Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MFC
SEMESTER-II
Subject Name
Study COUNTRY
Roll Number (Reg.No.)
Student Name

:Project Planning Appraisal and Control

: Zambia
: MFC001412014-2016002
: DERICK MWANSA

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates and need to be
submitted for evaluation by Amity University.
f) The students have to attached a scan signature in the form.

Signature :
Date
:

_______________
____________________
________________30/11/2015_________________

( ) Tick mark in front of the assignments submitted

Assignment
Assignment B
Assignment C
A

Project Planning Appraisal and Control

ASSIGNMENT A
Question 1
Answer.
YEAR
1 New Machine Cost

(22.00)

2 Annual Revenue

5.00

5.00

5.00

5.00

5.00

3 Decrease in operational Costs

1.10

1.10

1.10

1.10

1.10

(3.17)

(1.90)

(1.14)

2.93

4.20

4.96

(0.59)

(0.84)

(0.99)

2.34

3.36

3.97

4 Depreciation (W1)

(8.80)

5 Profit Before Tax (PBT)

(2.70)

6 Tax 20%

0.54

7 Profit After Tax (PAT)

8 Net Salvage: Old Machine
9

Net Salvage: New Machine

10

Initial Investment(1)

(2.16)
6.00

(5.28)
0.82
(0.16)
0.66

6.00
(22.00)

11 Operating Cash In-flows (7+4)

6.64

12 Terminal Cash Flows (8+9)

6.00

5.94

5.51

5.26

5.11
6.00

13 Net Cash Flow(10+11+12)

14 Discount Factor @ 17%

(22.00)
1.00

12.64
0.855

5.94 5.51
5.26
11.11
0.731
0.624
0.534 0.456

15 Present Value
16 Net Present value

(22.00)

10.81
4.46

4.34

3.44

2.81

Conclusion
The positive net present value is an indication that the new machine will add value to the
firm; therefore Precision Engineering should replace the old machine with a new one.

5.07

The table below shows depreciation charges from year 1 through to year 5
Year
0 Investment
1 Depreciation @40%
Writing Down Value (WDV)
2 Depreciation @40%
Writing Down Value (WDV)
3 Depreciation @40%
Writing Down Value (WDV)
4 Depreciation @40%
Writing Down Value (WDV)
5 Depreciation @40%
Writing Down Value (WDV)

22.00
(8.80)
13.20
(5.28)
7.92
(3.17)
4.75
(1.90)
2.85
(1.14)
1.71

ASSIGNMENT A
Question 2
Answer.
Part A
The cash flows for investment proposal from the long term funds point of view are
cash flow streams which reflect the contributions made and benefits receivable by
equity shareholders for the use of funds from long term lenders. They are divided into
3 components:

Initial Investment:

Long Term funds committed to the Project; Fixed Assets + Working Capital Margin

Operating Cash Flows:

Profit after Tax (PAT) + Depreciation + Other Non-Cash charges + Interest on Term
Loans (1-TR)

Terminal Cash Flow:

Net Salvage Value of Fixed Assets + Net Recovery of Working capital Margin

Part B
YEAR
1 Total Funds Invested
2 Revenue
3 Cost of Production
4 Depreciation(W1) (i) Buildings
(ii) Plant and machinery @ 33%
(iii) other fixed assets @33%
5 Interest: (i) Term Loan @16%
(ii) Bank Loan @ 18%
6 Profit Before Tax (PBT)
7 Tax 30%
8 After Tax (PAT)
9 Preferred Dividends
10 PAT & Preferred Dividends
11 Salvage: Plant and Machinery
: Other Fixed assets
: Land
:Building
12 Net Salvage Value of W/Capital
13 Repayment of Term Loan
14 Repayment of Bank Loan
15 Initial Investment(1)
16 Operating Cash In-flows [10+4+5(1T)]
17 Terminal Cash Flows [11+12+13+14]
18 Net Cash Flow[15+16+17]
19 Discount Factor @ 20%

0
(1,390.00)

20 Present Value
21 Net Present value

1,000.00
(700.00)
(4.00)
(165.00)
(33.00)
(48.00)
(61.20)
(11.20)
3.36
(7.84)
(7.84)

