Question Paper

Project Management – I (241): April 2005

Section A : Basic Concepts (30 Marks)
• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.
< Answer
1. The difference(s) between go/no-go control systems and cybernetic control systems is/are given by: >
I. Informational inputs required for go/no-go control systems are not complex but the same is
complex for cybernetic control systems.
II. The latter is an automatic system and functions continuously, while the former can be put into use
only when the controller requires so.
III. All cybernetic control systems invariably contain a ‘human element’ while go/no-go control
systems may or may not.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (I) and (III) above (e) Both (II) and (III) above.

< Answer
2. One of the limitations of portfolio theory is that the number of inputs required is very high. The >
number of inputs required is:
(a) N standard deviations of returns, N proportions and N(N-1)/2 correlations
(b) N standard deviations of returns, N proportions and N(N+1)/2 correlations
(c) N correlations, N(N-2)/2 proportions and N(N+3)/2 standard deviations of returns
(d) N standard deviations of returns, N(N-2)/2 proportions and N(N+3)/2 correlations
(e) N(N+3)/2 standard deviations of returns, N(N-2)/2 proportions and N correlations.

< Answer
3. Sravan Leathers Ltd. invested Rs.90 crore in a recent project. The company has a projected uniform >
cash inflow of Rs.25 crore p.a. for ten years from this project. If the cost of capital for the company is
10.5%, at which rate should the company reinvest the intermediate cash flows so as to obtain the
modified NPV as Rs.64.03 crore?
(a) 11% (b) 12.50% (c) 14.20% (d) 16% (e) 17.45%.
< Answer
4. Which of the following sets of data do you need to calculate the value of call option as per Black and >
Scholes model?
I. Share price divided by PV of exercise price, Standard deviation times the square root of time (i.e.
period of maturity)
II. Share price divided by PV of exercise price, Standard deviation times the square root of time (i.e.
period of maturity), share price.
III. Exercise price, standard deviation of the continuously compounded rate of return on the stock per
period, standard deviation times square root of time (i.e. period of maturity).
IV. Share price, exercise price, period of maturity, normal distribution table.

(a) Only (I) above (b) Only (II) above

(c) Both (I) and (III) above (d) Both (I) and (IV) above
(e) Both (III) and (IV) above.
< Answer
5. A project requires an investment outlay of Rs.1,500 lakh from its promoters and generates post-tax >
cash inflow of Rs.240 lakh per annum, perpetually. The firm has a perpetual debt capacity of Rs.600
lakh at an interest rate of 12%. The opportunity cost of equity capital and the marginal tax rate for the
company are 15% and 35% respectively. The base-case NPV of this project would be
(a) Rs.73.33 lakh (b) Rs.75.00 lakh (c) Rs.89.00 lakh
(d) Rs.98.33 lakh (e) Rs.100.00 lakh
 < Answer
6. Which of the following statements is not true with regard to simulation? >
(a) The behavior of the variables affecting the problem can be described by using probability
distribution and the interrelationship between the variables can be expressed mathematically
(b) The models formulated, for simulation, can be used to perform sensitivity analysis or what if
analysis to study the impact of all the variables simultaneously
(c) The exercise of model building can be a very complex task, as it requires a thorough
understanding of the variables of the system as well as their logical relationships
(d) Simulation can be used to study problems, which are overtly risky or difficult to study in a real
life situation
(e) Simulation does not produce an optimal solution to the problem under study.
< Answer
7. Atithi Hotels Limited received the performance monitoring report from one of its continuing projects >
near Lava in West Bengal. It is found that cost performance index is 0.85 and the schedule
performance index is 0.65. If the budgeted cost of work schedule is 32.5% of the budgeted cost of total
work, then the ratio of BCTW and ACWP would be
(a) 3.31 (b) 3.85 (c) 4.02 (d) 4.34 (e) 4.52.
< Answer
8. To confront Chinese products eating up its share of the Indian market, Electronex is planning to invest >
Rs.34 million in a project of cheap digital diary. Existing market price of similar products lies between
the range of Rs.600 and Rs.700. The company did a sensitivity analysis and found the relationship
between price per piece and NPV in this range as 0.5P = 1.5N + 83 where P is the price of the product
and N is the NPV of the project in Rs. lakh. If the minimum accepted profitability index of this project
is 1.50, the minimum price to be set is
(a) Rs.635 (b) Rs.642 (c) Rs.660 (d) Rs.676 (e) Rs.687.
< Answer
9. Which of the following statements is/are true with respect to project staffing? >
I. Before making commitments to employees on the rewards to be given at the end of a project,
prior approval of the general management should be undertaken.
II. The personal choice of the selected employees should be considered i.e., whether they are
interested in working for the project.
III. A person expecting a promotion by the next month will be keen on being away from the
department for a year for an assignment in another department.
(a) Only (I) above (b) Only (III) above (c) Both (I) and (II) above
(d) Both (II) and (III) above (e) All of (I), (II) and (III) above.

