Question Paper

Project Management - II (242) : October 2004

Section D : Case Study (50 Marks)
• This section consists of questions with serial number 1 - 5.
• 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. a. Estimate the cost of project indicating different broad cost heads.
b. Estimate the means of finance.
(7 + 1 = 8 marks) < Answer >
2. Prepare the projected profitability statement for the first five years of operations.
(16 marks) < Answer >
3. Prepare the projected cash flows from long-term funds point of view for five years. Assume the terminal
value of fixed assets, excepting land, to be 80% of the book value at the end of 5th year.
(6 marks) < Answer >
4. Appraise the project using the following criteria:
(a) NPV
(b) Modified IRR
(c) Discounted Pay Back Period
(d) Debt Service Coverage Ratio (DSCR)
The management of the company has decided to reinvest the intermediate cash inflows in government
securities at an average yield of 6 percent. The term lenders of the project expect a minimum DSCR as
2.50.
(4 + 3 + 3 + 3 = 13 marks) < Answer >
5. Setting a steel factory is complex project so it is required to be sub-divided into several smaller jobs.
Explain work break down structure in the context of project planning and discuss its benefits.
(7 marks) < Answer >
Durgesh Steel Ltd.
Steel is one of the most important constituents for infrastructure development. Consumption of steel is an
important parameter for the growth and development of an economy. Following the process of economic
liberalization, the Indian steel industry has been liberated and hence the legal barriers for the entry of any new
player have been withdrawn. At present, the world economy has come out of recession while the process of
building a new Iraq as well as Afghanistan is on the process. Hence, the demand for steel in the world market
has gone up substantially that in turn raised the prices of the same by a reasonable extent. All these development
render a new lease of life to the ailing Indian steel industry. The existing players are seriously evaluating to
expand their production facilities to meet the increasing demand while many are critically assessing whether to
enter in this sector.
Mr. S.K Sharma, the Executive Director (Works) of Steel Authority of India Ltd. (SAIL), was approached by
Mr.Radheshyam Kedia on August, 2004 with regard to setting up a mini steel plant at Durgapur in West Bengal.
Mr. Narshaiah, Director (finance) of Southern Iron and Steel Company Ltd. (SISCL) also joined with them to
form Durgesh Steel Ltd. (DSL), incorporated under Companies Act 1956, on 4th October, 2004.
Promoters:
Principal promoter Mr. Radheshyam Kedia is a renowned steel magnate in India. His flagship company
Refrabrickers Ltd. manufactures and supplies refractory bricks to the major integrated steel plants around the
country as well as abroad. A man with strong business acumen started dealing with ferro scraps twenty years
ago. His company Punam Ferro Scrap (P) Ltd. supplies scraps to almost all the secondary steel producers. In the
year 1993 he set up a factory for fabrication of tailor made spare parts to meet the requirements of the steel
makers in Jalani near Pune. His new venture DSL is in the production of merchant products. The two primary
co-promoters in his latest venture are Mr. S.K.Sharma and Mr. Narshaiah.
Mr. Sharma, a graduate mechanical engineer from REC Durgapur, joined SAIL as a management trainee in the
year 1980. Initially he was associated with Blooming and Billet mill maintenance group. In July 1993 he was
promoted to General Manager (mechanical) of section mill. During the brief tenure of four years in section mill
he successfully commissioned new rolling table in the finishing line. The roll table was changed without any
trouble. In true sense he was the leader of workers. In roll shop he started suggestion scheme for the workers.
He used to arrange workshops with his subordinates and the front line executives of the client departments. This
process has not only smoothened the long maintained strained rifts among them but also improved the
productivity remarkably well in the client departments. He became GM (Mills) in the year 1998 and
subsequently became Executive Director (Works) in the year 2002. Since July 2002, he worked as the
operational head of the entire steel plant. His ability to manage people, to judge the problems as well as to work
out the corresponding solution is well known to every individual associated with him.
Mr. Narshaiah, a chartered accountant from UK, has varied working experience in Indian industry. In the year
1975, after passing CA, he joined ICICI as a junior officer. After working there for ten years, he joined ICFAI in
order to pursue CFA. In the year 1990, he joined Tata Iron and Steel Co. Ltd. (TISCO) as manager (Finance),
where he was the in-charge of financial control. In his tenure of four years the cost of production was reduced
by 7%. Thereafter, he worked with Bajaj Auto in Pune as DGM (Finance) for three years and then switched to
Southern Iron and Steel Company Ltd. as GM (Finance) in the year 1997 and subsequently after five years he
became Director (Finance). He has shown his sparkle of control skill in all his assignments. It is believed that
the modernization program worth of Rs.2000 crore for cash strapped SISCL could be completed because of his
superb skill in treasury management. Like, Mr. Narshaiah, a self-motivated, sincere and dedicated executive
with high level of professional skill is rarely observed in today’s corporate world.
PROJECT:
The installed capacity of the plant is planned to be 0.1 million ton. The steel plant will produce three different
sizes of rod: 8 mm, 10 mm and 12 mm. The products are set with a view of the present market demand as the
housing sector has recorded an impressive growth while the government has committed to provide improved
infrastructure facilities to the prospective entrepreneurs. These two factors are expected to boost up the demand
of rods in coming years. Though the promoters are planning to start with the above mentioned three products
but the facilities they are intending to bring can produce rods of 15 mm, 18 mm in the higher range and in the
lower range it can produce rods of 4 mm, 6 mm. The rolling machine they are buying is from Viscon of Japan at
a cost of Rs.16 crore. They are planning to feed the production line with untapped semi-finished products like
billets of different sizes from various integrated steel plants nearby.
