
4. Risk Assessment: Identifying risks associated with each potential solution.
5. Selecting the Best Option: Choosing the solution that best meets the project's
requirements.
6. Implementation Planning: Developing a plan for implementing the chosen solution.
The outcome of the technical analysis is a recommendation on which technology or
solution should be pursued, along with an assessment of its risks and benefits.

Q.3 Describe the various risks associated with New Projects. How can we evaluate
Financial Risk? What are the various limitations of Risk Evaluation?
New projects come with a variety of risks, each of which can have significant impacts on
the project's success if not properly managed. Risk management is an essential aspect of
project management to ensure that potential issues are identified early and mitigated
effectively. The key risks associated with new projects can be categorized as follows:
Risks Associated with New Projects
1. Technical Risks: These are risks related to the technology or approach used in the
project, such as unforeseen technical challenges.
2. Financial Risks: These relate to issues such as budgeting errors, cost overruns, or
funding shortages.
3. Operational Risks: These involve day-to-day operations and could include delays or
failure to meet milestones.
4. Market Risks: These involve changes in market conditions or consumer preferences
that could affect the project.
5. Legal and Regulatory Risks: These refer to changes in laws or regulations that may
impact the project’s progress or operations.
6. Human Resource Risks: These are related to staffing issues, including skill shortages
or team conflicts.
7. Environmental Risks: These pertain to external factors such as natural disasters,
political instability, or economic changes.
Evaluating Financial Risk
o Financial risks can be evaluated using various techniques, such as:
• Sensitivity Analysis: This technique involves adjusting key financial variables to see
how changes affect the project’s financial outcome.
• Risk-Adjusted Discount Rate: This method adjusts the project’s discount rate based on
the perceived risk to calculate the present value of future cash flows.
• Break-even Analysis: Determines the point at which the project will break even, helping
to evaluate whether financial risks are manageable.
 • Monte Carlo Simulation: A statistical technique that models the probability of different
financial outcomes.
• Cost-benefit Analysis: This technique compares the total costs of the project against its
anticipated financial returns.
Limitations of Risk Evaluation
Despite these techniques, there are limitations to risk evaluation, including:
 Inaccurate Risk Identification: It is difficult to identify all potential risks upfront.
 Lack of Data: Insufficient data can lead to inaccurate financial forecasts.
 Uncertainty in Forecasting: Financial predictions, especially for long-term projects, are
subject to considerable uncertainty.
 Bias in Judgment: Risk evaluations may be affected by subjective opinions or biases.
 Inability to Quantify Qualitative Risks: Some risks are difficult to quantify, making
evaluation challenging.

Q.4 What are various considerations important in the Technology Selection Process?
The technology selection process is an important decision-making process for any project
that involves adopting new technologies. It requires careful consideration to ensure that
the chosen technology aligns with the project’s goals, budget, and timeline. Several factors
should be taken into account during the technology selection process:
1. Compatibility: The technology should be compatible with the existing systems and
infrastructure.
2. Scalability: It should be able to scale with the growth of the project or organization.
3. Cost: The initial investment and ongoing costs associated with the technology should
be within the project budget.
4. Vendor Support: Availability of vendor support for troubleshooting and updates.
5. Reliability: The technology should be reliable and stable to minimize downtime.
6. Security: Ensuring the technology is secure from cyber threats.
7. User-Friendliness: The technology should be easy to use and implement.
8. Compliance: It should comply with relevant regulations and standards.
9. Future Proofing: The technology should be adaptable to future advancements and
trends.
10. Performance: The technology must meet the required performance levels.

Q.5 What are differences between Project Cash Flow from Owner's Perspective and
Project's Perspective?
Project cash flow refers to the inflow and outflow of funds during a project’s life cycle. The
difference in perspective between the project’s cash flow and the owner’s cash flow lies in
their focus and objectives:
Owner’s Perspective
From the owner’s perspective, cash flow is concerned with the overall financial health of
the project, particularly in terms of the return on investment (ROI). The focus is on how the
project’s expenditures, such as development costs, will be recovered and the timing of
revenue generation.
Project’s Perspective
From the project’s perspective, cash flow focuses on the day-to-day management of funds
for operational costs, such as labor, material, and other project-related expenses.
 In short, the project’s cash flow tracks how resources are spent, while the owner’s cash
flow is concerned with the financial returns and profitability over time.

Q.6 How is cost-benefit analysis done for Public/Government Projects?

Cost-benefit analysis (CBA) for public or government projects is a process used to evaluate
the economic feasibility and social value of a project. It involves comparing the total
expected costs of a project with the benefits that the project is expected to deliver. This
analysis helps decision-makers assess whether a project provides value for money and
whether it aligns with public priorities.
The steps involved in conducting a CBA for public projects are as follows:
1. Identifying Costs: Include all direct and indirect costs such as construction, labor, and
maintenance.
2. Identifying Benefits: These include direct and indirect benefits such as improved quality
of life, time savings, and economic growth.
3. Quantifying Costs and Benefits: Assign monetary values to both costs and benefits.
4. Discounting: Apply a discount rate to adjust for the time value of money.
5. Comparing Net Benefits: Subtract the total costs from the total benefits to determine
the net benefit of the project.
6. Sensitivity Analysis: Evaluate how sensitive the results are to changes in assumptions
or variables.

Q.7 Discuss the conditions to terminate a working project.

Terminating a working project is a critical decision that involves assessing the ongoing
project’s performance against its objectives. Projects may be terminated for various
reasons, including:
1. Achievement of Objectives: The project has successfully met its goals and objectives.
2. Lack of Viability: The project is no longer viable due to changes in market conditions,
technology, or funding.
3. Cost Overruns: The project has exceeded its budget significantly and can no longer
justify continued investment.
4. Unacceptable Risks: The project faces insurmountable risks that make it too dangerous
to proceed.
5. Lack of Resources: The project faces critical resource shortages that prevent
completion.
6. Changing Stakeholder Needs: New developments or changes in stakeholder
expectations render the project irrelevant.
7. External Factors: Unexpected events such as natural disasters or political instability
may force project termination.

Q.8 Discuss the various forecasting techniques, each with a suitable example.
Forecasting Techniques:
Forecasting is the process of making predictions about future events based on past and
present data. Various forecasting techniques help businesses and organizations plan for
future demand, sales, and market trends. Forecasting methods are categorized into
qualitative and quantitative techniques.
 1. Qualitative Forecasting Methods:
These methods rely on expert opinions and market research rather than numerical data.
Delphi Method:
A panel of experts provides forecasts independently.
Iterative rounds of surveys are conducted until a consensus is reached.
Example: A technology firm uses the Delphi method to predict future trends in artificial
intelligence.
Market Research:
Surveys and focus groups gather insights about consumer preferences.
Example: A smartphone company conducts market research to estimate demand for a
new model.
Jury of Executive Opinion:
A group of executives or senior managers predict future trends based on experience.
Example: A retail company’s board predicts holiday sales based on past trends and
market conditions.
2. Quantitative Forecasting Methods:
These methods use mathematical models and statistical techniques.
Time Series Analysis:
Uses historical data to identify trends and patterns.
Includes moving averages, exponential smoothing, and trend projection.
Example: A hotel uses time series analysis to predict seasonal demand.
Regression Analysis:
Establishes relationships between dependent and independent variables.
Example: A car manufacturer predicts future sales based on income levels and fuel
prices.
Econometric Models:
Uses multiple regression equations to predict economic trends.
Example: A government agency predicts GDP growth using econometric models.
Forecasting techniques are essential for strategic planning and resource allocation in
various industries.

Q.9 Discuss the various methods of Demand Forecasting with suitable examples.
Methods of Demand Forecasting:
Demand forecasting is the process of estimating future demand for a product or service
using various methods. It helps businesses manage inventory, pricing, and production
planning.
1. Qualitative Methods:
 Survey Method:
o Conducts surveys among consumers to assess future demand.
o Example: A beverage company surveys customers to estimate demand for a new
flavor.
 Sales Force Opinion:
o Sales representatives provide estimates based on customer interactions.
o Example: A pharmaceutical company gathers insights from medical
representatives to predict medicine demand.
 Expert Opinion Method:
o Industry experts and consultants provide demand estimates.
 o Example: A fashion retailer consults designers and analysts to forecast clothing
trends.
2. Quantitative Methods:
 Trend Projection Method:
o Uses historical sales data to project future demand.
o Example: A furniture store uses past sales data to predict next year’s demand.
 Moving Average Method:
o Calculates the average of past demand over a specified period to smooth
fluctuations.
o Example: A supermarket chain forecasts monthly sales using a three-month moving
average.
 Regression Analysis:
o Identifies relationships between demand and external factors like price and income.
o Example: A car manufacturer predicts demand based on fuel prices and consumer
income levels.
Demand forecasting enables companies to minimize stockouts, optimize production,
and improve customer satisfaction.