< Answer
10. Which of the following statements is/are true with respect to project appraisal criteria? >
I. Accounting rate of return neither differentiates projects with respect to the size of the investment
required for each project nor considers the benefits over the entire life of the projects.
II. Accounting rate of return differentiates projects with respect to the size of the investment
required for each project and considers the benefits over the entire life of the projects.
III. Modified NPV method explicitly incorporates the assumption about how the cash inflows are re-
invested once they are received, and avoids any influence of the cost of capital on the cash inflow
therein.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (III) above (e) Both (II) and (III) above.
 < Answer
11. Which of the following statement(s) is/are true with regard to the method of life cycle costing for the >
purpose of project budgeting?
I. Life cycle costing process considers the total costs of acquiring and maintaining the production
system bought by a manufacturing company.
II. Life cycle costing process assumes that the life of the products like, cement is infinitely long.
III. It is the cheapest method of project budgeting and hence is suitable for all types of projects.
IV. The budgeting exercise should be repeated as the market parameters are changing.

(a) Only (I) above (b) Only (II) above

(c) Both (I) and (II) above (d) Both (I) and (IV) above
(e) Both (II) and (III) above.
< Answer
12. The projected cash flows from a project are as follows: >
Year 0 1 2 3

Cash flows –Rs.500 lakh Rs.260 lakh Rs.200 lakh Rs.250 lakh
If
unrecovered investment balances are calculated using a rate of 15%, what would be the final
investment balance?
(a) Rs.35.70 lakh (b) Rs.42.00 lakh (c) Rs.48.30 lakh
(d) Rs.63.41 lakh (e) Rs.72.92 lakh.
< Answer
13. Vishnu Glass Limited is setting up a plant in Hooghly, near Kolkata. It proposes to raise Rs.1.60 crores >
by a debenture issue. Face value of the debentures is Rs.100. The coupon rate is 12%. These
debentures are to be redeemed at the end of 8th year at par. Previously, the issue price was planned at a
price of Rs.75, but due to sudden drop in the market interest rate the company is pricing the same at
Rs.87.40. If the expected post-tax cost of the debenture to the company is 9%, the tax rate applicable is
(a) 55% (b) 52% (c) 46% (d) 44% (e) 41%.
< Answer
14. Shakti Ispat Ltd. has set up an alloy steel plant at a cost of Rs.434 crores during the last year. Cash >
inflow from the plant is expected to be Rs.50 crores by the end of this year and it has been estimated to
increase by 30% for the next two years and by 20% during the following year. Then, the company is
planning to sell this project as a going concern. If the cost of capital to the company is 11.50%, the
minimum acceptable divestment price is:
(a) Rs.210.31 crores (b) Rs.223.69 crores
(c) Rs.325.06 crores (d) Rs.334.00 crores (e) Rs.457.69 crores.
< Answer
15. The following information relates to a project network: >
Activity Time (days) Direct Cost (Rs.)
A–B 12 7,500
A–C 9 9,000
A–D 10 2,500
B–D 7 5,000
C–D 6 14,000 The indirect cost is
Rs.3,200 per day. Total cost of the project will be
(a) Rs.28,400 (b) Rs.38,000 (c) Rs.60,800 (d) Rs.98,800 (e) Rs.1,50,000.
 < Answer
16. A project manager faces uncertainty regarding how the economy may perform during the next year. >
According to the estimates available with him, five different states of the economy, the probability of
the occurrence of each state as well as the expected NPV corresponding to that particular state are
given in the following table.
NPV of the project
State of the Economy Probability
(in Rs. crore)
1 0.15 25
2 0.25 40
3 0.40 60
4 0.15 85
5 0.05 105 The semi-variance, as a
measure of risk, of the project’s NPV would be:
(a) Rs.2 55.75 crore2 (b) Rs.2 76.55 crore2
(c) Rs.2103.08 crore2 (d) Rs.2203.85 crore2 (e) Rs.2460.69 crore2.
< Answer
17. The projected cash flows from a project under consideration to MNM Ltd. are as follows: >

(Rs. in lakhs)