The process to be implemented in this plant is of traditional automated type. It starts at the inward bay, where
the input for the process i.e. billets are received and unloaded from trucks or railway wagons with the help of
EOT crane. These billets are stored here. Storage capacity can sustain the production for two weeks at the most.
From this storage, billets are dropped in charging table 1 and from there these billets are charged into the
reheating furnace. After six hours that billet is drawn from the furnace and rolled through different passes.
Finally it takes the shape of a rod. With the help of an optical sensor the length is measured. In the flying shear
the long drawn rod is cut into proper lengths and discharged into cooling bed. Approximately one hour later
these rods are shifted to stacking or outward bay with the help of crane. From this stacking bay these rods are
loaded onto trucks or railway wagons and transported to outside clients.
Hot billets coming out from furnace are of 8000C and temperature of the derived rods lying on the cooling beds
comes to the level of around 1000C. The movement of hot billets and strands enhances the ambient temperature,
so to protect the equipments from the exposure to such high temperature a continuous flow of water is provided.
Primarily the transport of billets is carried out in the roller table driven by electric motors. The movements like
face changing of billets before starting different passes are done with hydraulic systems. The pneumatic system
is provided to organize the process flow. The main role served by this pneumatic system is to provide the guide-
blocks to the strands before entering in any passes. The shear mechanism is activated by pneumatic system.
The efficiency of this process is 98%. Out of 2% of losses, 1.5% would go in the form of cobbles and the
remaining 0.5% would go wasted in the form of scales. Scales can be sold in the market at the rate of Rs.3600
per ton and cobbles can be sold at Rs.6000 per ton while the market price of the billets is Rs.12,000 per ton.
The stalled torque motors for the rolling table are to be supplied by Siemens India. Each motor costs Rs.1.25
lakh. Total 64 numbers of such motors are required. An old oil fired furnace was planned to be acquired from
Indian Iron and Steel Company (IISCO) at an expected cost of Rs.54 lakh. The hydraulic system is being
supplied by Rogers India Limited at a cost of Rs.15,00,000. The hydraulic system contains two headers of 160
bars. Total three hydraulic cylinders are being planned in the transport line. Upstream is planned to be
controlled by pneumatic instruments. The whole system comprised of – two numbers of reciprocal compressors
of 7 bars, distribution lines, control panels, valves and solenoids is supplied by Crompton Greaves India Ltd.
The cost of pneumatic system would be Rs.10,00,000.
A pump house for water supply to the machines and process has to be built. The water requirement for the
continuation of process and equipment cooling are respectively 120 cubic meters and 36 cubic meters per hour.
Mather and Platt has been ordered to supply four pumps. The motors for driving those pumps are supplied by
Kirloskar motors. During production any two pumps would be running and two would remain as stand by. Each
of these pumps along with motors cost Rs.1,25,000. The cost of pipelines would be Rs.80,000. The project
requires altogether pipeline works of 500 meters. Average cost of laying pipelines is Rs.680 per meter. Electric
panels and control gears would cost altogether Rs.30,00,000. The cost of control and power cables put together
comes to the tune of Rs.1,00,00,000. Total length of cable to be laid is 10.00 kilometers. The average cost of
cable laying is Rs.350 per meter.
Under miscellaneous fixed assets the office equipments, furniture and vehicles worth of Rs.15,00,000 have to
be purchased.
The custom duty applicable on imported capital equipment is 35% of basic cost. The average rate of excise for
indigenous machines is 16%. The average cost of octroi, freight, transportation, loading, unloading and
forwarding charges for indigenous machines is 4% of basic cost. The erection charges on an average come to
10% of the basic cost of the plant and machinery.
The company is planning to purchase 40 acres of industrial land at Durgapur in West Bengal. The legal
consultant of the company is visiting Durgapur to check the legal disputes, if any, in the title deeds. The basic
cost of this land comes to the tune of Rs.25 lakh. The costs associated with registration and stamp duty will amount
to 16% of basic cost of land. The cost of leveling of site is Rs.50,000. The cost of laying internal roads and
approach roads are approximately Rs.2,50,000 and Rs.30,000 respectively. The cost of boundary walls and
main gate come to be Rs.1,25,000. A deep bore well digging cost is Rs.45,000. The details of proposed
buildings and civil works are as follows :
• • Main Process Building (12000 sq ft) at a cost of Rs.95.25 lakh
• • Hydraulic Room (1000 sq ft) at a cost of Rs.22.35 lakh
• • Pneumatic Room (2500 sq ft) at a Cost of Rs.24.40 lakh
• • Pump House (1500 sq ft) at a cost of Rs.22.50 lakh
• • Administrative Office (4000 sq ft) at a cost of Rs.25.00 lakh
• • Auxiliary buildings like time offices, crew facility buildings, canteen, garage etc. (6000 sq ft) at a
cost of Rs.17.50 lakh.
DSL is planning to provide two EOT magnet cranes for the material handling. One would be used for the
purpose of handling inputs and the other one would be used for the handling of outputs. The first crane is of 10
ton capacity where as the second one is of 5 ton capacity. Each of the cranes would cost Rs.2.30 crore to the
company.
Legal charges for drafting agreements for memorandum and articles of association cost them Rs.40,000. The
cost of market survey was Rs.75,000. The company appointed John and John Associates for preparing the
feasibility report. Total expenditure for the preparation of feasibility report was Rs.35,000. Other expenses
expected to be incurred by the company till the date of commencement of commercial production are as
follows:
• • Travelling expenses to the tune of Rs.50,000
• • Postage, telegrams and telephone expenses to the tune of Rs.7,000
• • Printing and Stationery expenses to the tune of Rs.18,000
• • Advertisement expenses to the tune of Rs.25,00,000
• • Insurance premium during construction to the tune of Rs.2,75,000
The cost of furnace oil required per ton of input is Rs.800. The cost of electricity is Rs.6.00 per kwh. The slabs
for power requirement are as follows:

