Birla Institute of Technology & Science, Pilani

Distance Learning Programmes Division

Second Semester 2006-2007
Comprehensive Examination (EC-2 Regular)
Course No.
Course Title
Nature of Exam
Weightage
Duration
Date of Exam
Note:
1.
2.
3.
4.

Q.1

: ET ZC414
: PROJECT APPRAISAL
: Open Book
: 60%
: 3 Hours
: 01/04/2007 (FN)

No. of Pages
=2
No. of Questions = 9

Please follow all the Instructions to Candidates given on the cover page of the answer book.
All parts of a question should be answered consecutively. Each answer should start from a fresh page.
Mobile phones and computers of any kind should not be brought inside the examination hall.
Use of any unfair means will result in severe disciplinary action.

Three assets, designated as P, Q, and R have expected returns of 0.12, 0.18 and 0.24
respectively. The variances and co-variances are as follows:
P
Q
R
P
0.02
0.01
-0.03
Q
0.01
0.06
0.00
R
-0.03
0.00
0.08
Find out the expected return and standard deviation of a portfolio consisting of 40% of
funds in A, 30% of funds in B, and 30% of funds in C.
[5]

Q.2

Discuss basic principles and of biases in the cash flow estimation.

Q.3

VHL is considering an investment proposal involving an outlay of Rs. 4500000. The

expected cash flows (ECF) and certainty equivalent coefficients (CEC) are:
Year:
ECF:
CEC:

1
1000000
0.9

2
1500000
0.85

3
2000000
0.82

[5]

4
2500000
0.78

The risk-free interest rate is 5%. Calculate the NPV.

[5]

Q.4

Point out the difference between BCR and NPV criteria in the feasibility report. Between
the two, which one is better and in what situations?
[5]

Q.5

The following information is available on quantity demand and income level

Quantity demanded:
Q1 = 50
Q2 = 55
Income:
Y1 = 1000
Y2 = 1020
Find out income elasticity of demand

[5]

Describe the steps in Decision Tree Analysis.

[5]

Q.6

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ET ZC414 (EC-2 REGULAR)

SECOND SEMESTER 2006-2007

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Q.7

The return two projects X and Y under two different states of nature, which correspond to
different states of economy, are as follows:
Economic Growth
Return
X
Y
Strong (0.3)
.233
.100
Moderate (0.5)
.200
.150
Weak (0.2)
.150
.225
Find out variance, covariance, correlation and Beta of two returns.
[10]

Q.8

The expected cash flows of a project, which involves an investment outlay of Rs.
1000000, are as follows:
Year:
1
2
3
4
5
Cash Flows:
200000
300000
400000
300000
200000
The risk adjusted discount rate for this project is 18%. Is this project worthwhile? If
discount rate varies from 18% to 20% and 15%, who does again affect the feasibility of
the project?
[10]

Q.9

HPL Engineering is currently at its largest debt-equity ratio of 4: 5. It is evaluating a

proposal to expand capacity, which is expected to cost Rs. 4.5 million and generate afterrax cash flows of Rs. 1 million per year for the next 10 years. The tax rate for the
company is 25%. Two financing options are being looked at:

Issue of equity stock. The required return on the companys new equity is 18%. The
issuance cost will be 10%.
Issue of debentures a yield of 12%. The issuance cost will be 2%

What is NPV of the expansion projects and what will be the effect of weighted average
flotation costs.
[10]

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