Question Paper

Project Management – II (242): January 2006

Section D : Case Study (50 Marks)
This section consists of questions with serial number 1 - 3.
Answer all questions.
Marks are indicated against each question.
Do not spend more than 80 - 90 minutes on Section D.

Case Study
Read the case carefully and answer the following questions:
1. You are the Manager of a Financial Consultancy firm in Kolkata. Your client wants to
invest in paper industry, because he feels that it is currently the best sector to invest in.
You have been assigned the job to suggest the client whether he should invest or not in
Polaroid Paper Mills Ltd. Your seniors have given you the information about the proposed
company and the existing industry scenario and its norms, which you will have to adhere
to when you prepare the projections for the next five years. With this objective-
a. You are required to estimate the cost of the project and show the means of
financing.
b. Prepare the projected profitability statement for the next 5 years.
Show all the computations.
(10 + 2 0 = 30 marks) < Answer >
2. Prepare the projected cash flows of the project from the long-term funds point of view.
(10 marks) < Answer >
3. Appraise the project in terms of the following criteria:
a. Net Present Value.
b. Modified Internal Rate of Return.
c. Discounted Pay-back Period.
Assume that the intermediate cash flows may be invested in government securities at the
rate of 6% p.a.
(4 + 3 + 3 = 10 marks) < Answer >
The details of proposed buildings and civil works are as follows:
 Cost of
Floor
Construction
Area Type of Construction
(Rs. per Sq.
(Sq.ft)
Feet)
Factory Building 52814 Asbestor Roof, Steel trusses & Pulping 800
Bonded Masonry wall, steel trusses, purlins
7744 500
Warehouse
Chemical & Rag Asbestor Roof, RCC Flooring
7000 600
Godown
Machine Hall 10472 Asbestor Roof, Artificial Stone Flooring 1000
Boiler House 2040 Column Beam, Asbestor Roof 1000
Transformer & Masonry structure, RCC Roof stone
1757 500
L.T. Room flooring
Pulp Mill 10200 RCC, Steel Trusses, Artificial Stone 1000
Battery Room 351.41 RCC Roof, Artificial Stone 500
Finishing House Asbestor Roof, Steel Trusses, Artificial
8976 600
Stone Flooring
Waste Paper Masonry wall, Asbestor Roof, Artificial
9525.09 600
Stone Flooring
Finishing Paper Asbestor Roof/ Iron frame
4488 600
Godown
Hydropulper Masonry wall Asbestor Roof, Artificial
3048.50 600
Godown Stone Flooring
Staff Quarter 4747 RCC Roof, Stone Flooring 500
Guest House RCC Roof, Artificial stone flooring,
2797 800
Mosaic flooring
Other Sheds 9500 Asbestor Roof / Brick Wall 50
Cycle Shed 4500 Steel column / Asbestor Roof 50
The three machines Machine-I, Machine-II and Machine-III will be used to produce
Writing and Printing Paper, Coated Duplex Board and Kraft Paper and Poster Paper
respectively. Their estimated cost (i.e; FOR cost) is Rs.7.05 crore, Rs.9.10 crore and
Rs.7.56 crore respectively. They will be purchased from indigenous sources only. The
other plant and machinery required for the mill would be three nos. of Pulping Mill with a
total cost of Rs.1.15 crore. The production process requires Drying Machines whose cost
is estimated at Rs.0.85 crore and a captive power plant will be installed in the premises at
a cost of Rs.0.25 Crore. Pump Motors will be installed at a cost of Rs.0.08 crore. A
weighbridge is also to be installed at a cost of Rs.9.5 lac. Excise Duty payable for the new
machineries would be 15%. Octroi, Freight, transportation, Loading, Unloading, Clearing
and Forwarding charges is estimated @ 4% of the basic cost of the machineries. Erection
charges are estimated @ 10% of the basic cost.
Miscellaneous fixed assets:
- Office Equipments - Rs.65.00 Lac
- Boilers - Rs.15.00 Lac
- Diesel Generator Sets – Rs.85.00 Lac.
Legal charges for drafting agreements for memorandum and articles of association cost
them Rs.85,000. The cost of market survey was Rs.1,00,000. Your company will charge
Rs.2.50 Lac for preparing the feasibility report. Other expenses expected to be incurred by
the company till the date of commencement of commercial production are as follows:
Traveling expenses to the tune of Rs.8,90,000
Printing and Stationery expenses to the tune of Rs.2,25,000
Advertisement expenses to the tune of Rs.5,50,000
Insurance premium during construction to the tune of Rs.85,00,000
Products and Uses
The main products from this unit would be Kraft paper and Poster paper, Writing and
Printing paper and Coated Duplex board. These products are used in the packaging
