Model Question Paper-II

Q1. a. What is project life cycle?

b. What are the advantages of project management?
Ans. a. Project life cycle refers to a logical sequence of activities that are performed to achieve project goals or
objectives. It can also be termed as project cycle. In project management literature, numerous project life
cycle models are available, depending on the industry and type of project.
The project life cycle stages shown in Figure-1 are explained as follows:
 Initiation: Constitutes the first stage of the project life cycle. In this stage, the project idea or problem
is identified and the objective of the project is selected.
 Planning: Refers to designing the course of actions required to achieve the objective of the project.
 Execution: Refers to the stage in which the project manager starts performing various activities to
achieve the goal of the project.
 Controlling: Implies measuring and monitoring the progress of the project to identify the loopholes, if
any. In this stage, the project manager can take corrective actions to rectify any error occurred while
executing the project.
 Closing: Refers to the formal closure of the project. As the project attains its goal, it needs to be closed
finally. The employees and other resources are released to be used for other activities.
When the two phases would continue at a time, the cost of operation would decrease and the requirement of
resources would also fall.
b. The advantages of project management are as follows:
 Aligning the project with the strategic goals of the organization
 Reducing the project budget by effective planning and management of resources
 Focusing on performance of employees by providing them training
 Increasing the project success ratio
 Ensuring that the pre-stated objectives are achieved
 Improving the coordination among resources used in a project
 Reducing the risk associated with the project
 Delivering predictable as well as desired results
 Improving the issue management
 Reducing the project cycle time
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Q2. a. What all things are determined through market analysis?

b. What do you mean by secondary sources of market information?
Ans. a. The following factors are determined through market analysis:
 Market Size: Refers to the potential of the market determined on the basis of present and estimated
future sales of the product, government reports, financial data, and customer surveys.
 Market Growth Rate: Refers to the rise or fall in the demand of the product in the market. It is
determined by extrapolating the historical data with the estimation of demand of the product in future.
The market growth rate indicates the stage of the product life cycle and sales of a product.
 Market Profitability: Refers to an aspect of market analysis that gets influenced by various factors,
such as buyers’ power, suppliers’ power, barrier to entry, threat of substitute products, and competition
in the market. For example, if the purchasing capacity of buyers increases, they would spend a large sum
of money in buying products, which, in turn, increases the profitability of the market.
 Project Cost Structure: Helps in preparing budget and formulating strategies to get an edge over the
competitors.
 Channel of Distribution: Increases the demand of the product in the market. The direct channel of
distribution makes the product easily available to the customers, which, in turn, increases the demand of
the product in the market.
 Market Trends: Act as an important aspect that needs to be considered by the organization while
performing the market analysis. The change in the tastes and preferences of customers in the market
helps in identifying price sensitivity and demand for variety.
b. Secondary market information is collected by processing the information compiled and organized from the
primary sources of market information. It is obtained from the studies previously performed by government
agencies and departments, industry and trade associations, media, and chambers of commerce. One of the
popular examples of the secondary information is Nielsen’s television ratings used for advertising decisions.
Following are some of the advantages of secondary sources of market information.
 Easy to Collect: Implies that the secondary market information is easily derived from primary market
information. The findings and results can be manipulated to derive the information required for the
project.
 Less Time Consuming: Implies that the secondary information can be collected in less time as it is
easily available.
 Inexpensive: Implies that the cost involved in collecting the secondary market information is less as
compared to the primary sources of market information.
The main disadvantage of secondary market information is that the information collected may be obsolete,
which, in turn, can lead to inaccuracy in market analysis.
Q3. What are the components of cost of a project?