0 1 2 3
Initial Flow (450)
Operating Flow 130 172 32
Terminal Flow 53

The cost of capital to the company is 18%. If the project is accepted, there would be an opportunity to
make a follow-on investment after three years from now. The outlay required for the follow-on
investment is 1.8 times of the first investment. The PV of inflows is expected to be higher than that
from the first investment by 1.8 times. If the standard deviation of the cash flows from the follow-on
investment is 23.1% and the risk-free rate of interest is 8%, the call value is
(a) 7.50 % of asset value (b) 8.00% of asset value
(c) 8.50% of asset value (d) 9.00% of asset value (e) 10.60% of asset value.
< Answer
18. Which of the following layouts considers the smooth flow of the materials as well as the efficient >
performance of the required processes?
(a) General Functional Layout (b) Transport Layout (c) Utilities Layout
(d) Communications Layout (e) Organizational Layout.
< Answer
19. Suswasthya Ltd. is a company, well known in India as a healthcare service provider. Which of the >
following factors may be considered to be most critical one regarding the choice of location of the
service delivery point?
(a) Location of the market (b) Transportation (c) Availability of labor
(d) Availability of infrastructure (e) Intangible Factors.
< Answer
20. Mr. Mondal is a potato wholesaler at Nasik. The per capita consumption of potatoes per day is about >
200 grams. Currently, potatoes are being priced at Rs.6 per kg. The price elasticity of potatoes is 0.62.
Due to present short supply of potatoes Mr. Mondal decides to increase the price. If he can sustain a
reduced sales volume up to 10%, the maximum price he can set is (Round off your answer up to one
decimal only)
(a) Rs.6.60 per kg (b) Rs.7.10 per kg (c) Rs.7.80 per kg
(d) Rs.8.50 per kg (e) Rs.9.80 per kg.
 < Answer
21. XA and XB are two decision variables pertaining to the acceptance of Project A and Project B >
respectively, in an integer linear programming problem. If XA is less than or equal to XB, which of the
following statements is/are true?
I. They are mutually exclusive projects
II. They are complementary projects
III. Project A is contingent on Project B

(a) Only (I) above (b) Only (II) above

(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
< Answer
22. Which of the following is\are correct assumption(s) of the modern portfolio theory? >
I. Investors are risk averse although they prefer to maximize their utility.
II. Investors make their investment decisions on the basis of the expected return and standard
deviation of expected return.
III. Expectations of the investors in a particular market vary according to their ability to bear risk and
return expectations from a particular asset.
(a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above
(d) Both (II) and (III) above (e) All of (I), (II) and (III) above.
< Answer
23. Which of the following statements is true with respect to the scrubbing method of effluent treatment? >
(a) The air is allowed to pass slowly through a chamber where pollutants contents in the air settle
down gradually
(b) The air is passed through a porous media that prevents the pollutants from flowing further along
with the polluting air
(c) In this method, the solid as well as some of the gaseous pollutants may be eliminated by spraying
minute drops of water on the pollutants
(d) This method can eliminate even the larger pollutants by using screens and filters through the
application of the mechanical process
(e) This method uses suitable microorganisms in order to eliminate the pollutants like, proteins,
carbohydrates and fats by decomposing the same.
< Answer
24. Which of the following is the disadvantage of the Product organization? >
(a) There may be a tendency to ignore or neglect activities that are not directly within the domain
of the department.
(b) Coordination with other divisions is difficult and hence the possibility of conflict with them is
substantially high.
(c) Personnel are retained in the division even after their work is complete, thereby adding to idle
resources.
(d) The customer is not the focus of the activity, as all departments are concerned only with those
activities related to their functions.
(e) Top management gets less time for decision-making as well as strategy formulation.

< Answer
25. Which of the following is not true regarding Statement of Work (SoW) ? >
(a) The team members should take care to see that the SoW follows the Contract Work Break-down
structure to the utmost detail.
(b) SoW is generally prepared by key members of the project team as decided by the project
manager.
(c) Standard codes should be developed for materials, components and subsystems and all the
members should use standard codes only.
(d) When existing things are uncertain and are to be decided only in future, the procedure of making
decision under such circumstances should be specified only when things become certain.
(e) The SoW team should review estimates of the project cost in order to eliminate the non-essential
items that increase the total cost.
 < Answer
26. Which of the following statements is/are true with regard to the different methods of project >
termination?
I. In the Extinction method, a project that is completed successfully may be divested to some other
business entity at a negotiated price.
II. In the Inclusion method, the newly completed project is included as a separate division with the
parent organization while personnel posted in the project are allowed to return back to their
earlier positions.
III. In the method of Integration, the properties and functions of the project are distributed among the
existing departments while the people working for the project get a better focus in their earlier
departments.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
< Answer
27. Which of the following activities may be termed as an example of support activity with regard to value >
chain analysis?
(a) The storekeeper of Elgin Motors Ltd. received the components that are to be used in the assembly
lines, supplied by Sona Spares Ltd.
(b) The Production Manager of Axle Shop looks after the process of conversion of the billets to axles
that are to be sold to Indian Railways
(c) Ajay, the Sales Executive of Sharp Cutter, collected the payments for the goods delivered during
the last year
(d) Mohan, the Graduate Engineer Trainee of High Voltage Switchgear, is working hard to develop a
superior method of production that is highly cost effective
(e) Rohan, the Service Engineer of Yamuna Motors, is very busy repairing the defective trucks as
complained by the customers.
< Answer
28. Which of the following is not true about the Little-Mirrles approach and the UNIDO approach for >
social cost benefit analysis?
(a) One of the similarities between the two approaches is in calculation of accounting (shadow)
prices for foreign exchange savings and unskilled labor
(b) L and M approach measures costs and benefits in terms of consumption whereas the UNIDO
approach measures costs and benefits in terms of uncommitted social income.
(c) Both the approaches consider factor of equity
(d) L and M approach measures costs and benefits in terms of border prices whereas the UNIDO
approach measures costs and benefits in terms of domestic rupees.
(e) L and M approach considers efficiency, savings and redistribution together for analysis whereas
in UNIDO these considerations are looked into and done in different stages.
< Answer
29. Which of the following methods is not used to alleviate the problems created by the traditional type of >
organization structures with respect to a project?
(a) Hierarchical referral (b) Rules and procedures
(c) Participation (d) Direct contact (e) Appointing project controller.
< Answer
30. The existing textile companies of Kenya feel threatened due to a high possibility of the entry of >
multinational companies into the industry. One of the probable reasons of such a threat may be
(a) Their production volumes are high
(b) They have developed wide distribution channels spread throughout Kenya
(c) The capital required to set up a profitable venture is high
(d) The production cost of the existing players is high
(e) They enjoy a strong brand image.