Q.10 What do you mean by Financial Appraisal of a Project? Discuss the measures used
for financial appraisal.
Financial Appraisal of a Project:
Financial appraisal evaluates the financial viability of a project by assessing its costs,
revenues, and profitability. Investors and stakeholders use financial appraisal to determine
whether a project is worth pursuing.
Measures Used for Financial Appraisal:
 Net Present Value (NPV):
o The present value of future cash flows minus the initial investment.
o Example: A solar power plant project with positive NPV is financially viable.
 Internal Rate of Return (IRR):
o The discount rate at which NPV becomes zero.
o Example: A company selects a project with an IRR higher than the cost of capital.
 Payback Period:
o The time taken to recover the initial investment.
o Example: A retail store expansion with a three-year payback period is considered
feasible.
 Profitability Index (PI):
o The ratio of present value of cash inflows to initial investment.
o Example: A PI greater than 1 indicates a profitable project.
 Sensitivity Analysis:
o Evaluates project risks by changing key variables.
o Example: An infrastructure project assesses financial viability under different
economic scenarios.
Financial appraisal ensures informed decision-making, reducing investment risks and
optimizing resource allocation.
Q.11 Explain the various types of Project Risks and also describe the various techniques
of risk evaluation.
Types of Project Risks:
Project risks are uncertainties that can impact project success. Understanding these risks
is essential for effective risk management.
1. Types of Risks:
 Financial Risk:
o Involves budget overruns, cost inflation, and funding shortages.
o Example: A real estate project facing increased material costs.
 Technical Risk:
o Arises from technology failures or inadequate expertise.
o Example: A software development project encountering technical glitches.
 Operational Risk:
o Includes process inefficiencies and supply chain disruptions.
o Example: A manufacturing plant facing production delays due to machine
breakdowns.
 Market Risk:
o Changes in consumer demand and competitor actions.
o Example: A smartphone company launching a product in a declining market.
 Regulatory and Compliance Risk:
o Legal changes affecting project operations.
o Example: A pharmaceutical company adjusting to new FDA regulations.
 Environmental Risk:
o Impact of natural disasters and climate changes.
o Example: A construction project facing delays due to floods.
2. Risk Evaluation Techniques:
 Risk Assessment Matrix:
o Categorizes risks based on probability and impact.
o Example: A company evaluates project risks using a high-medium-low impact
matrix.
 Sensitivity Analysis:
o Examines how project outcomes change with variations in key variables.
o Example: A financial firm tests investment risks by changing market interest rates.
 Monte Carlo Simulation:
o Uses statistical models to predict project risks.
o Example: A power plant project simulates cost fluctuations in energy prices.
 Failure Mode and Effect Analysis (FMEA):
o Identifies potential failures and their impact.
o Example: An automotive company evaluates risks in vehicle manufacturing
processes.
 Scenario Analysis:
o Evaluates different future scenarios to plan risk mitigation.
o Example: A logistics company prepares for supply chain disruptions due to global
crises.
By using risk evaluation techniques, businesses can prepare for uncertainties and improve
project success rates.
Q.12 Write short notes on:
(a) Project Appraisal:
Project appraisal is a comprehensive assessment of a project's feasibility, viability, and
potential impact before execution. It involves financial, technical, economic,
environmental, and social evaluations to determine whether a project should proceed.
This process helps stakeholders make informed investment decisions by analyzing
costs, risks, and expected benefits.
 Financial Appraisal: Evaluates the project's profitability through methods such as
Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.
 Technical Appraisal: Assesses the technical feasibility, including resource
availability, technological requirements, and infrastructure needs.
 Economic Appraisal: Measures the project's impact on the overall economy,
including job creation and contribution to GDP.
 Environmental Appraisal: Evaluates environmental risks and sustainability factors
to ensure compliance with ecological standards.
 Social Appraisal: Examines the impact on society, including benefits to local
communities, employment opportunities, and public welfare.
Example: A wind energy project undergoing appraisal for cost estimation, land
acquisition, technical feasibility, and environmental sustainability before approval.
(b) Social Cost Benefit Analysis (SCBA):
SCBA is a method used to evaluate a project's overall impact on society by considering
both financial and non-financial factors. Unlike traditional financial appraisals, which
focus on profitability, SCBA assesses externalities such as environmental effects, social
welfare, and economic redistribution.
 Direct Costs and Benefits: Tangible financial costs (e.g., construction expenses)
and direct economic benefits (e.g., increased GDP contribution).
 Indirect Costs and Benefits: Environmental impact, pollution control, traffic
congestion reduction, and quality-of-life improvements.
 Shadow Pricing: Assigns monetary values to intangible factors such as pollution
reduction and improved healthcare access.
 Distributional Effects: Assesses who benefits and who bears the costs, ensuring
fair distribution of economic gains.
Example: Evaluating a metro rail project’s impact on reducing carbon emissions,
lowering travel costs for commuters, and improving urban mobility.
(c) CPM and PERT:
CPM (Critical Path Method) and PERT (Program Evaluation and Review Technique) are
project management techniques used for planning, scheduling, and controlling projects.
 Critical Path Method (CPM):
o Used for projects with predictable and deterministic activity durations.
o Identifies the longest sequence of dependent tasks (critical path) to determine the
minimum project completion time.
o Helps in resource allocation and cost optimization.
o Example: A construction project using CPM to identify key milestones and ensure
timely completion.
 Program Evaluation and Review Technique (PERT):
o Used for projects with uncertain activity durations, typically in research and
development.
 o Estimates time using three variables: Optimistic Time, Pessimistic Time, and Most
Likely Time.
o Calculates expected time using the formula: TE = (O + 4M + P) / 6.
o Example: A space research agency using PERT to estimate the launch timeline of
a new satellite, considering unpredictable weather conditions.
(d) Project Termination and Close-out Procedures:
Project termination and close-out refer to the final phase of a project, ensuring all
deliverables are completed, stakeholders are satisfied, and project documentation is
finalized.
Types of Project Termination:
Planned Termination: Successful completion where objectives are met, and the project
is formally closed.
Premature Termination: Stopping the project due to financial issues, technical failures,
or strategic changes.
Termination by Integration: Merging the project into an ongoing program or another
business function.
Termination by Extinction: A project ending after fulfilling its purpose, with no further
activities planned.
Close-out Procedures:
Finalizing documentation and administrative tasks.
Conducting a post-project review to analyze lessons learned.
Releasing project resources and transferring ownership to relevant stakeholders.
Ensuring compliance with contractual obligations and legal requirements.
Archiving project reports for future reference.
Example: A software development project undergoing a formal close-out process,
including testing, user training, documentation submission, and project review
meetings.
 Performance Analysis
Q.1 A Project begin on 1st Jan., 2020 and was expected to be completed by 30th Sept., 2020
The project is being reviewed on 30th June, 2020 and following information has been
developed.
(i) Budgeted Cost for Work Scheduled (BCWS) Rs. 15,00,000
(ii) Budgeted Cost for Work Performed (BCWP) Rs. 14,00,000
(iii) Actual Cost for Work Performed (ACWP) Rs. 16,00,000
(iv) Budgeted Cost for Total Work (BCTW) Rs. 25,00,000
(v) Addition Cost for Completion (ACC) Rs 12,00,000
Determine the following:
(a) Cost Variance
(b) Schedule Variance in Cost Terms
(c) Cost Performance Index.

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Q.2 A project was planned to have total cost of Rs. 200 lacs. A review is done on 29th Sept,
and work estimated till date was worth Rs. 100 lacs. The total time estimated to complete
the project was 250 days. The work which has been completed till date was budgeted for
Rs. 90 lacs although Rs. 96 lacs have been spent. Determine:
(i) Cost and Schedule Variance.
(ii) New estimated cost and time for project completion.
(iii) Strategy to be used.

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Q.3 A BRTS project (1,400 crore) was originally planned to be completed in 5 years. A review
done after 2 years informed that works worth 250 crores have been completed by incurring
225 crores. The planned work to be completed in 2 years was ₹ 300 crores. Determine
cost and schedule variance, re -estimated time and cost of project with similar progress.
Suggest strategy.

M.B.A. 2016 Q.8

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Q.4 A Metro Train Project (Rs. 140 Crores) was planned to be completed in 5 years. A review
was done after 2 years. Works worth Rs. 25 Crores have been completed by spending Rs.
23.4 Crores. The planned work to be completed by them was Rs. 30 Crores. Determine:
(a) Cost and Schedule Variance.
(b) Re-estimated Cost and duration of project assuming similar performance.
(c) Strategy to match the targets

M.B.A. 2019 Q.9

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Q.5 A project was originally planned to be completed with an investment outlay of Rs. 300
million and was planned to be completed in 30 months.
After reviewing the project after 10 month it was found that work worth Rs. 80 million have
been completed instead of Rs. 90 million as per plans though the expenses incurred till
date was found to be Rs. 75 million. Determine cost and schedule variance also determine
the expected cost and time of completion with same performance. Suggest the strategy
that should be selected.

M.B.A. 2025 Q.5

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 Project Cash Flow
Q.1 A company wants to invest Rs. 160 Lakhs in fixed assets and 40 lakhs in working capital.
This project can generate a revenue of Rs. 300 lakhs every year and raw material
requirement will be 55% of sales. Wages required would be 10% of the sales. Other fixed
costs would be Rs. 50 lakhs every year. Rate of depreciation 25% on WDV, Tax rate 30%.
The project will fetch a net salvage value of Rs. 35 lakhs and bad debts in expected to be
10 lakhs during the project. Calculate project cash flows assuming life of the project 5
years.

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Q.2 A company is planning to increase its product range. The new product will require a fixed
investment of Rs. 120 lakhs. Working capital requirement will be 25% of sales. The sales
revenue of the new product will be –
Year 1 2 3 4 5
Sales (Rs. in lakhs) 220 240 280 260 220
The variable cost will be 45% of sales fixed cost being 30 lakhs per year. There will be a
contribution loss of Rs. 11 lakhs every year because of use of common facilities.
Overheads allocation is 10% of sales (only 6% of actually spent) bad debts expected to be
Rs. 14 lakhs during project. Rate of depreciation 25% WDV. Tax rate 40% net salvage
value is 28 lakhs, cost of capital 20%. Find out project cash flows for 5 years.

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Q.3 ABC Ltd. is planning to start a new product line with fixed investment outlay of Rs. 80 lacs.
The expected sales of new product is:
I Year II Year III Year IV Year
Sales: 90 lacs 100 lacs 110 lacs 100 lacs
The variable cost is expected to be 45% of sales. Working Capital requirement is expected
to be 30% of sales. Fixed cost is expected to be Rs. 6 lacs/year. The new product line will
cause a contribution loss of Rs. 4 lacs/year on old products. Rate of Depreciation is 25%
(WDV) and tax rate is 30%. The project will fetch a Net Salvage Value of Rs. 20 lacs often
4 years.
Determine Project Cash Flow and NPV if 'r' is 10%.

M.B.A. 2014 Q.5

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Q.4 ABC Ltd. is planning to start a new project with a fixed investment of Rs. 7 Crores. The
expected sales in various years is:
I Year II Year III Year IV Year V Year
Rs 7 crore Rs 8 crore Rs 9 crore Rs 8 crore Rs 7 crore
The raw material cost is expected to be 45% of sales. Working capital requirement is 30%
of sales to be acquired at the preceding year. Fixed Cost is Rs. 50 Lacs per year.
Depreciation 25% on WDV and Tax rate is 30%. The project will fetch net salvage value of
Rs. 1.7 Crore after 5 years.
Determine project cash flows and NPV if = 10%

M.B.A. 2019 Q.5

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 Network Diagram
Draw the network diagram.
Activity 1-2 1-3 2-4 3-4 3-5 4-6 4-7 5-9 6-7 7-9

Draw the network diagram.

Activity 1-2 1-5 2-3 2-4 2-5 3-7 4-6 4-7 5-6 6-7

Draw the network diagram.

