PM0012 – Project Finance

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ASSIGNMENT

DRIVE WINTER	2013
PROGRAM/SEMESTER	MBADS (SEM 3/SEM 5) MBAFLEX/ MBAN2 (SEM 3) PGDPMN (SEM 1)
SUBJECT CODE & NAME	PM0012 – Project Finance
BOOK ID	B1238
CREDITS	4
MARKS	60

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

1 Write short notes on:

Classification of Investment Projects

Investment projects are classified into three categories on the basis, of the way they influence the investment decision process: independent projects, mutually exclusive projects and contingent projects.

Independent projects

An independent project is one, where the acceptance or rejection does not directly eliminate other projects from consideration or affect the likelihood of their selection. For example, if management plans to introduce a new product line, as well as, replace a machine which is currently producing a different product. These two

2 What it is a project proposal? What are its contents?

Answer:- Definition of project proposal, its purpose

Project proposals are those documents which are intended to present a plan of action, and list out the reasons for the necessity of the action with respect to the project to be executed. The project proposal1 should be in such a way that it convinces the readers in executing those actions. In most of the cases, this document is prepared either to serve an internal purpose or when somebody in the firm has an idea on the ways in which the firm can be profitable and resourceful. Before preparing a

3 MIT Training Ltd. is making an allowance for buying a new online learning system tofacilitate them to carry out the training they do for their corporate clients. The traininginstitute is looking at three different systems with a variety of functionality, and the costof each system is as follows:

System A System B System C

Rs 120,000 Rs 100,000 Rs 85,000

Even though they vary in functionality, however, they differ moderately in what theyoffer. Although they would all perform the jobs that the training institute is looking for,they would require the firm to run their systems very differently and so the expectedcash flows from each system are very different. The expected net cash flows for eachsystem are as follows:

Year System A System B System C

1 Rs 60,000 Rs 45,000 Rs 15,000

2 Rs 50,000 Rs 30,000 Rs 25,000

3 Rs 60,000 Rs 30,000 Rs 30,000

4 Rs 30,000 Rs 25,000 Rs 48,000

5 Rs 25,000 Rs 15,000 Rs 45,000

Calculate the payback period for each system by using the net cash flow data.Calculate the average rate of return for each system using the expected net cash flowdata in the case material.

Solution:-1. Calculate the payback period for each system by using the net cash flow data.

Payback period =Investment/ Cash Flow/year

[Answers: system A = 2.2

2. Calculate the average rate of return for each system using the expected net cash flow data in the case material.

4 Write short notes on

Flexibility valuation

In many projects there are chances where a project may follow a new path of action to obtain the end result. NPV fails to capture these typical paths. Where as the DCF models the investment considering the flexibility and staged nature of investment. The difference between these two valuation is the “value of flexibility” inherent in the project.

The two most common flexibility valuation tools

5 Explain some of the tools and techniques of Cost Management

Answer:- Reason why accurate estimation is required

Project Management has been practiced since early civilisation. Until 1900 civil engineering projects were normally managed by creative architects and engineers themselves. It was in the 1950s that organisations started to systematically apply project management tools and techniques to complex projects.

6 As there was intense power shortage in Karnataka due limited power generation in thestate, it became important to explore diverse types of power generation. As the statehad a mountainous terrain, getting renewable energy became an apt option. ABCenergy Ltd is one of the largest state owned energy generator and is committed toexploring a wind farm project. It found a suitable site before consulting with thecommunity. Then, it started shaping the project in order to meet the wishes andexpectations of the community during the process. The consultation started in the monthof May and full permission was granted within five days of the hearing. The work startedin the month of November.

There were quite a few challenges which were faced by the team. It includes working ina physically demanding environment and adhering to the needs of the landowners, inorder to meet the key project miles stones. Over 20 kilometres of roadways had to beconstructed and the installation of cabling had to be done. There were several streams,unsuitable oil and soil, and a pipeline that ran through the site. To carry out the aboveprocesses the ABC energy LTD estimated an extra amount of about Rs 3 crores. Theproject also faced force meajure risk like adverse weather conditions with the rainfall.The floods also caused problems.

The ABC Company and its consultants worked as team to meet the challenges and cutshorten on their expenditures to meet the budget. The extra fund of Rs 3 crores wasprovided by the government. A well defined project plan helped them to provide cleardirection and purpose. The efficient management team was committed to design andconstruct the project management practises to develop the plan. Daily managementmeetings were held, which helped the team to achieve the goals. As a result, the projectteam completed the project in five days ahead of the estimated timeline and they wereable to show it as a bench mark to the stakeholders.What were the challenges faced by the project team and how did they overcomeit?

Answer:-Rule 1: Make Risk Management Part of Your Project

The first rule is essential to the success of project risk management. If you don't truly embed risk management in your project, you can not reap the full benefits of this approach. You can encounter a number of faulty approaches in companies. Some projects use no approach whatsoever to risk management. They are either ignorant, running their first project or they are somehow confident that no

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