1,200.00
(840.00)
(4.00)
(110.55)
(22.11)
(48.00)
(61.20)
114.14
(34.24)
79.90
(30.00)
49.90

1,500.00
(1,050.00)
(4.00)
(74.07)
(14.81)
(48.00)
(61.20)
247.92
(74.38)
173.54
(30.00)
143.54

1,500.00
(1,050.00)
(4.00)
(49.63)
(9.93)
(48.00)
(61.20)
277.24
(83.17)
194.07
(30.00)
164.07

1,500.00
(1,050.00)
(4.00)
(0.76)
(20.15)
(48.00)
(61.20)
315.89
(94.77)
221.12
(30.00)
191.12
100.00
80.00
100.00
450.00
(300.00)
(340.00)

0 267.32

259.72

309.59

300.79

(1,390.00) 267.32
1.000
0.833

259.72
0.694

309.59
0.579

300.79
0.482

289.20
90.00
379.20
0.402

(1,390.00) 222.68

180.25

179.25

144.98

152.44

(1,390.00)

(510.40)

WORKINGS
Depreciation: i) Plant and Machinery
YEAR Investment
1 Depreciation @33%
Writing Down Value (WDV)
2 Depreciation @33%
Writing Down Value (WDV)
3 Depreciation @33%
Writing Down Value (WDV)
4 Depreciation @33%
Writing Down Value (WDV)
5 Balancing Charge
Writing Down Value (WDV)

500.00
(165.00)
335.00
(110.55)
224.45
(74.07)
150.38
(49.63)
100.76
(0.76)
100.00

ii) Other Fixed Assets

YEAR Investment
1 Depreciation @33%
Writing Down Value (WDV)
2 Depreciation @33%
Writing Down Value (WDV)
3 Depreciation @33%
Writing Down Value (WDV)
4 Depreciation @33%
Writing Down Value (WDV)
5 Balancing Charge
Writing Down Value (WDV)

100.00
(33.00)
67.00
(22.11)
44.89
(14.81)
30.08
(9.93)
20.15
(20.15)
0.00

iii) Building 4% of acquisition cost on straight line is Rs.4 per year

a. To calculate the Internal Rate of Return (IRR)we estimate the second value of the
NPV at a lower discount rate say 10% and use the interpolation formula to calculate
the IRR

NPV at 10% discount rate will be

15 Initial Investment
(1,390.00)
16 Operating Cash In-flows [10+4+5(1-T)] 0
267.32
259.72
309.59
17 Terminal Cash Flows [11+12+13+14]
18 Net Cash Flow[15+16+17]
(1,390.00) 267.32
259.72
309.59
19 Discount Factor @ 10%
1.000
0.909
0.826
0.751
20 Present Value
(1,390.00) 242.99
214.53
232.50
21 Net Present value
(243.47)
Extracted from 2(b) above but with new discount factor of 10%

= + [

] ( )

Where IRR= Internal rate of Return

L= Lower Discount Rate (10%)
H= Higher Discount Rate (20%)
= Net Present Value at a Lower Rate 243.47
= Net Present Value at a Higher Rate -510.40 (in b. above)

= 10% + [
= 10% + [
= 10% + [

243.47

] (20% 10%)

243.47(510.40)
243.47

] (10%)

243.47+510.40
243.47
266.93

] (10%)

= 10% + (0.91 10%)

= 10% 9.1%
= 0.9%

300.79
300.79
0.683
205.44

289.20
90.00
379.20
0.621
251.07

a. With the discount factor of 20% the project gives a negative net present value. Matrix
Pharma Ltd should not go ahead with the proposed investment.
If additional cash flow of Rs. 5 Crores arises by disposing off the project then the
terminal cash flows would go up by Rs. 5 Crores. The new NPV would therefore be
as follows

15 Initial Investment

(1,390.00)