applications of consumer durables, processed foods and many other products. The various
range of products to be manufactured by PPML and the specification thereon are given in
the following table:
Machine Product
Name of Product Annual Production
No. Specification
Writing and Printing
1 43 to 54 GSM 13200 MT
paper
2 Coated duplex Board 180 to 400 GSM 19800 MT
3 Kraft Paper 25 to 120 GSM 13200 MT
3 Poster Paper 28 to 60 GSM (combined)
Apart from this, machine No. 1 i.e. writing and printing paper manufacturing machine can
produce Cream woven paper of 44 to 80 GSM specifications and Maplitho Paper of 44 to
80 GSM.
Process
Paper and board production involves two steps. First, the fibres need to be produced. This
is done in a pulp mill where pulp is produced using chemical or mechanical processes.
And then the paper itself is produced on a paper machine from a mixture of fibres (which
can be virgin or recovered fibres), chemicals and additives. All paper and board machines
are based on similar basic process. There are six distinct sections: wire section, press
section, drier section, size press, calendar and reel-up. Raw material fibres and chemicals
(and 99% of water) are pumped to the head box, which feeds the stock evenly onto the
wire section. As the paper stock flows from the head box onto the wire, the water drains
away through the mesh leaving tiny fibres as a mat on top of the mesh. By the time it
reaches the end of the wire section, it becomes a sheet of paper, although very moist and
of little strength. It passes through press section where more moisture is squeezed out.
The paper then passes through drier section with a temperature of slightly over 1000C.
Here it becomes completely dry. Part way down the bank of drying cylinders is the size
press, where a solution of water and starch are added in order to improve the surface. At
the end of the drying process, the paper is smoothed by ‘ironing’ method, which consists
of hot polished rollers mounted in pairs (Calendars). This also helps to consolidate, polish
and glaze the surface of the paper. Still traveling at very high speeds, the paper comes off
the machine ready for reeling up into large reels, which are normally cut or slit into
smaller sizes, according to customer requirement.
Raw Materials
Wood pulp is considered the best as it lends strength and superiority to paper.
Environment concerns have forced the industry to switch to non-conventional raw
materials like waste paper, agro based products like rice and wheat straws, baggase, grass,
and non-wood crop fibres which include hemp, kenaf and cotton lintels. The technology
supplied to this project recommends the use of all these types of raw materials in
proportions, for the production of different grades and qualities of paper.
Power
PPML does not have power supply arrangements from power grid. Though the mill has
plans for availing grid supply, with a power substation constructed within the mill
premises it will not resort to grid supply due to the following reasons:
PPML needs power supply arrangement of 33 KVA from West Bengal State Electricity
Board (WBSEB) preferably. The mill needs to be connected to two feeder lines, which
needs a vast amount of time and cost.
The area faces inconsistent power supply due to frequent power cuts. Wide voltage
fluctuations will cause disruption in continuous operation of mill and thereby hampering
the operating efficiency both qualitatively and quantitatively.
The mill, however, will resort exclusively to captive power generation through diesel
generator sets. The mill at present will install four diesel generator sets, each having
capacity of 1000 KVA.
The product wise requirement will be as follows: (i) Writing and Printing Paper – 350
units per MT of production, (ii) Coated duplex Board –500 units per MT of production
and (iii) Kraft Paper and Poster Paper – 411 units and 880 units per MT of production,
respectively. Cost of power per unit will be Rs.7.07.
Fuel
Coal is a very important ingredient for the Boilers. The product wise requirement will be
as follows: (i) Writing and Printing Paper – 500 units per MT of production, (ii) Coated
duplex Board –714 units per MT of production and (iii) Kraft Paper and Poster Paper –
714 units and 1120 units per MT of production, respectively. Cost of fuel per unit will be
Rs.1.50.
Water
PPML has its own tube well and will install turbine pumping set, overhead tank and water
softening plant.