Activity 1-2 1-3 2-4 3-5 4-6 5-7 6-8 7-9

Draw the network diagram.

Activity 1-2 2-3 2-4 3-5 4-6 5-7 6-8 7-9 8-9

Draw the network diagram.

Activity 1-2 1-3 2-4 3-5 2-6 4-7 5-8 6-9 7-10 8-10 9-10

Draw the network diagram.

Activity 1-2 1-4 2-3 3-5 4-6 5-7 6-8 7-9 8-10 9-10

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Draw the network diagram.

Activity 1-2 1-3 2-4 3-4 2-5 4-5

Draw the network diagram.

Activity 1-2 2-3 2-4 3-5 4-5 4-6 4-7 5-7 6-7 7-8

Draw the network diagram.

Activity 1-2 1-3 2-4 2-6 3-4 4-5 4-6 5-7 6-7 7-8

Draw the network diagram.

Activity 1-2 1-3 1-4 1-7 2-4 2-6 2-7 3-4 4-5 5-6 3-7 6-7

Draw the network diagram.

Activity 1-2 1-3 2-3 2-5 3-5 2-4 4-5

Draw the network diagram.

Activity 1-2 1-3 2-4 2-5 3-4 4-6 5-6 6-7

Home Work
Draw the network diagram.
Activity 1-2 1-3 2-3 2-4 3-4 3-5 4-6 5-6
 Draw the network diagram.
Activity 1-2 1-3 1-4 2-3 2-6 3-5 4-5 4-6 5-6

Draw the network diagram.

Activity 1-2 1-3 2-4 3-5 2-6 4-7 5-8 6-9 7-10

Draw the network diagram.

Activity 1-2 2-4 1-3 3-4 1-4 2-5 4-7 3-6 5-7 6-8 7-8

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Rule to follow while creating Network Diagram for Activity on Arrow (AOA)
1. Representation of Activities
• Activities are represented by arrows. Each arrow indicates a task or activity that consumes
time and/or resources.
• The tail of the arrow is the start node, and the head is the end node.
2. Representation of Events
• Events (or nodes) are represented by circles (or ellipses) and denote the start or end of
one or more activities.
• Each event is assigned a unique identifier (number).
3. Dependencies
• All activities must logically connect to show their dependencies.
• Activities should not loop back to a previous event (no cycles are allowed).
4. Dummy Activities
• A dummy activity is represented by a dashed arrow and is used:
• To indicate logical dependency where no actual activity exists.
• To ensure unique event numbering when two activities share the same start and end
nodes.
• Dummy activities do not consume time or resources.
5. One Start and End Node
The network should have only one start node (representing the beginning of the project) and
one end node (representing the completion of the project).
6. Event Numbering (Topological Order)
• Nodes are numbered sequentially in such a way that:
• The tail node of an arrow has a smaller number than the head node.
• The numbering should follow the logical sequence of activities.
7. No Loops or Cycles
• The diagram must not form loops or cycles, as these violate the sequential nature of
activities.
8. Crossovers
• Minimize crossover of arrows to keep the diagram clear and readable.
9. Time Calculation
• Assign durations to activities to analyze critical paths and project duration (optional during
diagram creation but essential for analysis).
10. Use Logical Flow
• The network should clearly show the logical progression of tasks:
• Identify predecessors (tasks that must be completed before others can start).
• Identify successors (tasks that depend on the completion of prior tasks).

Draw the network diagram.

Activity a b c d e f g
Predecessor - a a b c d e, f

For Solution Watch the Video Lecture 4 in

(Network Diagram) on the App

Draw the network diagram.

Activity a b c d e f
Predecessor - - a a b, c d, e

Draw the network diagram.

Activity a b c d e f g h i j k
Predecessor - a b c b e d, f e h g, i j

Draw the network diagram.

Activity a b c d e f g h i
Predecessor - a a - d b, c, e f d g, h

Draw the network diagram.

Activity a b c d e f g h i j
Predecessor - a a b b c c d e, f g

Draw the network diagram.

Activity a b c e f g h i j k
Predecessor - - - a a, b b, c c e, f g, h h

For Solution Watch the Video Lecture 5 in

(Network Diagram) on the App
 (MBA 2003, 2006)
Draw the network diagram.
Activity A B C D E F G H I J k l M N O
A, A, A, L,
B, B, B, B, G,
B, B, B, E, E, M,
Predecessor - - - C, C, C, C, H, K
C, C, C, F F J,
D D D D I
D D D N

Draw the network diagram.

Activity A B C D E F G
Predecessor - A A B C, B E D

Draw the network diagram.

Activity A B C D E F G H I
Predecessor - - A, B B A C E, F D, F G, H

Home Work
Draw the network diagram.
Activity A B C D E F G H
Predecessor - - A A A B, C D E, F, G

Draw the network diagram.

Activity A B C D E F G H
Predecessor - - A A A, B D, E C, F C, F

Draw the network diagram.

Activity A B C D E F G H I
Predecessor - A A A B C, D F D E, G, H

For Solution Watch the Video Lecture 6 in

(Network Diagram) on the App

Draw the network diagram.

Activity A B C D E F G H I
Predecessor - - B B A A F C, E, G F

Draw the network diagram.

Activity A B C D E F G H I J K L M N
Predecessor - A A B D D D B C, E G F, I, J K H, G M

Draw the network diagram.

Activity A B C D E F G H I
Predecessor - - A A B C, D C, E F F, G
Draw the network diagram.
Activity A B C D E F G H I
Predecessor - - A A B C, D C, E F F, G

For Solution Watch the Video Lecture 7 in

(Network Diagram) on the App

Draw the network diagram.

Activity A B C D E F G H I
Predecessor - A A B B C E D, F G, H

Draw the network diagram.

Activity A B C D E F G H I J K L
Predecessor - - A A B B C, D E C, D G, H F J, K

Draw the network diagram.

Activity A B C D E F G
Predecessor - - - A C A D, B, E

For Solution Watch the Video Lecture 8 in

(Network Diagram) on the App
 Critical Path Method (CPM)
Q. From the following draw the network diagram. Determine the total float and identify the
critical path:
Activity 0-1 1-2 1-3 2-4 2-5 3-4 3-6 4-7 5-7 6-7
Duration 2 8 10 6 3 3 7 5 2 8

For Solution Watch the Video Lecture 2 in (CPM) on

the App

Q. A small assembly plant assembles PCS through 8 interlinked stages according to the
following precedence process:
Activity 1-2 1-3 2-5 2-7 3-4 3-6 4-5 5-6 5-7 6-7 7-8
Duration 10 12 8 12 6 5 8 8 10 8 12
(a) Draw an arrow diagram (network) representing above assembly work.
(b) Tabulate earliest start, earliest finish, latest start, latest finish time for all the stages.
(c) Find critical path and the assembly duration.
(d) Tabulate total float, free float and independent float.

For Solution Watch the Video Lecture 3 in (CPM) on

the App

Q. The following information is given regarding a project:

Activity 1-2 1-3 1-4 2-5 4-6 3-7 5-7 6-7 5-8 6-9 7-10 8-10 9-10
Duration 10 8 9 8 7 16 7 7 6 5 12 13 15
Calculate:
1. Total Float, Free Float, Independent Float

For Solution Watch the Video Lecture 4 in (CPM) on

the App

Q. A company had planned its operation as follows:

Activity 1-2 2-4 1-3 3-4 1-4 2-5 4-7 3-6 5-7 6-8 7-8
Duration 7 8 8 6 6 16 19 24 9 7 8
(a) Calculate earliest start, earliest finish, latest start, latest finish time for all the stages.
(b) Find critical path and the assembly duration.
(c) Tabulate total float, free float and independent float.

For Solution Watch the Video Lecture 5 in (CPM) on

the App
Q. From the following draw, the network diagram. Determine the total float and identify the
critical path:
Activity 0-1 1-2 1-3 2-4 2-5 3-4 3-6 4-7 5-7 6-7
Duration 2 8 10 6 3 3 7 5 2 8

For Solution Watch the Video Lecture 6 in (CPM) on

the App

Q. A small assembly plant assembles PCS interlinked stages according to the following
precedence process
Activity 1-2 1-3 2-5 2-7 3-4 3-6 4-5 5-6 5-7 6-7 7-8
Duration 10 12 8 12 6 5 8 8 10 8 12
(i) Draw an arrow diagram (Network) representing above assembly work
(ii) Tabulate earliest start, earliest finish, latest start, finished time for all the stages.
(iii) Find critical path and the assembly duration.
(iv) Tabulate total float, free float and independent float.

For Solution Watch the Video Lecture 7 in (CPM) on

the App

Q. The following information is given regarding a project

Activities 1-2 1-3 1-4 2-5 4-6 3-7 5-7 6-7 5-8 6-9 7-10 8-10 9-10
Duration 10 8 9 8 7 16 7 7 6 5 12 13 15
Calculate-total float, free float and independent float

For Solution Watch the Video Lecture 8 in (CPM) on

the App

Q. Company had planned its operations as follows

Activity 1-2 2-4 1-3 3-4 1-4 2-5 4-7 3-6 5-7 6-8 7-8
Duration 7 8 8 6 6 16 19 24 9 7 8
(i) Calculate earliest start, earliest finish, latest start, finished time for all the stages.
(ii) Find critical path and the assembly duration.
(iii) Tabulate total float, free float and independent float.