16 Operating Cash In-flows [10+4+5(1T)]

267.32

259.72

309.59

300.79

17 Terminal Cash Flows [11+12+13+14]

18 Net Cash Flow[15+16+17]
19 Discount Factor @ 20%
20 Present Value

590.00
(1,390.00) 267.32

259.72

309.59

300.79

879.20

1.00

0.694

0.579

0.483

0.402

180.25

179.25

145.28

353.44

0.833

(1,390.00) 222.68

21 Net Present value

(309.10)
Extracted from 2(b) above with addition of 500 to terminal cash flows

The project would still not be worthwhile because the project NPV is still negative. Matrix
Pharma Ltd should still not go ahead with the investment

ASSIGNMENT A
Question 3
Answer.
(a)
Year 1
P
800 0.1
600 0.2
400 0.4
200 0.3

Year 2
P

0.1
80
0.3
210
0.4
240
0.2
100
630

CF
80
800
120
700
160
600
60
500
Mean
420
CF= Cash flow, P= Probability and
=
CF

289.20

CF
1200
900
600
300

Year 3
P
0.2
0.5
0.2
0.1

240
450
120
30
840

Determination of expected NPV

Present Value Factor
Year
Mean Cash flows
@5%
1
420.00
0.952
2
630.00
0.907
3
840.00
0.864
Total Present Value Cash inflows
Less cash Outflows
NPV

Total Present
Value
399.84
571.41
725.76
1,697.01
(1,500.00)
197.01

(b)
YEAR 1
(
)
(800 420)
(630 420)
(400 420)
(200 420)

(
)2
3802 = 144,400
2102 = 44, 100
202 = 400
2202 = 48, 400
)2
(
1

YEAR 2
(
)
(800 630)
(700 630)
(600 630)
(500 630)

(
)2
1702 = 144,400
702 = 44, 100
302 = 400
1302 = 48, 400
)2
(
2

YEAR 3
)
(
(1200 840)
(900 840)
(600 840)
(300 840)

)2
(
3602 = 129,600
602 = 3, 600
2402 = 57, 600
5402 = 291, 600
(
)2
3

(
)2
144,400 0.1 = 14, 440
44, 100 0.2 = 8, 820
400 0.4 = 160
48, 400 0.3 = 14520
37,940.00
37,940.00 = 194.78

(
)2
28, 900 0.1 = 2, 890
4, 900 0.3 = 1, 470
900 0.4 = 360
16, 900 0.2 = 3, 380
8100.00
8100.00 = 90

)2
(
129600 0.2 = 25, 920
3, 600 0.5 = 1, 800
57, 600 0.2 = 11, 520
291, 600 0.1 = 29,160
68, 400.00
68400.00 = 261.53

1 2
2 2
3 2
=
+
+
(1 + )2 (1 + )2 (1 + )2

37940
8100
68400
=
+
+
2
2
(1 + 0.05)
(1 + 0.05)
(1 + 0.05)2
37940
8100
68400
=
+
+
1.1025 1.1025 1.1025
= 103800.4535
= 322.18
(c)
a. The probability that the NPV will be Zero or Less

=

0 197.01
322.18
= 0.61
From the Z table
=

( 0.61) = 0.2709 27.09%

ASSIGNMENT A
Question 4
Answer.
Domestic Prices
Tradable Inputs

Rs.

Rs.

World Prices
Rs.

Rs.

Raw materials (world Price (600 1.25)

700

750

Consumables

150

200

Total

850

950

Non Tradable Inputs

Other overheads

100

100

Repairs and Maintenance

44

44

Adminstrative overheads

110

110

60

60

Selling Overheads
Total

314

314

Total Inputs

1164

1264

Sales realization

1500

1500

336

236

Value Added

()

100

336236
236

100

100

= 236 100
= 0.42 100
= 42%
Domestic resource Cost (DRC)
= ( + 1)