Steam
The mill has three numbers of Multitherm Boilers, operated with coal, two of which are
having capacity of generating 4200 Kg per hour and the other having capacity of 5600 Kg
per hour of steam. The steam generating system is fitted with pipelines and other
accessories.
Additional Information
1. Number of working days is 303 days in a year. The production will be carried out in 3
shifts in a day. The capacity utilization is expected to be as follows :
Products Year 1 Year 2 Year 2 Year 4 onwards
Writing and Printing Paper 65% 75% 85% 100%
Coated Duplex Board 65% 75% 85% 100%
Kraft Paper and Poster Paper 70% 80% 90% 100%
The installed capacity product wise is as follows : (i) Writing and Printing
Paper – 40 tonnes per day, (ii) Coated duplex Board – 60 tonnes per day and (iii)
Kraft Paper and Poster Paper – 40 tonnes per day.
 Products Product Mix
Writing and Printing Paper 100%
Coated Duplex Board 100%
Kraft Paper and Poster Paper :
Kraft Paper 75%
Poster Paper 25% 2. Raw material requirements
are as follows:
Requirement in (Kg)
Rate/Kg (Rs)
per tonne of production
For Kraft Paper :
Waste paper 1180 6.00
For Poster Paper :
White cutting 1125 12.00
Wood Pulp 105 16.00
For Coated Duplex Board :
Top Layer 250 12.00
Protective Layer 144 7.50
Filler Layer 625 4.50
Bottom Layer 192.5 5.00
For Writing & Printing Paper :
RM1 (White Cutting) 750 13.50
RM2 (Exercise Book) 500 10.00
3. Consumables required are as follows:
Cost of Consumables Year 1 Year 2 Year 3 Year 4 Year 5
Writing and Printing Paper 87.19 100.60 114.02 134.14 134.14
Coated Duplex Board 254.71 293.89 333.08 391.85 391.85
Kraft Paper 28.97 33.11 37.24 41.38 41.38
Poster Paper 24.49 27.98 31.48 34.98 34.98
Total 395.36 455.58 515.82 602.35 602.35
4. Cost of Stores & Spares:
Rs./MT of Output
Coated Duplex Board : 253.00
Kraft Paper : 206.00
Poster Paper : 367.00
5. Contingencies have to be provided on Building, Plant and Machinery and
Miscellaneous Fixed Assets at the rate of 10% to comply with cost escalation.
6. Cost of Packing materials:
Rs./MT of Output
Writing & Printing Paper : 150
Coated Duplex Board : 150
Kraft Paper : 106
Poster Paper : 150
 7. The margin money for working capital requirement of first year is to be
included in the cost of the project. The following periodicities have been estimated
for the computation of working capital:
Particulars Days
Raw Materials : 30
Consumables : 45
Packing Materials : 45
Work in Progress : 20
Finished Goods : 15
Debtors : 30 However, the margin money required for
working expenses in different years are as follows:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Working Expenses (Rs. in Lacs) 39.15 44.48 49.90 57.50 57.64 8.
Gross Selling price of final Product in Rs. per MT:
Writing & Printing Paper : 32,000
Coated Duplex Board : 25,350
Kraft Paper : 21,500
Poster Paper : 37,000
9. The promoter’s contribution would be Rs.8.00 crore. The remaining amount
of share capital would be raised from market through an IPO of its common stock.
The cost of primary issue of equity shares would be 5%.
10. IDBI, Vijaya Bank and Dena Bank have agreed on principle that it will
provide a secured long-term loan of Rs. 45 crore to the Company in a consortium
with IDBI acting as the lead banker. The rate of interest is 9% p.a. The principal
amount of the loan is to be repaid in equal annual installments from the end of the
first year itself.
11. Indian Overseas Bank (IOB), Commercial Branch has agreed to finance the
working capital requirement to the extent of 75% of working capital requirement at
an interest rate of
13 % p.a.
12. Depreciation Rates applicable to different categories of fixed assets are as
follows:
Particulars Buildings Machinery Miscellaneous Fixed Assets
As per Companies Act 3.34% 10.34% 10.34%
As per Income Tax Act 5% 20% 20%
13. Income tax rate applicable to the company is 30%. Surcharge applicable is
10.02%.
14. Other Operating Costs:
(Rs. in Lac)
Year 1 Year 2 Year 3 Year 4 Year 5
Effluent Treatment Cost 5.58 6.41 7.24 8.26 8.26
Repairs & Maintenance 76.73 88.28 99.83 115.50 115.50
Wages 50.75 50.75 52.02 53.32 54.65
 15. Carriage outwards in Rs. in Lac:
Year 1 Year 2 Year 3 Year 4 Year 5
122.76 141.24 159.72 184.80 184.80
16. General and Administrative Overheads amount to Rs.15 Lac for the first year.
Thereafter it will increase constantly @ 5% for the next four years.
17. Selling and other expenses are assumed to be 3% on gross Sales. Excise
payable is 12.36% on Gross Sales.
18. Cost of equity is 14%.