END OF SECTION A
 Section B : Problems (50 Marks)
• This section consists of questions with serial number 1 – 5.
• Answer all questions.
• Marks are indicated against each question.
• Detailed workings should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

1. Texstyle Ltd. is considering an investment project that involves a current outlay of Rs.1,00,000, at a debt equity
ratio of 2:1. The expected life of the project is four years. The present cost of borrowing for the company is 10%
while the applicable tax rate is 46%. It is considering Silver Spring Ltd. as a proxy company, which has a debt-
equity ratio of 2 and an effective tax rate of 40%. The risk free rate is 6% and the expected return on the market
portfolio is 16%. The probability of the NPV of project cash flows being negative is 0.3264. The mean and
standard deviation of the cash flows are perfectly correlated. The mean of the cash flows are as given below:

Year Mean cash flow (in Rs.)

1 50,000
2 31,000
3 41,000
4 32,000
If the standard deviation of the NPVs of the cash flows is Rs.45,108,
you are required to calculate the asset beta of Texstyle Ltd. for the new investment project.
(9 marks) < Answer >
2. The economic planning department of Chhattisgarh is considering a proposal to build a road from a town. The
road would be 150 km long. So long this area used to be connected by river boat. The construction of the road will
cost Rs.700 crore and the annual maintenance charges will be approximately Rs.1 crore. The social discount rate is
8 per cent. The life of the project is estimated to be 50 years. The following effects are likely to result from the
completion of the proposed project:
•A saving of Rs.3 crore per year on the cost of shipping agricultural produce from the village and its surrounding
area.
•An additional 100,000 acres of land would be opened for development. Development would cost Rs.5000 per
acre and produce, after five years, crops worth Rs.15,000 per acre per year. The land will be settled by small
holders, who will move from other employments where their earnings average Rs.15,000 per year. An estimated
10,000 small holdings will be provided. Land clearing and drainage cost will be borne by the government, and
each settler will receive a grant of Rs.50,000 to assist him in meeting relocation costs. Prior to the time main
crop becomes established, other crops yielding Rs.5,000 per acre per year can be grown.
•Tax revenue from the area will increase by Rs.1 crore per year.
•Value of timber output will increase by Rs.5 crore by the end of the first year. But as soon as the land is
being cleared by the first year, it will reduce to Rs.1 crore per year thereafter.
•Once the road is constructed the boat operators are expected to stop their operations and sell the boats for
Rs.3 lakh. However, the labor are expected to be absorbed elsewhere at equivalent wages.
You are required to
(a) List the effects to be taken into account in the social cost benefit analysis.
(b) Find the NPV of the social costs and benefits.
(6 + 3 = 9 marks) < Answer >
3. Kolkata Paper Mills (KPM) uses three water tube boilers to supply steam to the digesters to prepare pulps for
manufacturing papers. The maintenance engineer of the company Mr. Chaturvedi suddenly observed large amount
 of leakages of steam from the water tubes of a boiler and hence recommended changing the water tubes. The
following activities are involved in the process of changing the water tubes:
Changing the Water Tubes of a Boiler (time in weeks)