For Solution Watch the Video Lecture 9 in (CPM) on

the App
 December 2022 or January 2023
Q.6 A project schedule has the following activities and duration:
Activities 1-2 2-3 2-4 3-5 4-5 4-6 4-7 5-7 6-7 7-8
Time (Days) 13 9 11 16 5 7 12 15 9 16
(a) Draw the project network
(b) Compute the earliest and latest event times
(c) Determine Critical Path
(d) Calculate total float and free float for each activities

For Solution Watch the Video Lecture 10 in (CPM) on

the App

May-June 2022
Q.7 A project has the following characteristics:
Activity A B C D E F G H I J K L M N
Preceding Activity - A A B D D D B C, E G F, I, J K H, G M
Expected Completion
5 2 6 12 10 9 5 9 1 2 3 9 7 8
Time (Weeks)
(a) Draw PERT Network for this project
(b) Find Critical Path and Project Completion Time
(c) Prepare an activity schedule showing ES, EF, LS, LF and Slack for each activity
(d) Will the Critical Path change if the activity G takes 10 weeks instead of 5 weeks? If so,
the what will be the new critical path

For Solution Watch the Video Lecture 11 in (CPM) on

the App
 PERT
Q.1 Given below are (a) Optimistic Time (b) Most Likely Time (c) Pessimistic Time in Respect of
Related Activities of a project:
Time Estimates (in weeks)
Activity
Optimistic (to) Most Likely (tm) Pessimistic (tp)
1-2 9 12 21
1-3 6 12 18
2-4 1 1.5 5
3-4 4 8.5 10
2-5 10 14 24
4-5 1 2 3
Taking the estimated time (te) of these activities show for each:
(a) Earliest Start Time
(b) Earliest Finish Time
(c) Latest Start time
(d) Latest Finish Time

For Solution Watch the Video Lecture 2 in (PERT)

on the App
Q.2 A small project is composed of seven activities whose time estimates in hours are given
below: a:Optimistic Time b:Pessimistic Time c:Most Likely Time
Activity 1-2 1-3 1-4 2-5 3-5 4-6 5-6
a 1 1 2 1 2 2 3
b 7 7 8 1 14 8 15
c 1 4 2 1 5 5 6
(i) Draw the project network
(ii) Find the expected duration and variance of each activity
(iii) Determine critical path
(iv) Calculate total float and free float

For Solution Watch the Video Lecture 3 in (PERT)

on the App
Q.3 A small project is composed of seven activities, whose time estimates are listed below.
Estimated durations (in weeks)
Activity Optimistic Most Likely Pessimistic
1-2 1 1 7
1-3 1 4 7
1-4 2 2 8
2-5 1 1 1
2-5 2 5 14
4-6 2 5 8
5-6 3 6 15
 (i) Draw project network
(ii) Find expected duration and variance for each activity. What is the expected project
length?
(iii) What is the probability that the project will be completed at least 4 weeks earlier than
expected time?
(iv) What is the probability that the project will be completed in 19 weeks?
(v) If the project due date is 19 weeks, what is the probability of not meeting the due date?

For Solution Watch the Video Lecture 4 in (PERT)

on the App
Q.3 A small project is composed of 9 activities, whose time estimates are listed below.
Estimated durations (in weeks)
Activity Optimistic Most Likely Pessimistic
1-2 5 8 10
1-3 18 20 22
1-4 26 33 40
2-5 16 18 20
2-6 15 20 25
3-6 6 9 12
4-7 7 10 12
5-7 7 8 9
6-7 3 4 5
(i) Draw project network
(ii) Find expected duration and variance for each activity. What is the expected project
length?
(iii) The earliest and latest expected times to reach each event.
(iv) The probability of an event occurring at the proposed completion date if the origin
contract time of completing project 41.5weeks.

For Solution Watch the Video Lecture 5 in (PERT)

on the App
Q.4 Following are the information given about a project.
Estimated durations (in weeks)
Activity Predecessor Optimistic Most Likely Pessimistic
A - 4 6 8
B A 5 7 15
C A 4 8 12
D B 15 20 25
E B 10 18 26
F C 8 9 16
G E 4 8 12
H D, F 1 2 3
 I G, H 6 7 8
(i) Construct an arrow diagram
(ii) Determine the critical path and compute the expected project completion time
(iii) Determine the probability of completing the project in 55 days.

For Solution Watch the Video Lecture 6 in (PERT)

on the App
(MBA January-February 2022)
Q.9 A project consists of 12 activities and their time estimates are given below:
Time (in weeks)
Activity
to (Optimistic) tm (Most Likely) tp (Pessimistic)
1-2 4 6 10
1-3 3 7 12
1-4 5 6 9
1-6 2 4 6
2-4 6 10 20
2-6 3 4 7
2-7 5 9 15
3-4 3 7 12
4-5 2 4 5
5-6 1 3 6
3-6 2 5 8
6-6 1 2 6
(a) Draw the network diagram
(b) Determine the critical path
(c) Calculate event slacks and activity float
(d) Compute the probability of completing the project in 30 weeks.

For Solution Watch the Video Lecture 7 in (PERT)

on the App
(MBA December 2019)
Q.7 Construct the following network on AOA and determine critical path duration and standard
deviation of project:
Activity a b c d e f G h I
Prec. Act - - a a b c, d c, e f f, g
To 3 4 6 8 7 7 3 5 2
Tm 5 5 7 8 10 8 7 6 9
Tp 7 12 11 8 13 9 9 10 10

For Solution Watch the Video Lecture 8 in (PERT)

on the App
 CRASHING
Q.1 The activities, duration and direct activity costs of a project are as follows:
Time in weeks Cost (Rs)
Activity
Normal Crash Normal Crash
1-2 6 3 40000 70000
1-3 5 3 30000 52000
2-4 2 1 60000 84000
3-4 10 6 70000 98000
2-5 3 2 45000 63000
4-5 4 2 26000 50000
The indirect costs are Rs 11,500 per week
(a) What is the minimum time in which this project can be completed? What is the minimum
cost at which this can be done?
(b) Which activities should be crashed to minimize the total cost?

For Solution Watch the Video Lecture 1 in (Crashing) on

the App

(MBA, January-February 2022)

Q.7 The activities, duration and direct activity costs of a project are as follows:
Time in weeks Cost (in ‘000 Rs)
Activity
Normal Crash Normal Crash
1-2 7 4 42 75
1-3 5 3 28 50
2-4 2 1 62 82
3-4 10 6 75 99
2-5 3 2 48 64
4-5 5 3 28 52
The indirect costs are Rs 10, 500 per week
(a) What is the minimum time in which this project can be completed?
(b) Which activities should be crashed to minimize the total cost?

For Solution Watch the Video Lecture 2 in (Crashing)

on the App

(MBA, December 2019)

Q.8 Determine optimum cost of project if indirect cost is Rs 10,000 per day.
Time in weeks Cost
Activity
Normal Crash Normal Crash
1-2 8 5 7000 9400
1-3 12 10 2000 2800
 2-3 6 5 5000 6200
2-5 8 7 4000 4900
3-5 7 4 3000 4800
2-4 6 4 4900 6000
4-5 5 3 6000 8000

For Solution Watch the Video Lecture 3 in (Crashing)

on the App

(MBA, May-June 2022)

Q.6 Data for project are:
Preceding Time in weeks Cost (Rs)
Activity
Activity Normal Crash Normal Crash
A - 3 2 18000 19000
B - 8 6 600 1000
C B 6 4 10000 12000
D B 5 2 4000 10000
E A 13 10 3000 9000
F A 4 4 15000 15000
G F 2 1 1200 14000
H C, E, G 6 4 3500 4500
I F 2 1 7000 8000
(a) Draw the Project Network and find the critical path
(b) If the deadline of 17 weeks is imposed for completion of the project, what activities will
be crashed and what would be the additional cost. Find out what would be the critical
activities of the network after crashing?

For Solution Watch the Video Lecture 4 in (Crashing)

on the App

(MBA, January 2017)

Q.5 The following table shows, for each activity of a project the normal and crash costs, the
normal and crash times. The contract includes a penalty clause of Rs 200 per day in excess
of 19 days. The overhead cost is Rs 400 per day.
Time in weeks Cost
Activity
Normal Crash Normal Crash
1-2 6 4 600 1000
1-3 4 2 600 1400
2-3 5 3 500 1500
2-5 3 1 450 650
3-4 6 4 900 2000
 4-6 8 4 800 3000
5-6 4 2 400 1000
6-6 3 2 450 800
(a) Draw project network and determine the critical path
(b) Find the cost of completing the project in normal time.
(c) Crashing the project activities, determine the cost of completing the project in minimum
time, with total cost findings.
(d) What is the optimal duration of the project and what is the cost involved?

For Solution Watch the Video Lecture 5 in (Crashing)

on the App
 Capital Budgeting
Q.1 Project costs Rs. 10,00,000 and yields an annual cash inflow of Rs. 2,00,000 for 8 years.
Calculate its pay-back period.

Q.2 Determine the pay-back period for a project which requires a cash outlay of Rs. 1,00,000
and generates cash inflows of Rs. 20,000, Rs. 40,000, Rs. 30,000 and Rs. 20,000 in the
first, second, third and fourth year respectively.

For Solution Watch the Video Lecture 2 in

(Capital Building) on the App

Q.3 Anurag Ltd. is considering the purchase of a new machine for its immediate expansion
programme. There are three possible machines suitable for the purpose. Their details are
as follows:
Machines
1 2 3
(Rs.) (Rs.) (Rs.)
Capital Cost 30,000 30,000 30,000
Sales (at standard prices) 50,000 40,000 45,000
Net Cost of Production:
Direct Material 4,000 5,000 4,800
Direct Labour 5,000 3,000 3,600
Factory Overheads 6,000 5,000 5,800
Administration Costs 2,000 1,000 1,500
Selling and Distribution Costs 1,000 1,000 1,000
The economic life of machine no. 1 is 2 years, while it is 3 years for the other two. The
scrap values are Rs. 4,000 Rs. 2,500 and Rs. 3,000 respectively.
Tax to be paid is expected at 50% of the net earnings of each year. Interest on capital has
to be paid at 8% per annum.
You are requested to show which machine would be the most profitable investment on the
principle of “payback method.”

For Solution Watch the Video Lecture 3 in

(Capital Building) on the App

Q.4 A Ltd. is considering the purchase of a new machine which will carry out operations
performed by labour. X and Y are alternative models. From the following information you
are required to prepare a profitability statement and work out the pay-back period in respect
of each machine.
 For Solution Watch the Video Lecture 4 in
(Capital Building) on the App

Q.5 Determine the average rate of return from the following data of two machines A and B.
Machine A Machine B
Original Cost Rs. 5,61,250 Rs. 5,61,250
Addl. Investment in net working capital 50,000 60,000
Estimated life in years 5 5
Estimated salvage value 30,000 30,000
Average income-tax rate 55% 55%
Annual estimated income after depr. And tax
1st year 33,750 1,13,750
2nd year 53,750 93,750
3rd year 73,750 73,750
4th year 93,750 53,750
th
5 year 1,13,750 33,750
3,68,750 3,68,750

For Solution Watch the Video Lecture 5 in

(Capital Building) on the App

Q.6 Z Ltd. has under consideration the following two projects. Their details are as under:
Project „X Project „Y
Investment in Machinery Rs. 20,00,000 Rs. 30,00,000
Working Capital 10,00,000 10,00,000
Life of Machinery 4 years 6 years
Scrap value of Machinery 10% 10%
Tax Rate 50% 50%
Income before depreciation and tax at the end of year:
1 Rs. 16,00,000 Rs. 30,00,000
2 16,00,000 18,00,000
3 16,00,000 30,00,000
4 16,00,000 16,00,000
 5 ------- 12,00,000
6 ------- 6,00,000
You are required to calculate the Accounting Rate of Return and suggest which project is
to be preferred.