END OF SECTION D

Section E : Caselets (50 Marks)

This section consists of questions with serial number 4 - 9.
Answer all questions.
Marks are indicated against each question.
Do not spend more than 80 - 90 minutes on Section E.

Caselet 1
Read the caselet carefully and answer the following questions:
4. The caselet states, “the quality of the results cannot be better than the quality of the input”. According to
you what are the different events influencing the risk in a project. Discuss.
(9 marks) < Answer >
5. ‘Uncertainty analysis is to a greater extent used as a support for decision-making in projects’. Discuss how
you would propose to manage the risk of projects.
(9 marks) < Answer >
Uncertainty analysis is to a greater extent used as a support for decision-making in projects. If
used and implemented correctly the analysis may give the decision maker a view of
uncertainties that may influence project accomplishment. There are different methods and
techniques for evaluating uncertainties in a project; references are in this respect made to
Chapman and Ward (2003, 2002 and 1997), Kendrick (2003), Kerzner (2003), Klakegg
(1993), Lichtenberg (2000), Samset (2001) and Williams (1995). Common for all these
methods and procedures are, presumably, that the quality of the results cannot be better than
the quality of the input. On the other hand, the quality of the results can be worse than the
input, if there are weaknesses in the procedure or the model (Stoelsnes, 2005).
The largest source of “error” in uncertainty analysis is presumably the limitation inherent in
the analysis team (the group of people carrying out the uncertainty analysis) and its ability to
identify and evaluate uncertainties involved in the project. Their ability to set the “correct”
confidence limit is also assumed to be a source of error (Stoelsnes, 2005). Regardless these
sources of error, the optimal quality will, presumably, be only achieved when we obtain the
highest possible quality of the input and the highest possible quality of the procedures and the
calculation model.
It is further necessary to consider that carrying out an uncertainty analysis only has limited
effect on project accomplishment if the results from it are not used, for instance by
implementing an action plan and follow-up. The benefits of conducting an uncertainty analysis
lie in identifying threats and opportunities in early stages of a project. By making uncertainty
analysis, an ongoing activity that includes implementing an action plan, monitoring and
updating with regards to uncertainties (herein abbreviated as uncertainty management), we
may be able to eliminate, bypass and reduce possible threats. We will also be able to intensify
and see that desirable events really happen during the execution of the project.
Caselet 2
Read the caselet carefully and answer the following questions:
6. Why should the profitability of an investment from the government or society’s perspective differ from the
private investor’s perspective?’ Discuss.
(7 marks) < Answer >
7. ‘In the traditional approaches to social cost benefit analysis, the private returns are calculated using actual
market prices, and the social returns using shadow prices’. What are the traditional approaches to social cost
benefit analysis? Also discuss the similarities and dissimilarities between the two approaches.
(8 marks) < Answer >
Governments would be interested in supporting an infrastructure project only if the ‘social
benefits’ exceed the ‘social costs’. Social returns are different from private returns, and there
are difficulties in assessing the economic impact of very large projects. Economic Rate of
Return (ERR) used by Multilateral Institutions such as the International Finance Corporation
(IFC) is used to evaluate the developmental impact of large projects. The decision to go ahead
with a social infrastructure project is critical for any host government. This is because the
private sponsors and the government view the value of a large project differently. While the
private sponsors would be willing to implement the project if its return is commensurate with
the risks, governments would be interested in supporting a project, financially or otherwise,
only if the ‘social benefits’ outweigh the ‘social costs’. In financial terms, the private sponsor
of a large project would be looking for an attractive Internal Rate of Return (IRR) or Financial
Rate of Return (FRR) from the project. However, the government supporting the project
would look at a rate of return that would factor in, apart from the risks, the social costs and
benefits as well—such a rate of return is called the Economic Rate of Return (ERR). Why
should the profitability of an investment from the government or society’s perspective differ
from the private investor’s perspective? Some of the difficulties in assessing social returns are:
• Assessing the social impact of educating and training the workforce, not only on the
workforce itself but also on the local and domestic economy;
• Assessing the developmental impact of construction of schools, hospitals, housing, and
other facilities that the project could bring with it;
• Assessing the spin-off effects of investment in a particular industry, or locality on the
larger goal of economic development; and
• Assessing the multiplier effect of one large project on the community and the country.
A look at the traditional approaches to social cost benefit analysis is appropriate before
understanding the ERR approach being practiced by multilateral institutions like the IFC.
Multilateral institutions such as the World Bank and its arms support private and public
projects in developing countries with the objectives of reducing poverty and stimulating
economic growth. To participate in large projects of these countries, they need to understand
and assess the private and social returns of the projects.
In the traditional approaches to social cost benefit analysis, the private returns are calculated
using actual market prices, and the social returns using ‘shadow prices’. The Multilateral
institutions calculate the social return in two stages, also using shadow prices. ERR gives
results similar to traditional social cost benefit analysis, but is more scientific in its approach.
Being adopted and in the process of being improved by IFC, the ERR would be a powerful
valuation tool for governments and public bodies to make decisions on the economic viability
of infrastructure projects.
Caselet 3
Read the caselet carefully and answer the following questions:
8. “The difference between traditional and Critical Chain scheduling is in how uncertainty is managed”.
Discuss the problems associated with traditional project scheduling.
(7 marks) < Answer >
9. “Using the Critical Chain Method, projects can be completed more quickly and with greater scheduling
reliability”. In light of the caselet, discuss the important steps you would propose, to identify and manage a
Critical Chain schedule.
(10 marks) < Answer >