 = (0.42 + 1) . 45
= 1.42 . 45
= . .
The effective rate of protection (ERP) of 42% means that the value added at domestic prices
to manufacture spices would have been higher by 42% if the price of imported inputs were
not distorted through policy intervention of 25% tariff. The Domestic resource cost of
Rs.63.90 is the spending required by M/S Global Spices to generate a saving of $1. The ERP
assumes that the domestic prices and the world prices are not equal.
ASSIGNMENT A
Question 5
Answer.
A preliminary appraisal involves an initial specification of the nature and objectives of the
project and of relevant background circumstances economic, social and legal.
In terms of format a preliminary appraisal should include a clear statement of the needs
which a project is designed to meet and the degree to which it would aim to meet them. It
should identify all realistic options, including the option of doing nothing and, where
possible, quantify the key elements of all options. It should contain a preliminary assessment
of the costs and gains of all options choose the preferred one and make a judgement on
whether its gains (the net present value) are sufficient to warrant incurring its costs.
On the basis of the preliminary appraisal, the Sponsoring company or government agency
should decide whether formulating and assessing a detailed appraisal would be worthwhile or
whether to drop the project. A recommendation to undertake a detailed appraisal should state
the terms of reference of that appraisal.

ASSIGNMENT B
Question 1
Answer.
In the question the decision variables will be 1, 2 , 3,. , 10
Additionally, two other decision variables are required as follows:

11 is the decision variable to represent the delay of project 2 by one year.

12 is the decision variable that represents the combination of projects 3 and 7. 12 will be
as follows:
Project

Cash outflow
(Year 1)
37.8
[90%of (23+19)]

12

Cash outflow
(Year 2)
65.7
[90%of (28+45)]

Cash outflow
(Year3)
10.8
[90%of (5+7)]

NPV
38.1
[112%of (20+14)]

The integer linear programming model will be developed as follows:

Maximise:
+ + + + + + + + + + . +
.

Subject to:
+ + + + + + + + + + + .

+ + + + + + + + + +
+ .
+ + + + + + + + + + + .

Project interrelationships

a. Of projects 3, 4 and 8, at most two can be accepted.

8 3 + 4

b.

Projects 5 and 9 are mutually exclusive.

5 + 9 1

c.

Project 6 cannot be accepted unless both projects 1 and 10 are accepted.

26 1 + 10

d.

Project 2 can be delayed by a year. Though the cash flows required will be the same,
the net present value will drop by 50%.

2 + 11 1
e. Projects 3 and 7 are complimentary. If the two are accepted together, the total cash
flows will be reduced by 10% and net present value will be increased by 12%.

3 + 7 + 12 1

ASSIGNMENT B
Question 2
Why Conflicts arise between two or more mutually exclusive projects? Analyze the
situations where conflicts may arise and suggest how these conflicts can be resolved.
Answer.
Mutually exclusive projects are projects in which acceptance of one project excludes the
others from consideration. In such a scenario the best project is accepted. Net Present Value
(NPV) and Internal Rate of Return (IRR) conflict, which can sometimes arise in case of
mutually exclusive projects, becomes critical. The conflict either arises due to the relative
size of the project or the cash flow pattern of the projects may differ. That is, the cash flows
of one project may increase over time, while those of others may decrease or vice versa. Still
conflict arises because projects may have different expected lives.
Brigham and Ehrhardt (2008:386) states when either timing or size differences are present,
the firm will have different amounts of funds to invest in the various years, depending on
which of the two or more mutually exclusive projects it chooses. For example if one project
costs more than the other, then the firm will have more money at time = 0 to invest
elsewhere if it selects a smaller project. Similarly for projects of equal size one with larger
early cash inflows provides more funds for reinvestment in the early years. Given this
situation the rate of return at which the funds should be reinvested is a critical issue. The
NPV and IRR methods give conflicting ranking to mutually exclusive projects. In the case of
independent projects ranking is not important since all profitable projects can be accepted.
Ranking of projects, however, becomes crucial in the case of mutually exclusive projects.
Since the NPV and IRR rules can give conflicting ranking to projects, one cannot remain
indifferent as to the choice of the rule. The NPV method implicitly assumes that the rate of
return at which cash flows can be reinvested is the cost of capital whereas IRR method
assumes that the firm can reinvest at the IRR. The best assumption is that the projects cash
flows can be reinvested at the cost of capital, which means that the NPV method is more
reliable. Brigham and Ehrhardt (2008:387) assert that when evaluating mutually exclusive
projects especially those that differ in size and timing, the NPV should be used.