For Solution Watch the Video Lecture 6 in

(Capital Building) on the App

Q.7 The following is the relevant information for two Mutually Exclusive Projects 'X ' and 'Y'
being evaluated by firm:
Year Cash Flow „X Cash Flow „Y
0 -10000 -30000
1 5000 14000
2 6000 19000
3 4000 10000
Evaluate and rank these proposals as per NPV and IRR Techniques. Given that minimum
required rate of return is 10%

For Solution Watch the Video Lecture 7 for

NPV & Lecture 8 for IRR (Capital Building) on the App

Q.8 Phoenix Company is considering two projects P & Q. The expected cash flow of these
projects are as follows:
Year Project P Project Q
0 (10,00,000) (10,00,000)
1 2,00,000 1,00,000
2 2,00,000 1,50,000
3 3,00,000 3,00,000
4 3,00,000 3,50,000
5 3,50,000 3,50,000
What is the NPV of both the projects if discount rate is 10% for both the firms?

For Solution Watch the Video Lecture 7 for

NPV & Lecture 9 for IRR (Capital Building) on the App

[MBA-2008]
Q.13 The following information is related to two equipment’s M and N:
Particular Machine M Machine N
Cost 1,12,250 1,12,250
Estimates life 5 years 5 years
Estimated salvage value 6,000 6,000
Working capital required in the beginning 20,000 40,000
Annual incomes after tax and depreciation:
 Year
I 6,750 22,750
II 10,750 18,750
III 14,750 14,750
IV 18,750 10,750
V 22,750 6,750
Over hauling charges at the end of third year are Rs. 50,000 on machine M. Depreciation
has been charged at straight line method. Discount rate is 10%. Suggest which machine
should be preferred?

M.B.A. 2008
For Solution Watch the Video Lecture 10 in
(Capital Building) on the App

Q.14 A company is considering two mutually exclusive proposal X and Y.

Proposal X will require an initial cost of Rs. 1,40,000 with no salvage value and will also
require an increase in the level of inventories and receivables of Rs. 60,000 over its life.
The project will generate and additional sales of Rs. 1,30,000 and will require cash expenses
of Rs. 40,000 in each of its 5 years life. It will be depreciated on straight line method.
Proposal Y will require an initial capital of Rs. 2,00,000 including working capital of Rs.
50,000 with no salvage value and will be depreciated on straight line method. Earnings
before depreciation and taxes during its 5 years life are estimated as below:
Year 1 Year 2 Year 3 Year 4 Year 5
Rs. 70,000 Rs. 76,000 Rs. 80,000 Rs. 90,000 Rs. 92,000
The company pays 50% tax on income. Its required rate of return is 10%. Which project is
to be chosen under the NPV method?

M.B.A. 2002
For Solution Watch the Video Lecture 11 in
(Capital Building) on the App

Q.9 A machine costing Rs. 110 lakhs has a life of 10 years, at the end of which its scrap value
is likely to be Rs. 10 lakhs. The firm's cut-off rate is 12%. The machine is expected to yield
an annual profit after tax of Rs. 10 lakhs, depreciation will be changed on straight line basis.
At 12% p.a. the present value of the rupee received annually for ten years is Rs. 5.650,
and the value of one rupee received at the end of the 10th year is Rs. 0.3222. Ascertain
the net present value of the project.

M.B.A. 2022 Q. 5
For Solution Watch the Video Lecture 12 in
(Capital Building) on the App
Q.18 Modern Enterprises Limited is considering the purchase of a computer system, which would
cost Rs. 35,00,000. The operation and maintenance costs (excluding depreciation) per
annum are expected to be Rs. 3,00,000. The computer system has a useful life of 10 years,
after which it would have a negligible salvage value. Depreciation is charged under straight
line method. The installation of the computer would reduce clerical cost by Rs. 6,00,000 per
year. It will also save space cost by Rs. 1,00,000 per year. The tax rate for the firm is 40%.
The Required Rate of Return for the firm is 10% after tax. What is the net present value of
the investment? Should the computer system be purchased?

M.B.A. (PT) 2003

For Solution Watch the Video Lecture 13-14 in
(Capital Building) on the App

Q.25 A machine costing Rs. 2,50,000 life expectancy is 5 years and has no salvage value. The
tax rate is 40%. The method of depreciation is SLM, the estimated cash flows before tax
after depreciation (CFBT) from the machine are as follows:
Year 1 2 3 4 5
CFBT 60,000 70,000 90,000 1,00,000 1,50,000
Calculate:(a) PBP (b) ARR (c) NPV and PI at 12% discount rate

For Solution Watch the Video Lecture 15-16 in

(Capital Building) on the App

Q.27 Happy company is considering two mutually exclusive projects.

Initial investment Rs. 20,000
Life time of project 5 Years
Required rate of return 10%
Tax rate 50%
The net cash inflow before tax and depreciation are:
Year 1 2 3 4 5
Project 1 Rs. 8,000 8,000 8,000 8,000 8,000
Project 2 Rs. 10,000 10,000 10,000 10,000 10,000
The project will be depreciated on straight line method. You are required to calculate:
(a) NPV (b) IRR (c) P.I. (d) Discounted Pay Back Period (e) Avg. Rate of Return

For Solution Watch the Video Lecture 17-18 in

(Capital Building) on the App

Q.30 A limited company is considering investing in a project requiring a capital outlay of Rs.
10,00,000. Forecast for annual income after depreciation but before tax is as follows:
Year Rs.
1 5,00,000
 2 5,00,000
3 4,00,000
4 4,00,000
5 2,00,000
Depreciation may be taken as 20% on original cost and taxation at 50% of net income. You
are required to evaluate the project according to each of the following methods.
(a) Pay-back method.
(b) Rate of return on investment method.
(c) Rate of return on average investment method.
(d) Discounted cash flow method taking cost of capital as 10% (or NPV method).
(e) Profitability Index method
(f) Disc. payback period method
(g) Internal rate of return.

For Solution Watch the Video Lecture 19 in

(Capital Building) on the App

Q.5 A machine costing Rs. 110 lakhs has a life of 10 years, at the end of which its scrap value
is likely to be Rs. 10 lakhs. The firm's cut-off rate is 12%. The machine is expected to yield
an annual profit after tax of Rs. 10 lakhs, depreciation will be changed on straight line basis.
At 12% p.a. the present value of the rupee received annually for ten years is Rs. 5.650,
and the value of one rupee received at the end of the 10th year is Rs. 0.3222. Ascertain
the net present value of the project.

M.B.A. 2022 Q. 5
For Solution Watch the Video Lecture 20 in
(Capital Building) on the App
Q.5 A. Ltd. is evaluating a project with expected CFATs are as follows:
Year CFATs (Rs.)
0 (1,00,000)
1 20,000
2 30,000
3 60,000
4 30,000
Determine the NPV of the project if discount rate is 10% and 14%. Give your comment
about the feasibility of the project:
Year: 0 1 2 3 4 5
D.F (14%): 1.000 0.877 0.769 0.675 0.592 0.519
D.F (10%): 1.000 0.909 0.826 0.751 0.683 0.621

M.B.A. 2013 Q.5

For Solution Watch the Video Lecture 21 in
(Capital Building) on the App
Q.9 A firm is considering the following project:
Cash Flows (Rs)
C0 C1 C2 C3 C4 C5
-50,000 +11,300 +12,769 +14,429 +16,305 +18,421
Calculate the NPV for the project if the cost of capital is 10%. What is the projects IRR?

M.B.A. 2015 Q.9

For Solution Watch the Video Lecture 22 in
(Capital Building) on the App
Q.12 Compare the two mutually exclusive projects using (a) PBP (b) ARR (c) NPV (d) IRR.
Which project should be selected and why? Assume = 10%:
Project A Project B
Fixed Investment Rs 3,00,000 Rs 2,00,000
Working Capital Rs 50,000 Rs 80,000
Project Life 15 Years 12 Years
CF/ Year Rs 80,000 Rs 60,000
Salvage Value Rs 40,000 Rs 30,000

M.B.A. 2016 Q.5

For Solution Watch the Video Lecture 23 in
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Q.9 (a) Compare two projects A and B (using NPV method only) from the following information:
Project A
Investment on Project : Rs 10,00,000
Life of the project : 5 Years
Period of Implementation : 1 Years
Cost of Capita l : 15%
Year : 1 2 3 4 5
Cash In Flow (lakhs Rs) : 2 3 4 3 1
Project B
Investment on Project : Rs 10,00,000
Life of the project : 5 Years
Period of Implementation : 1 Years
Cost of Capital : 13%
Year : 1 2 3 4 5
Cash inflow (lakhs Rs) : 3 4 4 3 2
(b) Compare two projects by PI (Profitability Index Method):
Project A Project B
(Rs) (Rs)
Initial Value of investment (cash out flow) 5,00,000 11,00,000
Present value of Cash inflows 6,00,000 12,50,000
NPV 1,00,000 1,50,000
 M.B.A. 2017 Q.9
For Solution Watch the Video Lecture 24 in
(Capital Building) on the App

Q.14 (a) Compare projects A and B using net-present value method assuming discount rate of
11% per annum:
Year Project A Project B
(Cash Flow) Rs (Cash Flow) Rs
0 -10,00,000 -10,00,000
1 8,00,000 4,00,000
2 6,00,000 4,00,000
3 - 3,00,000
4 - 3,00,000
5 - 2,00,000
Note:(Where Negative figure indicated cash outflow)
(b) Also compare two projects by IRR method (assuming IRR-of 19%. 25%, 21%, 26%,
27% and 28%).

M.B.A. 2017 Q.8

For Solution Watch the Video Lecture 25 in
(Capital Building) on the App

RISK ANALYSIS IN CAPITAL BUDGETING

Q.1 The Beta Company Ltd is considering the purchase of a new investment. Two alternative
investments are available (A and B) each costing Rs. 1,00,000. Cash inflows are expected
to be as follows:
Cash Inflow
Year Investment A Investment B
1 40000 50000
2 35000 40000
3 25000 30000
4 20000 30000
The company has a target return on capital of 10%. Risk premium rates are 2% and 8%
respectively for investments A and B. Which investment should be preferred?

