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Project Appraisal Code: 568A

General Instructions:

 The Student should submit this assignment in the handwritten form (not in the typed format)
 The Student should submit this assignment within the time specified by the exam dept
 The student should only use the Rule sheet papers for answering the questions.
 The student should attach this assignment paper with the answered papers.
 Failure to comply with the above four instructions would lead to rejection of assignment

Specific Instructions:

 There are four Questions in this assignment. The student should answer all the four questions. Marks allotted
100.
 Each Question carries equal marks (25 marks) unless specified explicitly.

Question No 1:

The LOVING CANDY Co. has been studying an investment project calling for the manufacture and
introduction of a new candy bar called Yuppie Nougat, targeted (you guessed it ) for the yuppie market. As
a consequence, Loving Candy expects to use the finest foreign chocolate and to price the candy very high
relative to its cost; otherwise no self-respecting yuppie would even think of buying it. Part of the expense
will consist of a vast marketing program, complete with endorsements by yuppie heroes.

The project is expected to last eight years, after which time yuppies will be more interested in dentures than
candy bars. The introduction of the candy bar requires 400 new machines costing $ 10,000 each. Installing
each machine costs $ 100. The machines will be depreciated on a straight-line basis over five years. The
production facility will be located at a site the company already owns. The company could rent the space
that the candy facility will occupy for $ 500,000 per year.

Loving Candy expects to sell 2 million bars per year for the entire life of the project. The price will be $
2.50 per candy bar, with a production cost of $ 0.50. The plan schedules the marketing expense per candy
bar at $ 1.00. Outlets for the candy bar have been chosen with yuppies in mind. The firm expects to
maintain an average inventory of about 500,000 bars, and expects no other increase in working capital. The
appropriate after-tax discount rate for Yuppie Nougat is 18 per cent.

Calculate NPV of the projects cash flows.


You may consider the following while doing your calculations:
(a) For tax purpose, depreciate the machine, including installation cost, using straight-line method.
(b) Estimate working capital in terms of production costs, and consider the amount as investment in the
zero year.
(c) Assume salvage value equal to recovery of working capital.
(d) Assume tax rate of 34 per cent.
Should Loving Candy help sweeten the world with Yuppie Nougat?
Note: Extracted from the table.
P.V. factors at 18% discount rate for 0-8 years are:
1.0000, 0.8475, 0.7182, 0.6086, 0.5158, 0.4371, 0.3704, 0.3139, 0.2660.

Question No 2:
a) What are the major causes for delays and cost overrun in completion of projects?

b) Explain Brown Field Project

c) Explain Consortium Lending.

d) Explain Bridging Finance

Question No 3:

The Chairman of a large sector Oil Company calls for a meeting of his functional Directors to discuss the
plans for the future. In the meetings, considering the opening up of the Oil sector and Competition foreseen,
the Director (Planning) suggests that the company should increase its Refining capacity and also to optimize
cost and increase penetration and should expand its pipeline network, as well as open retail outlets.
The company in the last financial year declared a net profit of Rs. 1,300 Cr. on a turnover of about Rs.
20,000 Cr. The company had a dividend outflow of Rs. 500 Cr.

The Director (Projects) added in the meetings that the envisaged projects would require an investment of
over Rs. 8,000 Cr. over three years period. Moreover of this about amount Rs. 3,000 Cr. of foreign
exchange would also be required. The Chairman asked Mr. Narayana. Director (Finance) of the Company
to study the proposal and prepare a detailed plan for sourcing of funds, considering all pros and cons of
various options. He has also been required to draw plans to meet the increased working capital requirement.

Narayana is a worried man. The margins are eroding and in the untested environment of free competition,
the performance of his companies is unknown and hence the profitability. He calls his Project Financing
teams to evaluate the various options and develop the most optimal mix, if required of various long-term
and short-term funding options.

Discuss the different financing options and recommend the ideal financing mix.
Make suitable assumptions about the industry in its present state

Question No 4:

a) A Project requires an initial cash outlay of Rs. 50,000 and offers an annual expected cash inflow
of Rs. 40,000 for three years and has no salvage value. The risk coefficients for three years are
estimated to be 0.80, 0.70, and 0.65 respectively. The risk free rate of interest is estimated to be
15%. Given the PV factor @ 15% as 0.870 for 1st year, 0.756 for 2nd year, 0.658 for 3rd year.
Calculate the NPV of the Project.

b) Discuss the principles sources of discrepancy between Social Cost Benefit Analysis and Monetary
Cost Benefit Analysis.

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