Sl. No. Activities to tm tp

A Tube purging through sand blasting 2.00 2.50 4.00
B Removal of the Economizer, checking and rectification 3.00 4.00 7.00
C Loosening the position of the Downcomer, checking and 4.50 5.00 5.50
rectification
D Removal of the Superheater, checking and rectification 2.00 3.50 4.00
E Tube Cutting, Fabrication and Testing 3.00 4.00 5.00
F Replacement of the Tubes and testing the joints 6.00 7.50 8.00
G Fitting the Superheater 2.50 3.50 5.50
H Positioning the Downcomer 1.00 1.50 2.00
I Fitting the Economizer 1.00 2.50 4.00
J Trial Run 0.40 0.50 1.60 All the above
activities are to be carried out in order to accomplish the task. However, activities A and B can be started together.
Activities C and D should be started after A and B respectively. Activity E is the preparatory work for the activity
F. Activities C, D and E should be completed before starting activity F. Thereafter, activities G and H can be
started together while the activity I may be done after execution of H. Lastly, trial run is to be carried out.
The project was progressing satisfactorily. But on removing the Economizer after four weeks, Mr. Chaturvedi felt
that the refractory walls of the boiler need attention and replacement. Thus, he wanted to repair the refractory
linings immediately. The activity F cannot be started before completing this repair work.
In changing the refractory lining of the boiler, the relevant activities are given in the following table:
Changing Refractory Liners of a Boiler
(time in weeks)
Sl. Activities to tm tp
No.
T Contract bidding for refractory work and awarding the same 3.00 4.00 5.00
U Removal of the rear wall 2.00 2.50 4.00
V Repairing the Liner of the rear wall and fitting the same 1.25 2.50 2.75
W1 Removal of one side wall 1.50 1.80 2.30
W2 Removal of the other side wall 1.50 1.80 2.30
X1 Repairing the Liner of one of the side walls and fitting it 1.80 2.25 3.20
X2 Repairing the Liner of the other side wall and fitting it 1.80 2.25 3.20
Y Removal of the front wall 2.00 3.00 5.00
Z Repairing the Liner of the front wall and fitting the same 3.00 2.50 4.00
In this case, all the above activities should be completed in order to accomplish the task. Mr. Chaturvedi is
the sole responsible person for advertising and awarding the contract as defined by activity T. However, the
activities U and W1 can be started together with the completion of both the activities C and D. While the activities
V and X1 are to be done after U and W 1 respectively. Similarly, the activities W2 and Y can be started together only
after the completion of the activities V and X1 and then the activities X2 and Z are to be performed.
You are required to
(a) Draw the network diagram of the above two activities separately, showing the earliest occurrence times and
latest finishing times.
(b) Draw the network diagram of the combined project, showing the earliest occurrence times and latest finishing
times.
(c) Find out the probability that the combined project will be completed by 30 weeks.
(5 + 4 + 5 = 14 marks) < Answer >
4. Asian Instruments Ltd. has invented a new genre of digital camera, which it wants to market under the brand name
Procam. But, as the market for such high priced cameras is not well developed in India, if the camera is produced
on a commercial scale right now, the present value of the inflows from the project may turn out to be just Rs.250
 crore on an investment of Rs.295 crore.
If the launch of Procam is postponed by one year, while there is little chance of significant change in investment
required, the cash inflows under two equally probable scenarios may be as given in the next page.
If the risk-free rate of interest is 6.5 % and the required rate of return by shareholders of Asian Instruments is 12%,
you are required to compute the value of the option to postpone the investment as per Binomial Model.
Scenario 1
Cash Flow Cash Flow Cash Flow
Year Probability Probability Probability
(Rs.in Cr.) (Rs.in Cr.) (Rs.in Cr.)
1 95 0.25 155 0.5 195 0.25
2 171 0.25 279 0.5 351 0.25
3 203 0.25 331 0.5 415 0.25
4 85 0.25 140 0.5 175 0.25
5 60 0.25 98 0.5 124 0.25
6 35 0.25 58 0.5 73 0.25
Scenario 2
Cash Flow Cash Flow Cash Flow
Year Probability Probability Probability
(Rs.in Cr.) (Rs.in Cr.) (Rs.in Cr.)
1 36 0.25 104 0.5 128 0.25
2 63 0.25 185 0.5 227 0.25
3 58 0.25 168 0.5 206 0.25
4 41 0.25 117 0.5 145 0.25
5 23 0.25 67 0.5 83 0.25
6 17 0.25 50 0.5 63 0.25
(7 marks) < Answer >
5. Kiran Petrochemicals Ltd. (KPL), draws a two year capital budget. The budgetary support in this regard for these
two years is Rs.225 crore, of which, Rs.100 crore is available now and remaining Rs.125 crore will be available
after a year. The list contains some projects, which can be undertaken now and some after a year. The initial
investment and benefit cost ratio (BCR) of the projects calculated at the point of investment are as follows:
Projects available now Projects available after a year
Project Initial Investment BCR Project Initial Investment BCR
1. Rs.22.00 crore 1.70 6. Rs.32.00 crore 1.15
2. Rs.28.00 crore 1.50 7. Rs.44.00 crore 0.96
3. Rs.46.00 crore 1.06 8. Rs.48.00 crore 1.03
4. Rs.51.00 crore 1.20 9. Rs.56.00 crore 1.12
5. Rs.66.00 crore 0.98 10. Rs.64.00 crore 1.18 The company is
in the 30% tax bracket and its post tax cost of capital is 12%. Excess funds can yield a return of 7% per annum.
The company is yet to finalize the projects to be undertaken. The company uses the NPV criterion to select
projects. Project 3 and project 7 are mutually exclusive. Project 1 is a prerequisite for project 4 and project 9.
Project 10 cannot be undertaken unless both projects 2 and 4 are done.
You are required to
(a) Formulate the problem as integer programming problem.
(b) Solve the problem using feasible combination approach.

(7 + 4 = 11 marks) < Answer >

END OF SECTION B

Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 6 - 7.
 • Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on section C.