For Solution Watch the Video Lecture 1 in

(Risk Analysis In Capital Budgeting) on the App

Q.2. A firm is considering three mutually exclusive projects A, B and C. Bas is information is as
follows:
Cost of Capital = 16%
Risk free rate of return = 12%
 Tax rate = 45%
Cash flows and risk index are estimated as follows:
Project A Project B Project C
Initial Cash Outlay 25 30 35
Cash inflow year 1 10 14 10
Cash inflow year 2 10 10 12
Cash inflow year 3 10 8 15
Cash inflow year 4 10 6 18
Risk Index 1.5 1 0.5
Calculate risk adjusted NPV for each project using the risk adjusted discount rate method.
Which project should be selected away A, B and C?

M.B.A. 2018 Q.7

For Solution Watch the Video Lecture 2 in
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Q.3 There are two projects X and Y. Each involves an investment of Rs 40,000. The expected
cash inflows and the certainly coefficients are as under:
Project X Project Y
Year Cash Inflow Certainly Coefficient Cash Inflow Certainly Coefficient
1 25000 0.8 20000 0.9
2 20000 0.7 30000 0.8
3 20000 0.9 20000 0.7
Risk-free cut off rate is 10% Suggest which of the two projects should be preferred.

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Q.4 From the following information:

Initial outlay of Project A is Rs. 1,70,000
Initial outlay of Project B is Rs. 1.50,000
The certainty-equivalent approach is employed in evaluating Risky Investments. The current
yield on Treasury Bills is 5% and company uses risk less rate. The expected value of net
cash flows are:
Project A Project B
Year Cash Inflow Certainly Equivalent Cash Inflow Certainly Equivalent
1 90 0.8 90 0.9
2 100 0.7 90 0.8
3 110 0.5 100 0.6
(a) Which project should be accepted?
(b) Which project is Riskier and why?
(c) If company was to use the Risk Adjusted Discount Rate Method, then which project would
be analysed with higher rate?
 M.B.A. 2022 Q.8
For Solution Watch the Video Lecture 4 in
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Q.5 A company used Risk Adjusted Discount Rate Method. Certain CFAT and Certainty
Equivalents for two projects Project X and Project Y are given as follows:
Project X Project Y
Year Certain CFAT Certainly Equivalent Certain CFAT Certainly Equivalent
0 (40,00,000) 1.00 (45,00,000) 1.00
1 14,25,000 0.95 22,50,000 0.90
2 15,30,000 0.85 16,00,000 0.80
3 14,00,000 0.70 17,50,000 0.70
4 13,00,000 0.65 10,80,000 0.60
Which project should be accepted if risk free rate of return of company is 9%, cost of capital
is 13% and risk adjusted discount rate (for Project X and Project Y) is 16%?

M.B.A. 2022 Q.9

For Solution Watch the Video Lecture 5 in
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Q.6 Two mutually exclusive investment proposals are being considered. The following
information is available:
Project X Project Y
Cost 6,000 6,000
Year Cash Inflow Probability Cash Inflow Probability
1 4,000 0.2 8,000 0.2
2 8,000 0.6 9,000 0.6
3 12,000 0.2 9,000 0.2
Assuming cost of capital at 10%, advise the selection of the project.

For Solution Watch the Video Lecture 6 in

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Q.7 From the following information, ascertain which project is more risky on the basis of standard
deviation:
Project A Project B
Cash Inflow Probability Cash Inflow Probability
2,000 0.2 2,000 0.1
4,000 0.3 4,000 0.4
6,000 0.3 6,000 0.4
8,000 0.2 8,000 0.1
 For Solution Watch the Video Lecture 7 in
(Risk Analysis In Capital Budgeting) on the App

Q.8 A project involving an initial outlay of Rs 10,000 has the following benefits associated with
it:
Year 1 Year 2 Year 3
Net Cash Probability Net Cash Probability Net Cash Probability
Flow Rs. Flow Rs. Flow Rs.
3,000 0.3 2,000 0.2 3,000 0.3
5,000 0.4 4,000 0.6 5,000 0.4
7,000 0.3 6,000 0.2 7,000 0.3
Calculate:(a) Expected Net Present Value and (b) Standard Deviation of net present value,
assuming that i=6 per cent.

M.B.A. 2019 Q.5

For Solution Watch the Video Lecture 8 in
(Risk Analysis In Capital Budgeting) on the App

Q.9 Determine expected NPV and probability of making no loss with following information if Initial
Investment = Rs. 10 Cr. And r= 12%. No salvage values.
Year 1 Year 2 Year 3
NCF Probability NCF Probability NCF Probability
Rs 5 Cr. 20% Rs 6 Cr. 30% Rs 7 Cr. 50%
Rs 4 Cr. 50% Rs 4 Cr. 30% Rs 5 Cr. 30%
Rs 3 Cr. 30% Rs 3 Cr. 40% Rs 2 Cr. 20%

M.B.A. 2019 Q.6

For Solution Watch the Video Lecture 9 in
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Q.10 An investment project involves a current outlay of ₹10,000. The mean and standard
deviation of cash flows, which are perfectly correlated, are as follows:
Year t
1 5,000 1,500
2 3,000 1,000
3 4,000 2,000
4 3,000 1,200
Calculate ̅ ̅ ̅ ̅ ̅ ̅ and assuming a risk-free interest rate of 6 percent.

For Solution Watch the Video Lecture 10 in

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Q.11 ABC Ltd. is considering a project with following cash flows:
Year Purchase of Plant (Rs) Running Cost (Rs) Saving (Rs)
0 (7,000) - -
1 - 2,000 6,000
2 - 2,500 7,000
The cost of capital is 8%
Measure the sensitivity of the project to changes in the levels of Plant value, costs, and
savings (Considering each factor at a time) such that the net present value becomes zero.
What factor is most sensitive to affect the acceptability of the project. The present value
factor at 8% are:0.93 (at year-end 1) and 0.86 (at year-end 2)

M.B.A. 2019 January Q.1

For Solution Watch the Video Lecture 11 in
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Q.12 Following are the data regarding a project. Compute and interpret sensitivity of various
variables:
Expected Variation
Sales 10,000 units/ year 10%
Selling Price Rs 600/ unit 5%
Variable Cost 2/3 of S.P. -
Fixed Cost Rs 5,00,000/ year -
Tax Rate 30% -
Cost of Project Rs 40,00,000 -
Project Life 8 Years 1 year
Expected Return 15% 2%
Depreciation (SLM) 10% -
Salvage Value Rs 8,00,000 -

M.B.A. 2016 Q.6

For Solution Watch the Video Lecture 12 in
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 COST OF CAPITAL
Q.1 A company issued 1000 equity shares of Rs. 200 each at a premium of 10%. The company
has been paying 20% dividend to equity shareholders for the past five years and expects to
maintain the same in the future also. Compute the cost of equity capital. Will it make any
difference if the market price of equity share is Rs. 320?

Q.2 Mangals firm’s equity shares are currently selling at Rs. 125 per share and dividend is
expected to be Rs. 12 per share. A company is contemplating an issue of new equity shares
which can be sold at Rs. 123 per share (an underwriting commission of Rs. 3 per share is
payable). Compute the company’s cost of equity capital.

For Solution Watch the Video Lecture 2 in

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Q.3 (a) A company plans to issue 1000 new shares of Rs. 1000 each at par. The floatation costs
are expected to be 5% of the share price. The company pays a dividend of Rs. 100 per
share and the growth in dividends is expected to be 5%. Compute the cost of new issue of
equity shares.
(b) If the current market price of an equity share is Rs. 1500, calculate the cost of existing
equity share capital.

Q.4 The shares of a company are selling at Rs. 40 per share and it had paid a dividend of Rs. 4
per share last year. The investor’s market expects a growth rate to 5 per cent per year.
(a) Compute the company’s equity cost of capital:
(b) If the anticipated growth rate is 7 per cent per annum, calculate the indicated market
price per share.

Q.5 (a) Investors require a 12 per cent rate of return on equity shares of company Y. What would
be the market price of the shares if the previous dividend (D0 ) was Rs. 4 and investors
expect dividends to grow at a constant rate of (a) 4% (b) 0% (c) - 4% (d) 11% (e) 12% (f)
14%?
(b) An investor is contemplating the purchase of equity shares of a company which had paid
a dividend of Rs. 10 per share last year. The dividends are expected to grow at 6 per cent
for ever. The required rate of return on the shares of this company in the capital market is
12 per cent. What will be the maximum price you will recommend the investor to pay for a
equity share of the company?
(c) Amining company’s ironn ore reserves are being depleted, and its cost of recovering a
declining quantity of iron ore are rising each year. As a consequence, the company’s
earnings and dividends are declining, at a rate of 8 per cent year. If the previous year’s
dividend was Rs 20 and the required rate of return is 15 per cent, what would be the current
price of the equity share of the company?

For Solution Watch the Video Lecture 3 in

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Q.6 Hitachi company’s earnings and dividend are declining at the rate of 8% per year. If the
previous year dividend was Rs. 10 per share and the required rate of return is 15%, what
would be current price of the equity share of the company.

Q.7 Shares of Suzlon Ltd. are selling @ 20 per share. It has paid Rs 2 per share dividend last
year. Estimated growth of company is 5% per year.
Required:
1. Determine Cost of equity capital of Company?
2. Determine Estimated market price of equity shares, if anticipated growth rate
(a) rises to 8% (b) falls to 3% (c) Falls to negative 2%? (Assuming no change in Ke)

Q.8 A firm is considering an expenditure of Rs. 60 lakhs for expanding its operations. The
relevant information is as follows:
Number of existing equity shares 10 lakhs
Marketing value of existing share 60 (Rs.)
Net earnings 90 lakhs (Rs.)
Compute the cost of existing equity share capital and of new equity capital assuming that
new – shares will be issued at a price of Rs. 52 per share and the costs of new issue will be
Rs. 2 per share.

Q.9 The shares of a company are currently selling at R. 240 per share. The company is
proposing to issue new equity shares. The historical pattern of dividends paid during the last
5 years is given below:
Year Dividend (Rs.)
1 20.50
2 22.14
3 23.91
4 25.82
5 27.89
The costs of flotation are expected to be 4 per cent of the current selling price of the shares,
You are required to determine:
(i) growth rate in dividends:
(ii) cost of equity capital, assuming that the growth rate determined in (i) above will continue
indefinitely
(iii) cost of new equity shares.