ASSIGNMENT B
Question 3
Write a note on lending norms and policies of the institutions.
Answer.
Prudent management and administration of financial institutions including establishment of
sound lending norms and policies are of vital importance if the institutions are to be
continuously operated in an acceptable manner. Lending norms and policies should be clearly
defined and set forth in such a manner as to provide effective supervision by the directors and
senior officers. The board of directors of every financial institution has the legal
responsibility to formulate lending norms policies and to supervise their implementation.
Therefore supervisors of financial institutions such as the central institutions should
encourage establishment and maintenance of written, up to date lending norms and policies
which have been approved by the board of directors. These norms and policies should not be
a static document, but must be reviewed periodically and revised in the light of changing
circumstances surrounding the borrowing needs of the customers as well as changes that may
occur within the institution itself. To a large extent, the economy of the community served by
the institution dictates the composition of the loan portfolio. The widely divergent
circumstances of regional economies and the considerable variance in characteristics of
individual loans preclude establishment of standard or universal lending policies. There are,
however, certain broad areas of consideration and concern that should be addressed in the
lending policies of all institutions regardless of size or location. These include the following,
as minimums:

General fields of lending in which the institution will engage and the kinds or types of
loans within each general field;

Lending authority of each loan officer;

Lending authority of a loan or executive committee, if any;

Responsibility of the board of directors in reviewing, ratifying, or approving loans;

Guidelines under which unsecured loans will be granted;

Guidelines for rates of interest and the terms of repayment for secured and unsecured
loans;

Limitations on the amount advanced in relation to the value of the collateral and the
documentation required by the institution for each type of secured loan;

Guidelines for obtaining and reviewing real estate appraisals as well as for ordering
reappraisals, when needed;

Maintenance and review of complete and current credit files on each borrower;

Appropriate and adequate collection procedures including, but not limited to, actions
to be taken against borrowers who fail to make timely payments;

Limitations on the maximum volume of loans in relation to total assets;

Limitations on the extension of credit through overdrafts;

Description of the institution's normal trade area and circumstances under which the
institution may extend credit outside of such area;

Guidelines, which at a minimum, address the goals for portfolio mix and risk
diversification and cover the institution's plans for monitoring and taking appropriate
corrective action, if deemed necessary, on any concentrations that may exist;

Guidelines addressing the institution's loan review and grading system (Watch list);

Guidelines addressing the institution's review of the Allowance for Loan and Lease
Losses (ALLL); and

Guidelines for adequate safeguards to minimize potential environmental liability.

The above are only as guidelines for areas that should be considered during the loan policy
evaluation. Management should develop specific guidelines for each lending department or
function.

CASE STUDY
A new company incorporated recently in Andhra Pradesh is in the processing of setting
up a 10 million tones per annum capacity cement project and has appointed a new
project manager to
study various aspects of project appraisal in respect of the
proposed cement project. Put yourself in the place of the project manager and present
the appraisal process covering all the aspects.
Answer.
Appraising a project means reviewing and evaluating the project for feasibility and costeffectiveness. It involves understanding and approving the project concept, which explains
what problem or need, is to be addressed and what solution is required to implement it. This
Project Appraisal process is designed to help Andhra Pradesh, a new company incorporated
recently and in the process of setting up a 10 million tons per annum capacity cement project,
to assess and justify the viability of this proposed investment. Appraisal process involves a

careful checking of the basic data, assumptions and methodology used in project preparation, an
in-depth review of the work plan, cost estimates and proposed financing, an assessment of how
the project will be organized and management aspects and finally the viability of project.
It is mandatory for the Andhra Pradesh Company to undertake project appraisal or at least give
details of financial, economic and social benefits of the Cement plant. On the basis of such an
assessment, a judgement will be reached as to whether the 10 million tons per annum capacity
cement project is technically sound, financially justified and viable from the point of view of the
economy as a whole.
The starting point for appraisal is that Andhra Pradesh Company should provide a detailed
description of the project, stating clearing the local and even international needs for cement
the company aims to meet. Appraisal helps show if the project is the right response and
highlight what the project is supposed to do and for whom. The appraisal should help show
that a project is consistent with the objectives of the relevant funding program and with the
aims of the local partnership. The appraisal will help make links between Andhra Pradesh
Company project and other local programs and projects. Local consultation may help
determine priorities and secure community consent and ownership.