Ans. The different components of cost of a project are as follows:
 Land and Site Development: Involves expenses incurred on acquisition and development of land. The
expenses involved in the development of land and site are listed as follows:
 Purchase price of land
 Legal and registration charges
 Leveling of land
 Laying of internal and approach roads
 Boundary wall / fencing of land
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 Gates and site office

 Tube well and electrification for project implementation
 Any other expense of similar nature
 Construction Cost: Includes expenses incurred on the construction of a factory and non-factory buildings
of all nature. The classification of factory building and non-factory building is essential for accounting
purpose as rate of depreciation is different for the two. Factory buildings have higher rate of depreciation,
whereas non-factory buildings have lower rate of depreciation. Different factory buildings include:
 Production shed
 Boiler House
 Transformer room/ generator room
 Workshop
 Laboratory
On the other hand, the non-factory buildings include:
 Ware house
 Stores
 Security house
 Workers’ rest room
 Parking
 Time office/ excise room
 Administrative block
 Essential quarters for workers
 Canteen
 Plant and Machinery: Involves the major cost of the organization. It comprises expenses on the erection
of imported and indigenous machineries and various taxes on the plant. The different types of cost
associated with the establishment of the plant and machinery in a project are as follows:
 Basic cost of equipment
 Excise/ custom duty and sales tax
 Transshipment cost (from vendor to site) and insurance during transportation
 Erection and foundation cost
 Piping cost
 Technical Knowhow: Involves the expenses of the organization in hiring a technology and imparting
training to the staff. The technical knowhow cost includes:
 Basic cost of technology development or purchase
 Training cost for employees
 Royalty paid (if lump sum)
 Utility: Involves expenses of the organization for using the common facilities of the plant. This seems
similar to plant and machinery cost but the difference lies in the fact that utilities are used for various plants,
whereas plant and machinery is for individual plant. The various utilities are:
 Boiler
 Compressor
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 Generator/ Transformer
 Underground / overhead water tank
 Effluent treatment plant
 Miscellaneous Fixed Assets: Refer to the costs involved in purchasing the different assets of the
organization. The miscellaneous fixed assets include:
 Furniture / fixtures
 Computers/ fax/ printers and accessories
 Vehicles
 Weigh bridge
 Preliminary Expenses: Involve the cost of the organization incurred before starting of a project. The
preliminary expenses, also known as opening expenses, vary according to the nature of the project. The
preliminary expenses of an organization include:
 Cost of market surveys
 Purchase of equipment
 Early payroll
 Attorney fee
 Registration fee
 Investment in initial inventory
 Preoperative Expenses: Include the normal expenses, such as salaries and rents, incurred by an
organization prior to commercial production. Preoperative expenses also include travelling expenses,
company formation expenses, commissioning expenses, and trail run costs.
 Contingency: Refers to the cushion fund kept for various emergency needs. The emergency situations may
arise due to unfavorable market conditions, such as recession and inflation.
 Margin Money for Working Capital: Refers to the cost involved for meeting the working capital
requirements. It is generally raised through short-term sources of finance but some margins are raised from
other sources of finance.
Q4. Discuss any one source of long-term project financing?
Ans. Equity Financing
Equity financing is one of the most important sources of long term financing. Equity financing refers to a method
of raising long-term funds by selling the common and preferred stock of the organization to the investors. The
investors get ownership interests in the organization in return of amount paid by them for purchasing the
common and preferred stocks of the organization. Equity financing can be raised through equity and preference
shares. Equity shares are treated as the base for capital formation of the organization. Equity shareholders are
considered as the real owners of the organization. They are entitled to receive dividend out of the profit
generated at the end of every financial year. The amount of dividend may vary from one financial year to
another. Equity shares can be categorized into bonus and sweat equity shares, which are described as follows:
 Bonus Shares: Refer to a type of equity shares in which extra dividend is paid to shareholders in case the
organization earns surplus profit margins. The profit is distributed among shareholders either in the form of
cash bonus or bonus share. The organization provides cash bonus when it has accumulated sufficient cash to
pay dividend. On the other hand, bonus shares are issued when the organization lacks cash or paying cash
can affect the working capital of the organization. The bonus is paid to the shareholders according the
number of shares owned by them.
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 Sweat Equity Shares: Refer to the shares that are issued to the employees of an organization. Sweat
equity shares are always issued at a discount. These shares are given to employees in the form of reward for
the services rendered by them to the organization. This helps in motivating the employees, which, in turn,
improves their performance.