For Solution Watch the Video Lecture 4 in

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Q.21 A company issues 11 per cent irredeemable preference shares of the face value of Rs. 1000
each. Flotation costs are estimated at 5 per cent of the expected sale price. (a) What is the
kp, if preference shares are issued at (i) par value, (ii) 10 per cent premium, and (iii) 5 per
cent discount? (b) Also, compute kp in these situations assuming 13.125 per cent dividend
tax.
Q.22 Harley Davidson company issues 10% irredeemable preference shares of Rs. 100 each,
but the issue price is Rs. 95. Find cost of preference shares? What is the cost if issue price
is Rs. 105.

Q.23 Haya Busa company issues 9% 50,000 preference shares of Rs. 10 each and 1% is issue
expenses. Find cost of preference shares?

Q.24 Yamaha company issues 8% 50,000 preference shares of Rs. 10 each and 1% is issue
expenses. It is redeemable after 10 years at premium of 15%. Calculate cost of preference
shares?

Q.25 Hero Honda Ltd. has Rs. 100 preference share, redeemable at premium of 10% with 15
years maturity, coupon rate is 12%, flotation cost is 5%. Sale price is Rs. 95. Calculate cost
of preference shares.

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Q.10 (a) P Ltd. issues Rs. 5,00,000 8% debentures at par. The tax rate applicable to the company
is 50%. Compute the cost of debt capital.
(b) Q Ltd. issues Rs. 5,00,000 8% debentures at a premium of 10%. The tax rate applicable
to the company is 60%. Compute cost of debt capital.
(c) R Ltd. issues Rs. 5,00,000 8% debentures at a discount of 5%. The tax rate is 50%,
Compute the cost of debt capital.
(d) S Ltd. issues Rs. 10,00,000 9% debentures at a premium of 10%. The costs of floatation
are 2%. The tax rate applicable is 60%. Compute cost of debt-capital.

Q.11 Mercedes Ltd. has issued 30,000 14% debentures of Rs. 150 each. The cost of flotation is
5% of total amount issued. Company’s tax rate is 40%. Calculate cost of debt.

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Q.12 (a) Imperial company issues Rs. 10,00,000 16% debentures of Rs. 100 each. The company
is in 35% tax bracket. You are required to calculate the cost of debt after tax. If debentures
are issued at (i) Par, (ii) 10% discount, (iii) 10% premium.
(b) If brokerage is paid at 2%, what will be cost of debentures if issue is at par?

Q.13 BMW company issued 1,000 7% debentures of Rs. 100 each. The expenses of issue are-
underwriting 1.5%, brokerage 0.5% and printing expenses Rs. 500. Find out cost of
debentures.

Q.14 A company is considering raising Rs. 100 Lakh by one of the two alternative methods, viz.
14 per cent institutional term loan and 13 per cent non-convertible debentures. The term
 loan option would attract no major incidental cost. The debentures would have to be issued
at a discount of 2.5 per cent and would involve Rs. 1 lakh as cost of issue.
Advise the company as to the better option based on the effective cost of capital in each
case. Assume a tax rate of 35 per cent.

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Q.15 Calculate the explicit cost of debt for each of the following situations:
(a) Debentures are sold at par and flotation costs are 5 per cent.
(b) Debentures are sold at premium of 10 per cent and flotation costs are 5 per cent of issue
price.
(c) Debentures are sold at discount of 5 per cent and flotation costs are 5 per cent of issue
price.
Assume:(i) coupon rate of interest on debentures is 10 per cent; (ii) face value of debentures
is Rs. 100; (iii) maturity period is 10 years; and (iv) tax rate is 35 per cent.

Q.16 Ford company issues 11% debentures of Rs. 100 each for an amount aggregating Rs.
1,00,000 at 10% premium, redeemable at par after 5 years. The company’s tax rate is 35%.
Determine the cost of Debt.

Q.17 Puma Ltd. Issues 15% debentures of face value of Rs. 100 each, redeemable at the end of
7 years. The debentures are issued at a discount of 5% and the floatation cost is estimated
to be 1%. Find out the cost of capital of debentures given that tax rate is 50%.

Q.18 Nissan Ltd. has raised funds through issue of 10,000 debentures of Rs. 150 each at a
discount of Rs. 10 per debenture with 10 years maturity. The coupon rate is 16%. The
flotation cost is Rs. 5 per debenture. Debentures are redeemable with 10% premium.
Corporate tax rate is 40% Calculate cost of debentures.

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Q.26 Assuming that the firm pays tax at a 50% rate, compute after tax cost of capital in following
cases:
1. A 14.5% preference share sold at par.
2. A Perpetual bond sold at par, coupon rate being 13.5%
3. A ten year 8% Rs. 1,000 per bond sold at Rs. 950.
4. A common share selling at a market price of Rs. 120 and paying a current dividend of Rs.
9 per share which is expected to grow at a rate of 8%.

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Q.28 A company has on its books the following amounts and specific costs of each type of capital.
Source B.V. cost%
Debt (100) 40,00,000 5%
Pref. sh. cap. (100) 10,00,000 8%
Equity sh. cap. (100) 60,00,000 15%
Retained earning 20,00,000 13%
Market Value:
Debenture = Rs. 95 per
Pref. Share = Rs. 110 per
Eq. Share = Rs. 200 per

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Q.33 The capital structure of XYZ & Co. is comprising of 12% debenture, 9% preference share
and some equity share of Rs. 100 each in the ratio of 3:2:5. The company is considering to
introduce additional capital to meet the needs of expansion plans by raising 14% loan from
financial institutions. As a result of this proposal, the proportions of different above sources
would go down by 1/10, 1/15 and 1/6 respectively in the light of the above proposal, find out
the impact on the WACC of the firm given that (i) tax rate is 50%, (ii) expected dividend of
Rs. 9 at the end of the year and (iii) the growth rate, g, may be taken at 5%, No change is
expected in dividends, growth rate, market price of the share etc. after availing the proposed
loan.

Q.31 The capital structure of ABC Co., comprising of 10% debentures, 11% preference shares
and Equity shares of Rs. 100 each, is in the proportion of 11:4:5. The company is
contemplating to introduce further capital to meet the expansion needs by seeking 14% term
loan from financial institutions. As a result of this proposal, the proportions of debentures,
preference shares, equity capital and term loans will become 11:4:5:10, respectively. If the
above proposal is accepted, what will be the percentage impact on the weighted average
cost of capital, if the company pays 40% tax on its income, expected dividend at the end of
the year is Rs. 9 per share and present market price per share is Rs. 112.5 No change in
dividend, or market rate of share is expected after availing the proposed term loan.

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Q.29 A limited company has the following capital structure:

Equity share capital (4,00,000 shares) Rs. 80,00,000
6% Preference shares 20,00,000
8% Debentures 60,00,000
1,60,00,000
 The market price of the company’s equity share is Rs. 40, It is expected that company will
pay a current dividend of Rs. 4 per share which will grow at 7 per cent for ever. The tax rate
may be presumed at 50 percent. You are required to compute the following:
(a) A weighted average cost of capital based on existing capital structure.
(b) The new weighted average cost of capital if the company raises an additional Rs.
40,00,000 debt by issuing 10 per cent debentures. This would result in increasing the
expected dividend to Rs. 6 and leave the growth rate unchanged but the price of share will
fall to Rs. 30 per share.
(c) The cost of capital if in (b) above, growth rate increase to 10 per cent.

Q.30 The following is the capital structure of Simons company Ltd. As on 31st March, Current
year
Equity share:20,000 shares (of Rs. 100 each) Rs. 20,00,000
12% Preference shares (of Rs. 100 each) 8,00,000
10% Debentures 12,00,000
40,00,000
The market Price of the company’s share is Rs. 110 and it is expected that a dividend of Rs.
10 per share would be declared at the end of the current year, the dividend growth rate is 6
per cent.
(i) If the company is in the 35 per cent tax bracket, compute the weighted average cost of
capital
(ii) Assuming that in order to finance an expansion plan, the company intendeds to borrow
a fund of Rs. 10 lakh bearing 12 per cent rate of interest. What will be the company’s revised
weighted average cost of capital? This financing decision is expected to increase dividend
from Rs. 10 to Rs. 12 per share. However, the market price of equity share is expected to
decline form Rs. 110 to Rs. 105 per share.

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Q.37 Agro Industries Ltd. has assets of Rs. 3,20,000 which have been financed by Rs. 1,04,000
of debt, Rs. 1,80,000 of equity share and general reserve of Rs. 36,000. The company’s
total profits after interest and taxes for the year ended 31st March, 2004 were Rs. 27,000. It
pays 8% interest on debt capital and is in 50% tax bracket. It has 1800 equity shares of Rs.
100 each selling at a market price of Rs. 120 per share. What is the weighted average cost
of capital?

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Q.38 X Ltd. has the following capital structure:

Equity Capital (expected dividend 12%) Rs. 10,00,000
10% Preference Share Rs. 5,00,000
8% Loan Rs. 15,00,000
 You are required to calculate the weighted average cost of capital before tax and after tax
assuming tax rate of 50%.

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Q.34 As a financial analyst of a large electronics company, you are required to determine the
weighted average cost of capital of the company using (a) book value weights and (b) market
value weights. The following information is available for your perusal.
The company present book value capital structure is:
Debenture (Rs. 100 per debenture) Rs. 16,00,000
Preference shares (Rs. 100 per share) 4,00,000
Equity shares (Rs. 10 per share) 20,00,000
40,00,000
All these securities are traded in the capital markets, Recent prices are
Debenture, Rs. 110 per debenture
Preference shares, 120 per share
Equity shares, Rs. 22 per share
Anticipated external financing opportunities are:
(i) Rs. 100 per debenture redeemable at par; 10-year maturity, 11 per cent coupon rate, 4
per cent flotation costs, sale price, Rs. 100
(ii) Rs. 100 preference share redeemable at par; 10-year maturity, 12 per cent dividend rate,
5 per cent flotation costs, sale price, Rs. 100
(iii) Equity shares Rs. 2 per share flotation costs, sale price = Rs. 22
In addition, the dividend expected on the equity share at the end of the year is Rs. 2 per
share; the anticipated a growth rate in dividends is 7 per cent and the firm has the practice
of paying all its earnings in the form of dividends, the corporate tax rate is 35 per cent.