More targeted

consultation, with potential project users, may help ensure that project plans are viable. A key
question in appraisal will be whether there has been appropriate consultation and how it has
shaped the project. Options analysis is concerned with establishing whether there are
different ways of achieving objectives.

This is a particularly complex part of project

appraisal, and one where guidance varies. It is vital though to review different ways of
meeting local need and key objectives.

Project appraisal process includes technical, economic, financial, social and environmental
analyses.
Technical analysis of a project is aimed at ensuring the following:

To confirm the source of the project proposal, nature of the studies including
feasibility studies undertaken before the proposal and the nature of decisions taken by
all relevant authorities involved

That the problem or the need to be resolved by the project has been clearly stated.

That the project has been clearly spelled out with the correct technical design details
such as size, location, timing and technology

That the required materials have been correctly determined and their source identified

That the costs of the project have been clearly established, expected product prices
projected and payment modalities and schedules agreed to.

The economic appraisal gives the costs and benefits of a project these costs and benefits are
estimated through the application of profitability tools like Net Present Value (NPV), internal
rate of return (IRR), Pay Back Period and Incremental Profit are used to estimate the viability
of the project.
Financial Analysis takes a hard look at the funding sources for the project both in terms of
completing the project and for its sustained operation. This analysis should question if;

The Andhra Pradesh Company would fund the project from internal resources?

The Andhra Pradesh Company would fund the project from external resources?

The external resources would be borrowed funds?

If the funds are to be borrowed, would the Andhra Pradesh Company be able to pay
back the loan with accrued interest?

Would the external resources be a grant from the central government or from any
other source?

Would the Andhra Pradesh Company co-fund the project with an outside donor,
whether it is a central government or another development partner?

Would effective cost recovery mechanisms aimed recouping the project costs be put
in place?

Would financial management modalities be put in place to record the transactions

during implementation and operation of the project? Documents could include
cashbook, assets register, bank statements, balance sheet (accruals accounting),
income statements (or receipt and payment schedules).

The Environmental Analysis is aimed at ensuring that the project complies with the various
environmental requirements as administered by the host country such as the Environmental
Resource Management (EMA). Specifically, the project should comply with the provisions of
the National Environment Statute and the Environmental Impact Assessment. Environmental
aspects that projects would have to address include;

Public health and occupational safety

Control of air, water and land pollution

Management of renewable natural resources (plants and animals)

Efficient use of natural resources through multiple use, recycling and erosion control

Conservation of unique habits (forests, game reserves) for rare species and cultural
preservation

The validity of the planners assumptions about the social conditions is tested through social
analysis. Where necessary, adjustments should be made so that the project goals are
expressed in terms that have more meaning for both the project population and the
implementing agencies. Social analysis focuses on four areas indicated below;

The social-cultural and demographic characteristics of the project population its

size and social structure, including ethnic, tribal and class composition

How the project population has organized itself to carry out productive activities,
including the structure of households and families, availability of labour, ownership
of land and access to and control of resources

The projects cultural acceptability; in other words, its capacity both for adapting to
and for bringing about desirable changes in peoples behaviour and in how they
perceive their needs

The strategy necessary to elicit commitment from the project population and to
ensure

their

sustained

participation

from

design

through

to

successful

implementation, operation and maintenance

When the project appraisal is done and report is compiled it is then submitted to the senior
management for review and approval. The managers review the appraisal and in case there
are any misunderstandings or gaps in the appraisal they can return the document back for
revising. When all the revisions and corrections are done, the document is approved and
signed off and the project steps to the next phase - Planning.

ASSIGNMENT C
Multiple Choice
1
2
3
4
5
6
7
8

D
E
C
E
E
D
B
A

9
10
11
12
13
14
15
16

D
B
C
A
D
D
A
C

17
18
19
20
21
22
23
24

B
E
D
B
A
E
B
C

25
26
27
28
29
30
31
32

C
D
E
A
B
C
A
E

33
34
35
36
37
38
39
40

E
D
E
C
C
A
A
E