On the other hand, preference shares give preferential rights to their holders in comparison to equity shares.
These shares carry a fixed percent of dividend, which is lower than equity shareholders. The organization pays
the dividend on preference shares before paying dividend to equity shareholders. Even during the winding up of
the organization, the investment of preference shareholders is paid before equity shareholders. The various types
of the preference shares are discussed as follows:
 Cumulative Preference Shares: Refer to the shares for which dividends get accumulated over a period
of time. When the organization has sufficient profit, the accumulated dividend is paid to preference shares.
 Non-cumulative Preference Shares: Refer to the shares for which dividends are not accumulated over
a period of time. The organization has to pay dividends on these preference shares at the end of financial
year.
 Convertible Preference Shares: Refer to the shares that can be converted into equity shares after a
certain time period. The holders of convertible preference shares have to pay conversion price at a given
date for converting their shares into equity shares.
 Non-convertible Preference Shares: Refer to the shares that cannot be converted into equity shares.
 Redeemable Preference Shares: Refer to the shares that are repaid by the organization. These
preference shares are issued for a fixed time period and paid during the existence of the organization.
 Irredeemable Preference Shares: Refer to the shares that are not paid during the existence of the
organization. These preference shares are only paid at the time of liquidation of the organization. At the
time of liquidation, these shares are paid after paying all the liabilities.
The characteristics of preference shares are as follows:
 Do not allow preference shareholders to act as real owners of the organization
 Make the repayment of preference shares possible during the existence of the organization
 Allow preference shareholders to receive dividends out of profit earned by the organization
 Do not bind an organization to offer any asset as security to preference shareholders
 Carry less risk for investors as compared to equity shares
After discussing the characteristics and types of equity financing, let us look at its advantages:
 Paying dividend on equity shares is not an obligation for an organization when there is less profit or loss
 Raising funds through equity shares for long-term investment as these shares are repaid during the lifetime
of the organization
 Limiting the liability of equity shareholders to the amount of shares they hold
 Providing higher dividends to equity shareholders whenever an organization makes huge profit
 Providing voting rights to equity shareholders of an organization
 Help in raising more funds as they are less risky
 Release preference shareholders from any fixed liability at the time of liquidation of an organization
 Facilitate trading on equity
 Prevent preference shareholders from claiming for the assets of the organization
Equity financing has many advantages, but it also has some disadvantages. Following are some of the
disadvantages of equity shares:
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 Allows equity shareholders to interfere in the internal affairs of an organization, which may hamper the
smooth functioning of the organization
 Increase cost of capital when an organization raises fund from equity shares as tax is paid to the government
 Results in overcapitalization, if more than required equity shares are issued
 Provides low returns to preference shareholders
 Characterizes by fluctuations in returns
 Do not provide any voting rights to preference shareholders
 Do not allow an organization to show the dividend paid on equity shares on the debit side of profit and loss
account
Q5. a. What is the importance of cost of capital in project selection?
b. Suppose an organization has raised a capital of ` 500000 from debt and equity. The capital
raised from the debt is ` 200000 at the interest rate of 5% per annum and ` 300000 from the
equity at the rate of 10% per annum. Calculate WACC.
Ans. a. The cost of capital plays a crucial role in project management. Capital is an integral part of a project as an
adequate amount of capital enables an organization to complete a project on time. The organization raises
capital from various sources, such as debts, equities, joint ventures, and loans. The cost of capital is the
minimum rate of return a project must yield, so that the investors who have invested in the project in the
form of shares, debentures, and loans would be satisfied. The capital cannot be raised without cost, for
example, if an organization takes a loan from different banks for a project, it needs to pay a certain
percentage of interest to the bank. Similarly, the organization needs to pay dividend to equity investors. If an
organization finances a project from its own savings, opportunity cost is involved as the same amount of
capital can be invested in other projects that may yield some return. Therefore, the organization needs to
ensure that the return from a project is more than the cost of capital invested in the project.
b. The equation for calculating cost of capital is as following:
WACC = [(D/ (E+D)]kd + [E/ (E+D)]ke
Therefore, the cost of capital of the given organization would be:
(200000/500000)*5 + (300000/500000)*10 = 2 + 6 = 8% per annum
Q6. A successful human relations system is essential for the successful execution of a project. What
are the problems and challenges faced by a project team?