6. The success of projects hinges on the project manager. In addition to having technical expertise required for the
project he is managing, the project manager has to possess managerial skills and have a vibrant and dynamic
personality to succeed. The core competencies that project managers must cultivate and nurture to succeed can be
broadly divided as soft and hard skills.
Discuss the core competencies you should look for in a successful project manager. Explain why leadership
aspects are more critical than management aspects with regard to project management?
(10 marks) < Answer >
7. Project budgeting is an important exercise. The project manager is required to make different estimates at different
stages of the project during the budgeting process of any project in order to reduce the possibility of adverse
variations.
Discuss the various types of estimates that are to be made during the budgeting process of any project.

(10 marks) < Answer >

END OF SECTION C

END OF QUESTION PAPER

Suggested Answers

Project Management – I (241): April 2005

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16. Answer :

Reason :

17. Answer :
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20
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(2
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 Section B : Problems

1. Probability of NPV being negative = 0.3264

0  NPV
45,108 NPV
So, Z = – 0.45 = or, = 20,298.6
50,000 31,000 41,000 32,000
    1, 00, 000
NPV
(1  k) (1  k) 2 (1  k)3 (1  k) 4
Now, = =20,298.6
if k = 11%, LHS = 21,263
if k=12%, LHS = 18,875
21, 263  20, 298.6
0.11 
21, 263  18,875
By interpolation we get, k = = 0.114 = 11.4%,
k = 0.114 = ka = we ke + wd kd (1 – T) = 1/3 ke + 2/3(0.10)(1 – 0.46)
ke = 0.234 = 23.40 percent.
ke = Rf + βE (Rm – Rf) or, 0.234 = 0.06 + βE [0.16 – 0.06]
Therefore, the equity beta of the company is given by βe = 1.74
Again, βe =βA [1 + D/E(1 – T)]
or, 1.74 = βA [1 + 2(1 – 0.46)]
βA = 0.837
Hence, the required asset beta of the company is = 0.83654 ≅ 0.84.
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2. (a) Costs and Benefits from Economic angle:

Rs. in crore
Costs
Construction of Road One Shot 700
Maintenance cost Annual 1
Development cost of land One Shot 50
Loss of earning by land settlers Annual 15
Grant One Shot 50

Benefits
Saving in the cost of shipment Annual 3
Annual income from crops First five years 50
Annual income from crops Sixth year 150
onward
Value of timber output during first year First year only 5
Value of timber output during second Second year 1
year onward onward
Value of boats released One shot
0.03

(b).
 Nature and Periodicity of cash flow Rs. in crore
One shot -799.97
Annual for entire life -13
Annual for first five years 50
Annual for sixth years onwards 150
Only during first year 5
Annual second year onwards 1

The NPV would be

= – 799.97 – 13 × PVIFA (8%, 50 years) + 50 × PVIFA (8%, 50 years) + 150 × PVIFA (8%, 45 years) ×
5 + 1 × PVIFA (8%, 49 years)
1.08
PVIF (8%, 5 years) +

5 +1 ×12.212
=-799.97 -13 ×12.2335 + 50 ×12.2335 +150 × 12.108 ×0.6806 +
1.08

= - 799.97 – 159.0355 + 611.675 + 1236.11 + 15.94 = 904.72

So, from the social point of view the project has a NPV of Rs. 904.72 Crore.

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3. (a) The following network shows the sequence of activities involved in changing the water tubes of a boiler:

The following network shows the sequence of activities involved in repairing the liner of a boiler:

(b) The network diagram of the combined activities will be as follows:

(c) The expected time and standard deviation for the completion of the activities will be as follows:
 Sl. No. Activities te s
A Tube purging through sand blasting 2.67 0.33
B Removal of the Economizer, checking and rectification 4.33 0.67
C Loosening the position of the Downcomer, checking and rectification 5.00 0.17
D Removal of the Superheater, checking and rectification 3.33 0.33
E Tube Cutting, Fabrication and Testing 4.00 0.33
F Replacement of the Tubes and testing the joints 7.33 0.33
G Fitting the Superheater 3.67 0.50
H Positioning the Downcomer 1.50 0.17
I Fitting the Economizer 2.50 0.50
J Trial Run 0.67 0.20
Sl. No. Activities te s
T Contract bidding for refractory work and awarding the same 4.00 0.33
U Removal of the Rear Wall 2.67 0.33
V Repairing the Liner of the Rear Wall and fitting the same 2.33 0.25
W1 or W2 Removal of the side walls (either of the sides) 1.83 0.13
X1 or X2 Repairing the Liner of either of the side walls and building it 2.33 0.23
Y Removal of the Front Wall 3.17 0.50
Z Repairing the Liner of the Front Wall and fitting the same 2.83 0.17
From the given figure, the critical path may be identified as: 1–3–5–6–8–9–11–12–13–14–15 and the duration of
the critical path is 31 weeks. The variance of the duration of the critical path has been obtained as 1.0959 weeks 2
and hence the standard deviation is 1.047 week.
Therefore, the probability that the project may be completed by 30 weeks is given by:
30 − 31
1.047
Probability (D 30 weeks) = N(z) where, z = = – 0.9552 ≅ – 0.96
From the standard normal table, we get, N(– 0.96) = 0.1658 = 16.58% i.e. the required probability.
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4.

