Model Question Paper-III

Q1. a. Explain the various knowledge areas of project management

Ans. a. The various areas of knowledge management are as follows:
 Project Integration Management: Includes the processes that ensure proper coordination of
various elements of a project, which are as follows:
 Project Plan Development: Refers to creating uniform and reliable documents by combining
and organizing all project plans
 Project Plan Execution: Refers to implementing a project plan by performing the activities
involved in a project
 Integrated Change Control: Refers to synchronizing any changes across the whole project
 Project Scope Management: Consists of processes that ensure inclusion of only necessary activities
required to complete the project successfully. These processes can be classified as follows:
 Initiation: Refers to the approval of the project
 Scope Planning: Includes preparation of a scope statement for future project decisions
 Scope Definition: Identifies and defines the scope of the project
 Scope Verification: Refers to the formal acceptance of the defined project scope
 Scope Change Control: Refers to the area of control in which changes can be implemented
 Project Time Management: Takes into account the processes that ensure timely completion of a project.
Project time management includes the following activities:
 Activity Definition: Refers to identifying and defining the project activities required to be executed to
produce the desired outcome
 Activity Sequencing: Refers to establishing and documenting the relationship among the various
activities of the project
 Activity Duration Estimating: Refers to estimating the time period required to perform individual
activities or tasks
 Schedule Development: Refers to framing the schedule for the project on the basis of activity
duration and sequence
 Schedule Control: Refers to controlling the changes in the project schedule
 Project Cost Management: Represents the processes that ensure project completion within the
approved budget. Project cost management includes the following activities:
 Resource Planning: Estimates the quality and quantity of the resources required to perform various
activities in a project
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 Cost Estimation: Refers to evaluating the overall cost of the project