Ans. Generally, the members of a project team belong to different backgrounds and share a common goal. The
improper coordination between the team and the project manager create conflicts between the management and
the team, which, in turn, hampers the performance of the project. Therefore, the project manager should
identify the problems of the project team and rectify them. Following are the major problems and challenges
faced by a project team:
Cultural Differences
The cultural differences may arise due to dissimilarities among team members in terms of way of living, working
style, language, and behavior. In such cases, the project manager should strive to eliminate these differences
among team members, and synchronize their behavior to achieve the objectives of the project. Following are the
major reasons of cultural differences:
 Culture: Refers to the difference in the lifestyle of team members. The culture of an individual differs on
the basis of family background, religion, beliefs, and ethics. The cultural aspects are reflected in the behavior
of team members, which may create differences among them.
 Language: Refers to the difference in the language of team members. The translation of one language into
another language is a difficult task. Moreover, the connotative and donative meaning of words may raise
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conflicts among team members. The wrong interpretation of the meaning or lack of communication among
the team members can affect the performance of the project. It may also block the flow of information from
one unit to another unit.
 Environment: Refers to the difference in the learning and working experience of team members. The
teams from two different countries would have different approach towards solving a problem. These
differences may also increase rage among the team members working on the same project.
Matrix Team Problem
A matrix team involves working groups, task forces, as well as cross-functional, problem solving, and special
project teams. These different teams comprise a certain number of individuals from different departments and
backgrounds sharing a common goal. A project can be organized in the form of horizontal structure
(classification on the basis of department) or functional hierarchy (classification on the basis of management
functions). In other words, a matrix project structure is a hybrid form of horizontal structure and functional
hierarchy. In the matrix project structure, the command is delegated through two channels, namely, project line
and functional line. Thus, the teams participating in a project has to follow the guidelines of both the functional
manager and project manager. In such a case, it becomes difficult for the project manager to identify problems
that can arise from working with different teams, which creates hurdles in project operations. Therefore, the
project manager should be able to recognize, understand, and cope up any matrix team problem. Figure-3 shows
a hypothetical example of the matrix project structure:
 Following are the reasons of the matrix team problem:
 Career Priorities: Act as one of the major reasons of the matrix team problem. Sometimes, the team
members consider that reporting to their own functional manager is more important than reporting to
some external person (project manager). They also emphasize to work for their own team rather than
for the other external projects.
 Temporary Assignments: Refer to an important reason of the matrix team problem. Generally, the
team members do not willingly participate in external projects as they consider it as extra work. They
are more focused towards their real jobs. This discrimination makes the team members less committed
towards the project, which, in turn, leads to a conflict between the team members and the project
manager.
 Supervisory Issues: Play a significant role in raising the matrix team problem. The project manager
works with different groups of individuals, which sometimes makes it difficult for him/her to judge the
skills and capabilities of the team members. On the other hand, the team members expect the same level
of supervision by the project manager as that of their immediate superior or supervisor. This results in
conflicts between the project manager and the team.
Intra-team Conflicts
A project team comprises individuals from different backgrounds and departments sharing a common goal.
Therefore, conflicts in project management are inevitable. A conflict can arise among team members due to
various reasons, such as lack of communication, unclear goals, failure of meeting deadlines, and cultural
differences. In such cases, a project manager plays a significant role in managing conflicts. He/she should solve
contradictions among team members by addressing their personal and professional issues and properly
communicating the project goals and objectives.
A project manager can manage conflicts by using the following ways:
 Effective Project Planning: Requires the project manager to develop a project plan clearly stating the
goals and scope of the project. The project manager should encourage the team members to provide their
suggestions and recommendations, while making the project plan. The participation of the team members in
project planning helps in building a sense of belongingness among them, which, in turn, motivates them to
perform efficiently and lessens the scope of conflicts.