Scenario 1
Probabilit Mean Cash Flow
Year Cash Flow y Cash Flow Probability Cash Flow Probability
1 95 0.25 155 0.5 195 0.25 150
2 171 0.25 279 0.5 351 0.25 270
3 203 0.25 331 0.5 415 0.25 320
4 85 0.25 140 0.5 175 0.25 135
5 60 0.25 98 0.5 124 0.25 95
6 35 0.25 58 0.5 73 0.25 56

Scenario 2
Cash Probabilit Mean Cash Flow
Year Flow y Cash Flow Probability Cash Flow Probability
1 36 0.25 104 0.5 128 0.25 93
2 63 0.25 185 0.5 227 0.25 165
3 58 0.25 168 0.5 206 0.25 150
4 41 0.25 117 0.5 145 0.25 105
5 23 0.25 67 0.5 83 0.25 60
6 17 0.25 50 0.5 63 0.25 45
 150 270 320 135 95 56
+ + + + + −295
(1.12) (1.12) 2 (1.12) 3 (1.12) 4 (1.12)5 (1.12) 6
NPV of cash inflows in scenario I= = 450
93 165 150 105 60 45
+ + + + + −295
(1.12) (1.12) 2 (1.12)3 (1.12) 4 (1.12) 5 (1.12) 6
NPV of cash inflows in scenario II= = 150
450
250
u = = 1.8
150
250
d = = 0.6
r = 1.065
Cu = Max (450 – 295, 0) = 155
Cd = Max (150 –295, 0) = 0
Value of call option
r −d u−r
Cu . + Cd .
u −d u −d
r
=
1.065  0.6
155. 0
1.80  0.6
1.065
=
= Rs.56.40crores
The value of the option to postpone the investment is Rs.56.40crore.
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5.
Project Initial Investment BCR Project Initial Investment BCR
1 22 1.7 6 32 1.15
2 28 1.5 7 44 0.96
3 46 1.06 8 48 1.03
4 51 1.2 9 56 1.12
5 66 0.98 10 64 1.18 The
NPV of the first five projects are as follows:
Project 1 2 3 4 5
NPV (in Rs. crore) 15.40 14.00 2.76 10.20 – 1.32 The post tax cost of capital = 12%
The NPVs of the projects starting one year hence have been calculated as follows:
Project 6 7 8 9 10
NPV at the start Project 4.80 – 1.76 1.44 6.72 11.52
NPV (in Rs. crore) 4.29 – 1.57 1.29 6.00 10.29
Now, the outright rejection would be the projects with negative NPV and hence the projects to be considered for
planning are 1,2,3,4,6,8,9,10.
Now the formulation as per integer programming would be as follows:
Objective function:
Maximize: 15.4 X1 + 14.00 X2 + 2.76 X3 + 10.2 X4 + 4.29 X6 + 1.29 X8 + 6 X9 + 10.29 X10
The constraints are as follows:
22 X1 + 28 X2 + 46 X3 + 51 X4 + S1 = 100 ……………….Cash flow during first year
32 X6 + 48 X 8 + 56 X9 + 64 X10 + S2 = 125 + S1 × 1.07….. Cash flow during second year
 As project 7 is rejected so the interdependency between projects 3 and 7 will not figure in the formulation.
X4 + X9  2X1 as the projects 4 and 9 are contingent on project 1
2 X10  X2 + X4 as the project 10 is contingent on project 2 and project 4
Xj = {0,1} where j = 1,2,3,4,6,8,9,10
Projects starting now 1 2 3 4
Initial Outlay 22 28 46 51
NPV 15.4 14 2.76 10.2
Projects starting a year hence 6 8 9 10
Initial Outlay 32 48 56 64
NPV 4.29 1.29 6 10.29
Combination of projects Initial Allowed initial Outlay for Combination of projects Total
starting now Outlay the next set starting one year hence NPV
Projects 1-2-3 96.00 129.28 Projects 6 –8 37.74
Projects 6 – 9 42.45
Projects 8 – 9 39.45
Projects 1-3 68.00 159.24 Projects 6 – 8 23.74
Projects 6 – 9 28.45
Projects 8 – 9 25.45
Projects 6 – 8 – 9 29.74
Projects 1– 4 73.00 153.89 Projects 6 – 8 31.18
Projects 6 – 9 35.89
Projects 8 – 9 32.89
Projects 6 – 8 – 9 37.18
Projects 2 – 3 74.00 152.82 Projects 6 – 8 – 9 28.34
Projects 2 – 4 79.00 147.47 Projects 9 – 10 40.49
Projects 6 – 8 – 10 40.07
As the total NPV is maximized when the company selects Projects 1,2,3,6,9, so, the company should select that project
portfolio.
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Section C: Applied Theory