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Q.35 Super Ltd. has the following book value capital structure: (Rs. Crore)
Equity capital (in shares of Rs. 10 each, fully paid up at par) 15
12 % Preference capital (in shares of Rs. 100 each, fully paid up at par) 1
Retained earnings 20
11.5% Debentures (of Rs. 100 each) 10
11% Term loans 12.5
The next expected dividend on equity shares per share is Rs. 3.60; the dividend per share
is expected to grow at the rate of 7 per cent. The market price per share is Rs. 40.
Preference stock, redeemable after ten years, is currently selling at Rs. 75 per share.
Debenture, redeemable after six years, are selling at Rs. 80 per debenture.
The income-tax rate for the company is 40 per cent.
(i) Required:
Calculate the weighted average cost of capital using;
 (a) Book value proportions; and
(b) Market value proportions.

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Q.41 The following is the capital structure of a company:

Sources of Capital Book Value (Rs.) Market Value (Rs.)
Equity share @ Rs. 100 each 80,00,000 1,60,00,000
9% Cumulative Preference Share @ Rs. 100 each 20,00,000 24,00,000
11% Debenture 60,00,000 66,00,000
Retained earning 40,00,000 --
2,00,00,000 2,50,00,000
The current market price of the company’s equity share is Rs. 200. For the last year the
company had paid equity dividend at 25% and its dividend is likely to grow at 5% every year.
The corporate tax rate is 30% and shareholder personal income tax rate is 20%.
You are required to calculate:
(i) Cost of capital for each source of capital.
(ii) Weighted average Cost of capital on the basis of book value weight.
(iii) Weighted average Cost of capital on the basis of market value weight.

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Q.42 Aries Limited wishes to raise additional finance of Rs. 100 lakh for meeting its investment
plans. It has Rs. 21,00,000 in the form of retained earnings available for investment
purposes. The following are the further details:
1. Debt-equity mix, 30:70
2. Cost of debt: Upto Rs. 18,00,000, 10 per cent (before tax); Beyond Rs. 18,00,000, 12 per
cent (before tax)
3. Earnings per share, Rs. 4
4. Dividend pay-out, 50 per cent of earnings
5. Expected growth rate in dividend, 10 per cent
6. Current market price per share, Rs. 44
7. Tax rate, 35 per cent
You are required:
(a) To determine the pattern for raising the additional finance, assuming the firm intends to
maintain
existing debt/equity mix.
(b) To determine the post-tax average cost of additional debt.
(c) To determine the cost of retained earnings and cost of equity.
(d) Compute the overall weighted average after tax cost of additional finance.
For Solution Watch the Video Lecture 19 in
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 Demand Forecasting
(MBA, May-June 2024)
Q.7 The demand in the last seven years has been shown in the following table. Determine
forecast for the years 2019 & 2022.
Year 2012 2013 2014 2015 2016 2017 2018
Demand 35 40 48 56 65 76 89

(MBA, Jan-Feb 2022)

Q.8 Fit a straight-line trend to the following data using the method of least square and estimate
the demand for the year 2021:
Year 2014 2015 2016 2017 2018 2019 2020
Demand 80 90 92 83 94 99 92

(MBA, January 2016)

Q.8 (b) Determine a demand forecast for 2020 with the following historical demand using
appropriate method:
Year 2009 2010 2011 2012 2013 2014
Demand 750 900 1000 950 1200 1350

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(Demand Forecasting) on the App
 Time Value of Money
Q.1 Find out compound interest on Rs 6000 for 3 years at 9% compounded annually.

Q.2 What sum will amount to Rs 5000 in 6 years’ time at 8.5% per annum.

Q.3 Find the compound interest on Rs 2500 for 15 months at 8% compounded quarterly,

Q.4 Find the present value of Rs 2000 due in 6 years if money is worth 5% compounded semi-
annually.

Q.5 Find out the present value of Rs 10,000 to be required after 4 year if the interest rate is
6%.

Q.6 What shall be the Future Value of an annuity of Rs 100,000 for 5 years at an effective rate
of 12% p.a. after 5 year?

Q.7 Mr. X is depositing Rs 2000 in a recurring bank deposit which pays 9% p.a. compounded
interest. How much amount Mr. X will get at the end of 5th Year?

Q.8 Find the future value of ordinary annuity Rs 4000 each six month for 15 years at 5% p.a.
compounded semi-annually.

Q.9 If an employee deposit Rs 1000 at the end of each year into his company's plan which
pays 7% interest compounded yearly, how much will he have in the account at the end of
5 years?

Q.10 What shall be the Future Value of an annuity of Rs 100,000 (at the beginning of the year)
for 5 year at an effective rate of 12% p.a., after 5 year?

Q.11 How much amount is required to be invested every year so as to accumulate Rs 10,00,000
at the end of 5 year if the effective rate of interest is 12% p.a.

Q.12 Mr. Ramesh plan to send his daughter for higher studies abroad after 10 years. He expects
the cost of these studies to be Rs 10,00,000. How much should he save annually to have
a sum of Rs 10,00,000 at the end of 10 years, if the interest rate is 12%?

Q.13 How much amount is required to be invested in the beginning of every year so as to
accumulate Rs 10,00,000 at the end of 5 years if the effective rate of interest is 12% p.a.?

Q.14 A machine cost Rs 300,000 and its effective life is estimated to be 6 years. A sinking fund
is created for replacing the machine at the end of its effective life-time when its scrap
realizes a sum of Rs 20,000 only. Calculate to the nearest hundreds of rupees, the amount
which should be provided, every for the sinking if it accumulates at 8% p.a. compounded
annually.

Q.15 A person deposit Rs 100,000, Rs 200,000, Rs 300,000 and Rs 400,000 in his deposit
account at the beginning of 1st Year, 2nd Year, 3rd Year and 4th Year respectively.
Determine the account balance at the end of 4th year, if interest rate is 12% p.a.
Q.16 A person deposits Rs 100,000, Rs 200,000, Rs 300,000 and Rs 400,000 in his Deposit
account at the end of 1st year, 2nd year, 3rd year and 4th year respectively. Determine his
account balance at the end of 4th year if interest rate is 12% p.a.

Q.17 A company has Rs 200,000 6% Debenture company outstanding today. The company has
to redeem the debenture after 5 years and establishes a Sinking Fund to provide funds for
redemption Sinking Fund Investment earn interest @10% p.a. The investment is made at
the end of each year. What annual payment must be the firm make to ensure that the
needed Rs 200,000 is available on the designated date?

Q.18 You deposit Rs 17000 each year for 10 years at 7%. Then you earn 9% after that. If you
leave the money invested for another 5 years much will you have in the 15th year?

Q.19 Determine the present value of an annuity of Rs 100,000 receivable for 5 years at effective
rate of interest of 12% p.a.

Q.20 Determine the present value of an annuity of Rs 100,000 receivable for 5 years at an
effective rate of interest of 12% p.a. If annuity is receivable at the beginning of the year.

Q.21 Determine the present value of an annuity of Rs 1,00,000 receivable for 5 years semi-
annually at rate of interest of 12%p.a. compounded semi-annually.

Q.22 Determine the present payable annuity of Rs 1,00,000 receivable for 5 year semi-annually
at a rate of interest of 12% p.a. compounded semi-annually if annuity is payable at the
beginning of semi-year.

Q.23 Determine the annuity payable annually to an investor if he invests Rs 10,00,000 at present
at an effective rate of interest 12% p.a. for 10 years.

Q.24 Determine the annuity payable annually to an investor if he invests Rs 10,00,000 at present
at an effective rate of interest 12% p.a. for 10 years and annuity is payable at the beginning
of the year.

Q.25 A fixed deposit receipt carrying an interest rate of 12% pia has a maturity value of Rs
1,57,400 after 4 years. Determine the amount at which fixed deposit receipt was initially
purchased.

Q.26 A bank granted a loan repayable in four equal annual installments of Rs 100,000 each
beginning with the end of 1st year. Calculate the amount of loan granted if the effective
rate of interest is 12% p.a.

Q.27 A bank granted a loan of Rs 5,38,000 repayable beginning in 4 equated annual installments
with the end of 1st year. Determine the amount of instalment if effective rate of interest is
18% p.a.

Q.28 A bank granted a loan of Rs 6,34,800 repayable in 4 equated annual instalments beginning
with the date of sanction of the loan. Determine the amount of instalment if effective rate
of interest is 18% p.a.
Q.29 Mr. X deposits Rs 10,00,000 in a bank, which pays 10% interest. How much he should
withdraw annually for a period of 30 years? Assume that at the end of 30 years, the amount
deposited whittle down to zero.

Q.30 An overdraft of Rs 50,000 is to be paid back in equal annual installment over a period of
20 years Find the value of the installment, if interest is compounded annually at 14% p.a.

Q.31 A man borrows Rs 4000 from a bank at 10% compound interest. At the end of every year
he pays Rs 1500 as part repayment of loan and interest. How much does he still owe to
be bank after three such installment?

Q.32 An executive is about to retire at the age of 60. His employer has offered him two post
retirement options (a) Rs 20,00,000 lump sum; (b) Rs 250,000 for 10 years. Assuming 10%
interest, which is a better option?

Q.33 Determine the present value of perpetuity Rs 1,20,000 per year for infinite period at an
effective rate of interest of 12% p.a.

Q.34 Determine the present value of perpetuity Rs 1,20,000 per year (starting from the beginning
for an infinite period at an effective rate of interest of 12% p.a.

Q.35 Determine the present value of perpetuity of Rs 100,000 for 6 months for an infinite period
at an effective rate of interest of 12% p.a.

Q.36 Determine the present value of perpetuity of Rs 100,000 per 3 months for an infinite period
at an effective rate of interest of 12% p.a.

Q.37 Determine the perpetuity in each of the following cases if effective rate of interest is 12%
p.a. and initial amount invested is Rs. 10,00,000.
(a) If perpetuity is payable after every year
(b) If perpetuity is payable after every 6 months
(c) If perpetuity is payable after every quarter

Q.38 Calculate Effective Rate of Interest if Rate of Interest is 12% in each of the following cases:
(a) When interest is compounded half yearly.
(b) When interest is compounded quarterly.
(c) When interest is compounded monthly
(d) When interest is compounded twice a month.