 Cost Budgeting: Refers to assigning the budget to individual activities in a project
 Cost Control: Refers to managing all the activities of a project within the given budget
 Project Quality Management: Ensures that the project satisfies the needs for which it has been
undertaken. Project quality management includes the following activities:
 Quality Planning: Helps in identifying what and how quality standards are to be met for a project.
 Quality Assurance: Traces the project performance to ensure that the project would meet the desired
quality standards.
 Quality Control: Helps in comparing the actual performance of the project with the set standards to
identify performance gaps and develop measures to overcome these gaps.
 Project Human Resource Management: Ensures the efficient utilization of people involved within the
project. Project human resource management includes the following:
 Organizational Planning: Helps in identifying, documenting, and assigning the roles and
responsibilities of different people involved in the project
 Staff Acquisition: Refers to obtaining the workforce required to perform various activities of the
project
 Team Development: Refers to enhancing the skills of the people involved in the project to make
them efficient
 Project Communications Management: Includes the processes that ensure timely and suitable
creation, compilation, distribution, and storage of project information. Project communications
management includes the following:
 Communications Planning: Identifies the communication requirements of the stakeholders and
recognizes the ways of informing the concerned persons
 Information Distribution: Refers to sharing of information with the stakeholders on a regular basis
 Performance Reporting: Specifies that the information about the performance of the project should
be first gathered and then distributed among various departments
 Administrative Closure: Specifies that the development, collection, and sharing of information
should be done to formally close the phase or project
 Project Risk Management: Involves the processes that maximize the likelihood of positive outcomes and
minimize the likelihood of adverse outcomes. Conceptually, risk management is the systematic process of
identifying, analyzing, and responding to various risks related to a project. Project risk management includes
the following:
 Risk Management Planning: Determines how to deal with the risks associated with the project
 Risk Identification: Refers to recognizing the potential risks associated with a project and detailing
the various aspects of these risks.
 Qualitative Risk Analysis: Identifies the types of risk involved in a project. This helps the
organization in determining the impact of risk on the project.
 Quantitative Risk Analysis: Assesses the risks on the basis of their probability. It also calculates the
effects of risk on project objectives.
 Risk Response Planning: Establishes the course of action and techniques to mitigate the threats
from risks.
 Risk Monitoring and Control: Refers to recognizing potential new risks, implementing risk
mitigation plans, and assessing their effectiveness throughout the project life cycle.
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 Project Procurement Management: Includes the processes that ensure procurement of goods and
services from outside to accomplish the project objectives. Project procurement management includes the
following:
 Procurement Planning: Establishes and frames the procurement plan
 Solicitation Planning: Determines the potential sources of the procurement and writes the product
requirements in detail
 Solicitation: Invites appropriate quotations, tenders, bids, offers, or proposals from the various sellers
for the procurement of project requirements
 Source Selection: Identifies and selects the most suitable seller from the potential sellers
 Contract Administration: Establishes the contractual relationship with the seller
 Contract Closeout: Settles and completes the contractual agreement accompanied by the declaration
of any open item
Q2. a. A successful human relations system is essential for the successful execution of a project.
What are the problems and challenges, a project manager is called upon to handle?
Ans. a. A project manager is required to handle the following problems and challenges:
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
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
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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.
 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.
Q3. Write short note on the following:
a. Termination by Integration
b. Demand Forecasting
c. Resource Levelling
Ans. a. Termination by Integration: Termination by integration inndicates the type of termination in which
the output of the project is integrated to the operating system of the organization. The deployed resources
are redistributed in the parent organization. For example, a manufacturing organization is planning to
install a new machine to enhance its productivity. After installation, the machine becomes a part of the
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entire manufacturing facility of the organization. In such a case, the formal termination of the installation
project is known as termination by integration. In similar cases, when an organization implements any
software package in the organization, the implementation project ends after integrating with the existing
system of the organization.
b. Demand Forecasting: An organization uses the market information collected from different sources to
forecast the demand of its products. Demand forecasting involves estimating the sales of a particular product
in future. The organization predicts the demand of products before undertaking any project. It also collects
data from its different departments, such as marketing, production and operations, sales, and finance, to
estimate the demand of products. The concluding demand forecast is the consent of all the participating
managers involved in the project. The project manager can also involve the planning group composed of
people from the concerned departments, for forecasting the demand. The demand forecasting can be done
by using various approaches. The approaches of demand forecasting are basically grouped into two
categories, qualitative and quantitative
c. Resource Leveling: Requirement of resources is not same throughout the entire duration of the project.
Sometimes, the demand for a particular resource can be more than the availability of resources. Generally, a
project manager needs to maintain a constant requirement of resources. In addition, he/she always strives to
make the efficient utilization of resources, which, in turn, minimizes the idle time. Resource leveling involves
ensuring that the demand of resources does not exceed the availability of resources. The requirement of
resources should be constant, so that the project can progress smoothly. Similar to project crashing, resource
leveling also involves reallocation of resources. However, in crashing, the objective is to minimize the
duration of the project, whereas in resource leveling, the objective is to maintain the constancy of resource
utilization.
The resource leveling graph can be used for comparing demand and availability of resources. The starting time
of the activities in a project can be adjusted for leveling the requirement of resources throughout the life of a
project. Each individual resource can be utilized on a daily basis. Sometimes, the resources are not adequate as
per their demand. In such a case, there is a mismatch between the demand of the resources and the actual
available resources
Q4. Suppose that project A costs ` 25000 at present. The project is expected to generate cash inflows
of ` 9000, ` 8000, ` 7000, ` 6000 and ` 5000 respectively at the end of every year for the next five
years. Suggest whether the project should be selected or not (Assume a 10 percent cost of
capital)
Ans. NPV of project A = {9000/ (1+0.10) + 8000/ (1+0.10)2 + 7000/ (1+0.10)3 +6000/ (1+0.10)4+5000/ (1+0.10)5}
– 25000
= {8181.81+6611.57+5259.2+4098.08+3104.60}-25000
= {27255.26-25000)
= 2255.26
Therefore, we can see that the NPV of the project is greater than 0. Therefore, the project should be accepted.
Q5. Write short notes on the following:
a. Trade Credit
b. Customer Advances
c. Installment Credit
Ans. a. Trade Credit: Trade credit is one of the traditional and common methods of raising short-term capital
from the market. It is an arrangement in which the supplier allows the buyer to pay for goods and services at
a later date in future. The decision to provide trade credit depends on the mutual understanding of both the
buyer and supplier. The supplier takes the decision to extend trade credit after taking into consideration
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creditworthiness, goodwill, and record of previous transactions of the buyer. The trade credit transactions
are not always done in terms of cash but also in terms of kinds, such as finished goods. For example, the
supplier may provide raw material, machines, finished goods, and services to the buyer instead of cash. The
advantages of trade credit are as follows:
 Improved Cash Inflows: Refers to the increased amount of cash inflows in an organization. Trade
credit enhances the cash inflows of the organization, which, in turn, facilitates the smooth flow of
business operations.
 Reduced Capital Requirement: Specifies that if an organization has trade credit arrangements with
its suppliers, it would require less short-term capital to operate the business. In this case, the payments to
the suppliers can be made within the pre-decided credit terms, after the receipt of payment from
customers. Thus, the business would continue to operate with lower capital requirements. In addition,
the organization can effectively use the short-term capital for other activities, such as maintaining
inventory.
 Increased Focus on Other Business Activities: Refers to the fact that trade credit facilitates an
organization to focus on other business activities, which require immediate funds. The examples of such
activities are procurement of raw materials and payment of salaries and wages.