Product development projects, like many other types of projects, often can exceed their
planned schedule by 50% to 100%. Often this is attributing to uncertainty or the unforeseen.
To compensate for this age-old dilemma, managers and project personnel have learned to
compensate by adding additional time to their schedule estimates. Yet even when they do,
projects still overrun their schedules.
The Critical Chain Method (CCM) is an outgrowth of the Theory of Constraints (TOC)
developed by Eliyahu Goldratt to scheduling and managing manufacturing. TOC focuses on
identifying and fixing bottlenecks in order to improve the throughput of the overall system.
Likewise, Critical Chain focuses on bottlenecks. For example, one pharmaceutical company
was experiencing significant delays with drug approvals. After investigation, it found that the
bottleneck was statisticians to analyze clinical trial data. The cost of hiring statisticians was
more than offset by the revenue from getting products to market sooner.
Using the Critical Chain Method, projects can be completed more quickly and with greater
scheduling reliability. The difference between traditional and Critical Chain scheduling is in
how uncertainty is managed. In traditional project scheduling, uncertainty is managed by padding
task durations, starting work as early as possible, multi-tasking, and focusing on meeting
commitment dates.
Critical Chain approach is perhaps the most important new development in project scheduling
in the last 30 years. Used properly, the Critical Chain approach is an extremely powerful
means of gaining more predictability, productivity and speed from project plans. It has been
found to be an effective tool to protect projects from uncertainty and the effects of Murphy’s
Law.
This new approach to project management provides mechanisms to allow a “whole system”
view of projects. It identifies and protects what’s critical from inevitable uncertainty, and as a result,
avoids major impact of Parkinson’s Law at the task level while accounting for Murphy’s Law at the
project level.
Project managers and teams need to shift their attention from assuring the achievement of task
estimates and intermediate milestones to assuring the only date that matters – the final
promised due date. Safety that is typically built into tasks to cover Murphy’s Law is
inefficient, leading to longer than necessary (or acceptable) schedules, and apparently
ineffective, given the impact of Parkinson’s Law from which many projects suffer.

END OF SECTION E

END OF QUESTION PAPER

 
 Suggested Answers
Project Management – II (242): January 2006
Section D : Case Study
1. a. Cost of project:
 Rs. in Rs. in
Lacs Lacs
A Land:
Basic cost of land (52 acres @ Rs.8 Lacs per
i. 416.00
Acre)
ii. Stamp duty @ 16% 66.56  
iii. Cost of leveling the site 23.40
iv. Cost of laying internal roads 18.63
v. Cost of approach roads 9.56
vi. Cost of boundary walls and main gate 7.32
vii. Cost of tube-well digging 3.72
viii. Cost of construction of Main Gate 1.81
TOTAL 547.00
B Building and Civil Works:
Area Rate
(Square. (@ Rs. per
Ft) Square. Ft)
i. Factory Building 52814 800 422.51
Bonded
ii. 7744 500 38.72
Warehouse
Chemical &
iii. 7000 600 42.00
Rags Godown
iv. Machine Hall 10472 1000 104.72
v. Boiler house 2040 1000 20.40
Transformer
vi. 1757 500 8.79
Room
vii. Pulp Mill 10200 1000 102.00
viii. Battery Room 351.41 500 1.76
ix. Finishing House 8976 600 53.86
Waste paper
x. 9525.09 600 57.15
Godown
Finishing paper
xi. 4488 600 26.93
Godown
Hydropulper
xii. 3048.5 600 18.29
Godown
xiii Staff Quarters 4747 500 23.74
xiv Guest house 2797 800 22.38
xv. Other Sheds 9500 50 4.75
xvi. Cycle Sheds 4500 50 2.25
TOTAL 950.23

C Plant and Machinery:

i. (Machine-I) Writing and Printing Paper 705.00
ii. (Machine-II) Coated Duplex Board 910.00
iii. (Machine-III) Kraft Paper and Poster Paper 756.00
iv. Pulping Mills (3 Nos.) 115.00
v. Drying Machines 85.00