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 Proper Allocation of Tasks: Helps in managing conflicts among the team members to a large extent.
The project manager should delegate the tasks to the team members on the basis of their skills and abilities.
This helps in avoiding conflicts as the team members are focused to their own tasks.
 Effective Communication: Requires the project manager to clearly communicate the objectives and
progress of the project to his/her team members. The regular communication between the project manager
and team members helps in sorting out the issues obstructing the progress of the project.
Q7. a. What are the main objectives of a project final report?
b. What all elements should be included in an ideal project final report?
Ans. a. The following are some of the main objectives of a project final report:
 Stating the objectives and key deliverables of the project
 Mentioning the project plan
 Elaborating the techniques adopted for implementing the plan
 Outlining the administrative and managerial practices
 Acknowledging the performance of the key personnel
 Evaluating the performance of the project with respect to the desired objectives
 Providing key learning from the project
 Mentioning suggestions for future projects
b. An ideal project final report should contain the following:
 Executive Summary: Involves a brief overview of the entire project. Executive summary provides
concise information about the need of the project, the implementation process, and the final outcome.
 Background: States the main reasons for undertaking the project.
 Objectives of the Project: Refer to the desired results of the projects. The objectives of the project
mention the expected outcome of the project. The objectives of the project act as a working guideline
for project team members. If the implementation of a project is not directed towards the fulfillment of
the objectives, the project would fail to satisfy the stakeholders.
 Methodology: Signifies the implementation strategy of the project. This part of the final report states
the entire implementation process of the project in details.
 Techniques Adopted in the Project: Refers to various methods adopted for planning, forecasting,
scheduling, allocating resources, and managing risk. If the followed techniques were efficient and
effective, the project manager recommends the techniques for future projects.
 Performance of the Project: Includes the most essential information of the project. The
performance report of the project provides a clear picture about whether the desired objectives have
been fulfilled or not. A project is considered to be successful, if it meets the desired goals and deliverables
in the project. The stakeholders of the project are most interested in performance of the project.
 Performance of the Administration: Signifies the administrative practices that helped in the
successful completion of the project or practices that need to be modified. Based on the project final
report, administrative processes may be considered for modifications in the future projects.
 Performance of the Team: Indicates the contribution made by the personnel involved in the
project. The project manager identifies and mentions the names of the personnel who had major
contribution in the success of the project. The project manager is also supposed to identify the
underperformers. The performance report of the team is a useful guideline for assigning responsibilities
in the future projects.
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 Key Learning and Recommendations: Imply the overall experience of the project. The leanings
may be related to different aspects of the project, such as management of personnel, team dynamics,
implementation process, forecasting techniques. It also elaborates the mistakes committed throughout
the project duration. In this section, the project manager is also supposed to mention his/her suggestions
for future projects. This section is mainly meant for the internal purpose of the organization.
Q8. a. The following table shows the Optimistic time, most likely time and pessimistic time of a
project:
Activities Optimistic(t0) Most Likely(tm) Pessimistic(tp)
A 3 5 5
B 12 14 15
C 4 5 6
D 1 1.5 2
E 1 1.5 3
F 2 3 4
G 3 5 8

Calculate the expected time of each of the activities of the project. (b) Suppose the normal time
and crash time of an activity is 7 days and 3 days respectively. Find out the incremental cost of
the activity if the normal cost and crash cost of the activity are ` 13000 and ` 18000 respectively.
Ans. a.
Activity Optimistic(t0) Most Likely(tm) Pessimistic(tp) Expected time(te))
=(t0 +4tm + tp)/6
A 3 5 7 5
B 12 15 18 15
C 4 5.5 10 6
D .5 2 3.5 2
E 1 1.5 5 2
F 2 3 4 3
G 2 5 8 5

b. The incremental cost of the activity would be = ` (18,000-13,000)/(7-3) = 5000/4 = `1250