6. Both soft as well as hard skills are necessary for successful project management – hard skills set the goals and
procedures while soft skills make sure that people can meet those objectives.
Soft skills:
Visible leadership: The skill requires the project manager to set a vision and identify the action steps to achieve
that vision. The project manager must inspire and lead his team members to achieve that vision.
Flexibility: Project management is in many ways management of change. The ability to adapt and deal with
situations and manage expectations during periods of change is therefore critical.
Sound business judgment: Projects are conceived to meet business goals of the organization or/and that of the
customer. Sound business acumen is therefore valuable. Decisions should be made after considering the business
purposes and goals.
Trustworthiness: Organizations are betting their future on their project managers to steer the projects to success.
The success of the company is often connected to the success of the project. Hence creating trustworthy
relationships is important for project managers.
Exhibits several communication styles: Project managers must influence people to get action. The best way to
get action is to communicate with each individual in his or her style. Being able to recognize a person’s
communication style and adapt to it is an important skill.
Hard skills:
Every aspect of good project management processes and tools is a skill that project managers must acquire.
Planning, estimating, scheduling, tracking, controlling are the functions that project managers should perform. The
following are some of the key processes the project manager should master:
 Project definition: Project managers must be able to define the project’s business objectives and goals,
deliverables, assumptions and constraints and communicate this.
Planning process: The project manager is expected to be an expert in scheduling and planning. Since planning
depends on estimates, project managers should have a reasonable understanding of estimation processes, tools etc.
Controlling process: The project manager must be able to define what each team member is expected to
accomplish and to determine that it is accomplished.
There are a multitude of management tasks that anyone heading up a project must accomplish. These tasks involve
planning, tracking, and reporting the status of the work underway. These tasks are well documented and there is a
large body of knowledge associated with performing these tasks effectively and efficiently. Almost all the books
and training generated are for people leading a project deal with the “management” side of the job. The leadership
tasks associated with heading up a project have not been given anywhere near as much attention.
In fact it is the leadership qualities of the person heading up a project that more directly affect the successful
outcome of a project rather than their management qualities. A project leader acts just like a business leader or
CEO for the duration of the project. Business leaders understand the needs of the end customer and deliver those
needs. They carefully nurture employees and maintain a skilled and motivated workforce. Business leaders work
effectively with their board of directors providing information and leveraging their strengths for the benefit of the
business. They show responsibility to their shareholders in reporting accurate information and offering outlook
guidance. Similarly great project leaders focus on end customers, the work team, and internal stakeholders like the
sales and marketing team, and shareholders in their projects like their executives. A great project leader, just like a
CEO, focuses effort on the four key relationships: The customer relationship, the project team relationship, the
sales and marketing relationship and the management relationship. So, it is the leadership qualities of the project
manager that work as the key behind success in a project.
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7. There are four types of estimates, based on the inputs required and accuracy. The first type is called Order-of-
magnitude analysis. This method is used when the project is still in the conceptual phase. In this method, the cost
of the project is estimated without using any engineering data. The estimate is rough and is arrived at using the
past experience (relating to projects that may or may not be similar to the one on hand). The output of the order-of-
magnitude analysis may be ± 35 percent of the actual costs.
Next is the approximate estimate. It is also made without detailed engineering data. This estimate is made by
interpolating the expenditure on similar projects undertaken earlier. The expenditures made on the earlier projects
are adjusted to reflect changes in price levels, etc. The adjustment is generally made by using rules of thumb,
indexation methods, parametric curves and other methods which are simple to use unlike sophisticated or
advanced techniques. The variation of the estimate made by approximation compared to actual expenses at the
time of implementing the project is generally 15 percent on either side.
Definitive estimates are more accurate and are based on detailed engineering data, well laid out plans, clear
specifications, and reliable unit prices. Definitive estimates are also called detailed estimates. Their variation
compared to the actual expenses is expected to be less than 5 percent.
Finally, we have the method of estimation using estimation manuals. When this method is proposed to be used,
estimation manuals have to be developed first, if they are not already available. The manuals contain standard
costs for various tasks. The standard costs given in the manuals are determined taking into consideration all factors
such as machine down time, lunch breaks, clean up time, set up time, etc. Estimates are developed for groups of
similar tasks. These estimates are considered to be superior to the engineering standards, as all the factors are not
accounted for in the engineering standards. When this method is used, up to 90 percent of the activities are
estimated according to the standard costs given in the manual. The remaining 10 percent, which are generally non-
repetitive tasks and hence are not amenable to development of standards, are estimated separately. This leads us to
the drawback of this method – only projects which contain to a significant extent activities that are common with
other projects can be estimated using a manual. For projects containing unique activities in a major proportion, this
method is not useful. Another drawback is the reliability of the estimates. It is very difficult not only to develop,
but also to constantly update the manuals, without compromising on the quality of the estimate.
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