Annual Production (million ton) Up to 0.065 0.065 to 0.075 0.075 to 0.085 Above 0.085
Power Requirement (kwh/ton) 65 60 55 50
The
cost of consumables per ton of final product is Rs.350.
The projected estimate of manpower requirement is:
Man Power Technical Non-technical
Skilled 9 8
Semi-skilled 19 10
Unskilled 28 3 Project Execution Schedule :
Activity Start Finish
Land development October10, 2004 October 30, 2004
Civil work November 2, 2004 April 30, 2005
Equipment erection February 1, 2005 June 30, 2005
Equipment testing May 1, 2005 August 16, 2005
Cold trial July 20, 2005 August 25, 2005
Hot trial September 5, 2005 September 20, 2005
Commercial Production October1, 2005 Other
information:
1. The capacity utilization is expected to be 60%, 70%and 80% in the first, second and third years
respectively. Thereafter, the capacity utilization of 100% is expected to be maintained.
2. In order to meet escalation in cost, contingencies are to be provided at 10% on fixed assets yet to be
created, excluding land.
3. IFCI has agreed to extend a term loan of Rs.25.00 crore to DSL. The implicit rate of interest is 14% per
annum. The principal amount of the loan is to be repaid in 5 years, beginning from the end of first year
in equal annual installments.
4. The promoters’ contribution is as follows:
(Rs in crore)
Promoters Amount
Mr. Kedia 4.00
Mr. Sharma 3.00
Mr. Narshiah 2.00 5. Project cost excess of promoters’ contribution and term loan is to be
raised through public issue of equity capital. Cost related to issue would be 5% of the size of the public
issue.
6. Average market price of the rods is Rs.20,000 per ton.
7. The cost of repairs and maintenance in the first year of commercial production is 2% of the cost of Plant
and Machinery. An increase of 5% is to be provided every year.
8. The depreciation rates applicable are as follows:
 Particulars Buildings Machinery and Other assets
Company law purpose (SLM) 3.34% 10%
Income Tax purpose (WDV) 10% 25% 9.
Salaries and Wages are estimated to be Rs.15 lakh per month in the first year of commercial
production. An annual increase of 10 percent is expected during the successive years.
10. Administrative overheads are estimated to be Rs.70 lakh in the first year of commercial production with
an increase of 3% every year.
11. Selling overhead is calculated at the rate of 5% on the sales value.
12. The following periodicities have been estimated for the computation of working capital:

(Period in months)

Particulars Periodicity
Raw Material 1.0
Consumables 3.0
Finished Goods 1.0
Debtors 2.0
Expenses 1.5 13. State Bank of India (SBI) has agreed to finance 75% of the
working capital requirement. Interest on bank borrowings for working capital is 12%.
14. Margin money for working capital during first year should be included in the project cost.
15. Required return by shareholders of the company is 15%.
16. Tax rate applicable for the company is 35%.
END OF SECTION D