b. Customer Advances: Customer advances may be defined as the part of payment made in advance by the
customer to the organization for the procurement of goods and services in the future. It is also called Cash
Before Delivery (CBD). The customers pay the amount of advance, when they place the order of goods and
services required by them. The method of procuring goods and services depends on the characteristic and
value of the product. Customer advances allow customers to defer their payment for some time and fulfill
their other obligation on priority.
The advantages of customer advances are as follows:
 Free from Interest Burden: Implies that the organization does not require paying any interest on
customer advances
 No Security Required: Implies that the organization does not need to keep any security to raise
customer advances.
 No Repayment Obligation: Refers to the fact that the organization is free to decide whether to
refund money, if the order is cancelled by customers.

c. Installment Credit: Installment credit is another source of short-term financing, in which the borrowed
amount is paid in equal installments with interest. It is also called installment plan or hire-purchase plan.
Installment credit is granted to the organization by the suppliers on the assurance that the repayment would
be done in fixed installment at regular intervals of time. It is mostly used to acquire long-term assets used in
production processes.
The advantages of installment credit are as follows:
 Convenient Mode of Payment: Implies that installment credit is an easy mode of payment as it divides
the burden of payment in easy installments paid at regular intervals.
 Protecting Blockage of Funds: Refers to the fact that installment credit helps the organization in saving
capital, which can be used for other productive activities. In helps the organization in purchasing goods and
services by making a part of payment.
 Facilitating Modernization: Implies that installment credit helps the organization in acquiring new
machines and technology even in the absence of sufficient funds for the time being.
 Quick Possession of Assets: Requires very little paperwork to transfer the ownership of assets from one
party to another
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Q6. Explain the different steps involved in demand forecasting process.

Ans. The demand forecasting process involves seven steps, which are shown in the following figure:

The steps involved in the demand forecasting process (as shown the figure) are explained as follows:
 Determining the Purpose of Forecast: Refers to the first step of demand forecasting. At this stage, the
objectives of forecasting are determined, which further helps in deciding the type of market information
required for demand estimation.
 Selecting the Matter to be Forecasted: Involves identifying the item whose demand is to be predicted.
 Deciding the Time Period of the Forecast: Involves establishing the time horizon for forecasting the
demand of the product. The forecasting may be short range, medium range, and long range depending on
the requirement of a project. Generally, the short-range forecasting is valid for one to six months, medium
range for 1 to 12 months, and long range forecasting extends beyond one year.
 Selecting the Forecasting Approach: Involves ascertaining the forecasting approach used for predicting
the demand. As discussed in the previous section, there are two approaches of demand forecasting,
qualitative approach and quantitative approach. The forecasting approach is selected on the basis of the
time duration of the project.
 Collecting Data: Involves gathering the relevant data and information for demand forecasting. The
forecasting is done on the basis of the comparative study of the past data and market trends.
 Generating the Forecast: Involves making the forecast by gathering, manipulating, and interpreting the
market information.
 Authenticating and Executing Results: Refers to the last step of demand forecasting in which the
validity of the generated forecast is determined. Further, the forecast is put into practice after its validation.
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Q7. a. What is the present value of perpetuity of the constant annual payment of ` 10,000 for a
period of seven years, if the rate of interest is 10 percent? (b) Calculate the future value of `
12,000 after 5 years at a 12% interest rate.
Ans. a. We know that the present value of an annuity A =A [1/ (1+i) + 1/ (1+i)2 +1/(1+i)3 +1/(1+i)n], where i
refers to the rate of interest and n refers to the number of periods.
Therefore, the present value of the amount would be = 10000 [1/ (1+0.10) + 1/ (1+0.10)2 +1/(1+0.10)3
+1/(1+0.10)4 +1/ (1+0.10)5 + 1/ (1+0.10)6 + 1/ (1+0.10)7 ] = 48,684.19
b. The formula of calculating the future value of a single cash flow is P (1+i) n , where P refers to the present
value of the amount, I refers to the rate of interest and n refers to number of periods.
Therefore, the future value of the amount would be ` 12000(1+0.12)5 = ` 21148.10
Q8. The expected cash flows of a project are:
Year Cash Flows(`)

1 -1,00,000
2 20,000
3 30,000
4 40,000
5 50,000
6 30000

The cost of capital is 12 percent.

Calculate the following:
(d) NPV (g) Pay-Back Period
Ans. a. The NPV of the project = {20,000/(1+0.12) +30,000/(1+0.12)2 +40,000/(1+0.12)3 +50,000(1+0.12)4
+30,000(1+0.12)5}-1,00,000
= (17,857.14+23,915.81+28,471.20+31,775.90 +17,022.81-1, 00,000)
= 19060.86
b. The initial outlay if the project is ` 1, 00,000. In the first there years the project yields
` (20,000+30,000+40,000) = 90,000
In the fourth year the project generates cash inflow of 50000. Therefore the payback period of the project is 3
and (10,000/50,000) years= 16/5 years.