Great Lake institute of Energy Management & Rsearch MBA (Power) Financial Aspect of Project Planning Assignment -2

Q-1 M/S XYZ has spent Rs. 60 Crores on a Project 4 years ago. The Project has

remaining life of 6 years. The cash flow forecasts for the balance life of six years are as follows

Year

Cash Flows (Rs. In Crores) 30 35 45 50 30 25

The salvage value of the Project if terminated immediately is Rs. 120 crores. A Third party has offered to buy the Project at Rs.175 crores. The discount rate is 12%. Please advice what should M/s XYZ do Solution We are assuming salvage value of the project, after 6 years from now, to be zero. Option 1 Scrap the project now NPV- Rs.120 crores Option 2 Sell the project NPV- Rs. 175 crores Option 3 Operate the project for another 6 years NPV- Rs. 148.18 crores (refer excel sheet)

Answer is Option 2

Q-2 ABC Project has the following cash flows and abandonment value over its useful life Period Cash Flows Abandonment Value 0 7500 1 2000 6200 2 2000 5200 3 2000 4000 4 2000 2200 5 years 2000 0

The Firms Cost of Capital is 10%.Determine the optimal time for project ABC to be abandoned. Refer the excel sheet for calculations
Option 1Abandon after 1st year NPV Option 2-- Abandon after 2nd year NPV 14955 15269

Option 3-- Abandon after 3rd year NPV

Option 4-- Abandon after 4th year NPV Option 5-- Operate for the useful life period NPV

15479
15342 15082

Answer is option 3.

Q-3 You are contemplating to buy a Project the cost of which has been quoted as Rs 100 Crores. The Estimated Cash flows of this Project are as follows Period Cash Flows 0 1 5 2 6 3 6.5 4 7.5 5 8.5 6 10 7 12 8 13 9 14 10 14+85

Rs 85 crores included in the last years cash flows represent the present value of cash flows that is expected to come beyond the tenth year Will you buy the Project and if not indicate the maximum price you can offer. Presume rate of interest at 18% Solution

No, we will not buy this project. Maximum Price-53 crores INR (Refer Excel Sheet for calculations) Q-4 A Project was developed on 15th.March, 2011 and is expected to be completed by 31st March. 2013. The Project is being reviewed on 15th.March, 2012 .Prepare performance Analysis report from the following data Description Total Budget Cost for the Entire Project Budget for all work packages Schedule to be completed = = Amount in crores 25.50 10.50 2.50 1.50 8,50 2.00 1.00 9.00 1.80 1.2 2.75

Budget for the portion of in process work scheduled be accomplished = Budget for the overheads for the period Budgeted Cost for work packages actually completed Budget applicable to the completed in process work Overhead Budget Actual Cost of work Completed Actual Cost of Completing the in process works Actual Overheads Additional Anticipated Cost for Completing the Project Solution Refer the excel sheet for calculations = = = = = = = =

Performance Analysis Report

Cost Variance=BCWP-ACWP Schedule variance in cost Terms=BCWP-BCWS Schedule Performance Indices (SPI) =BCWP/BCWS Cost Performance Indices= (CPI) =BCWP/ACWP Estimated Cost Performance Index=BCTW/ (ACWP+ACC) -0.5 -3 79% 96% 1.73

Project is running behind the schedule and only 79% of scheduled work is completed. Actual cost of work performed is slightly higher than the budgeted cost of work performed.
Q-5 Prepare Variance Analysis Report from the Following data and Give Probable reasons for favourable/unfavourable variance. Suggest remedies to avoid recurrence of these variances Description Land &Site Development Rupees in Crores Budgeted cost in the period Cumulative Budget to date Actual cost in the period Cumulative Actual Cost till date Solution 2.6 3.6 1.9 3.10 4.7 5.8 5. 2 5.72 Plant & Machinery

Q-6 ABC are owning a Project with the following cash flows Year 1 2 3 4 5 Net Cash inflows 50,000 60,000 70,000 85,000 70,000

The terminal value at the end of 5th.year is estimated to be RS3,00,00,which will yield capital gain of RS,1,00,00 over which tax at the rate of 40% is payable. Mr. A is willing to buy this Project for 6lacs.Will you advice ABC to divest the project or run it till the end of the 5th.year
Q-7

SCL limited is engaged in the manufacture of Power intensive products. As a Part of its diversification plans the company proposes to put up a wind mill to

Generate Electricity. The details of the Scheme are as follows: 1 Cost of the windmill, Rs.300 lacs 2 Cost of Land, Rs 15lacs 3 Subsidy from Govt. to be received at the end of first year of Installation, Rs. 15lacs 4 Cost of electricity will be Rs.2.25 per unit in year 1.This will increase every year by Re.0.25 per unit every year till year 3.After that it will increase every year by Re 0.50 till year 5 5 Maintenance cost will be Rs. 4 lacs in year 1 and the same will increase by 2 lacs every year 6 Estimated life 5 years 7 Cost of capital 15% 8 Residual value, 50 lacs. However land value will appreciate to Rs. 60 lacs at the end of 5 years. 9 Depreciation will be 100 % in the year 1 and the same will be allowed for the purpose of tax 10 As the winds mill are expected to work based on the velocity of the wind, the Electricity is expected to be on an average 30 % .Gross electricity generated at this level will be 20 lacs unit per annum;4% of which shall be committed to the state Electricity Board as per he Agreement. 11 Tax rate ,35% On the basis of the above information please advice the Company whether they Should go for this Project or Not.

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