Section E : Caselets (50 Marks)

• This section consists of questions with serial number 6 - 13.
• 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:
6. How do you propose to identify opportunities? What is ‘opportunity management’? What are the
different strategies of opportunity treatment?
(9 marks) < Answer >
7. Discuss the different steps of project risk management.
(9 marks)< Answer >
A project is an uncertain factor that can significantly affect achievable performance. Risk management is the
practice of identifying, evaluating and controlling those factors to avoid or mitigate potential negative effects.
But there are also positive views that the essential purpose of risk management is to improve performance. An
experienced manager tries to balance project risks and opportunities. In practice, it means that when facing
unusually high risks, there need to be clear opportunities for improved benefits. In reality, project risk includes
both a threat to project objectives and also certain opportunities to improve on those objectives. Opportunities
can often be more dependent on prompt and well timed action. Therefore, the identification of a particular time-
window for acting is an important characteristic of successful opportunity management. Opportunity
management therefore focuses on positive scenarios that offer benefits to the project in terms of achieving
project objectives. Opportunity management is growing in importance. The risk management plan of a project
should state that it is important to address both opportunities and threats in the risk management process.
Project risk management is a process of identifying potential surprises upfront and managing them throughout
the project to diminish their likelihood or impact. We will not be able to avoid every potential pitfall that might
threaten our project and some are truly unknowable in advance. But with explicit attention to project risk, we
can improve our odds considerably.
The key to managing risk is being proactive about it. Many risks are half when known in advance, but often
they are dismissed in the rush to get on with the ‘real’ work of the project. Risk management is simply a matter
of acting explicitly in advance to prevent a risk or diminish the risk’s consequences. Being proactive is easier
for some individuals and organizations than for others. The opposite of being proactive is the “fire-fighting”
behavior that many managers enjoy and some organizations reward tacitly. If the organizations embraces fire
fighting – dealing with problems only when they become crises – proactive risk management will be more
challenging to apply. As business becomes more competitive, the pressure tends to drive us toward ignoring
possible problems and thus toward more reactive behavior. However, many organizations today are recognizing
the high costs of dealing with project problems that could have been anticipated.
Since we cannot anticipate the future, software project managers need to make risk management a key element
of their strategy. And this requires changing how you measure progress: Instead of assessing progress based on
completed activities, one should measure the progress based demonstrable results. This is the essence of result-
based management. Applying a result based management strategy means focusing on risks and tracking
problems head-on. By deliberately structuring project activities to address risk, you can cover hidden problems,
resolve them, and then steadily reduce uncertainty as the project proceeds.
In addition, since the primary result of a software development project is the software itself, the quality of the
deliverable should be the primary measure of success. One may assess this quality with metrics such as the
number of tests your software passed, the number of defects in the code and their severity, the amount of code
churn, and so forth. In other words, a move to iterative development means assessing status by measuring
demonstrable results against the stated objectives and requirements, and not by counting how many activities,
artifacts or work products have been completed. To assess the stability of the project (another measure of
management effectiveness), one should also track the amount in requirements, design and code.

Caselet 2
Read the caselet carefully and answer the following questions:
8. Discuss the salient features of the infrastructure projects.
(6 marks) < Answer >
9. The caselet describes the financing of infrastructure projects. Discuss the shortcomings of the existing
financing style. How do you think private as well as government sectors can play an active role to
improve the scenario?
(9 marks) < Answer >
In today’s dynamic business environment, organizations are trying hard to succeed and to remain competitive.
As a direct result of organization’s endeavor to gain competitive advantage over competitors, the last one-
decade has witnessed a number of new products, technologies and joint ventures. While a majority of them
didn’t succeed the initial euphoria, however, those who succeeded adopted a well-planned strategy. The
strategic initiatives are taken in the form of well-defined projects – small and big depending on the objectives of
the initiatives. Along the definitions of the project objectives, organizations critically examine how to get
finance for the projects.
During the last one decade, the project finance market has increased tremendously. According to the World
Bank, it has disbursed $27 billion in the year 2002 towards various developmental projects. While the World
Bank funding is more towards the societal development projects and upliftment of poor nations, global
commercial banks have funded around $90 billion in 2002 towards private projects. The growth of the project
financing activity during the last one decade took place due to certain economic factors such as low inflation,
high growth of service sectors, etc. As a result, almost all organizations, irrespective of their size, have
embarked on numerous projects.
Along with the global growth of project financing, the Asia region is also experiencing similar trends.
According to market search firm, Dealogic, project finance volumes in Asia stood at $31 billion, which
represents a one-third of global volumes. The 2003 volumes are higher than that of 2002 by 18 percent. Out of
the $31 billion, Asian banks have lent around $20.8 billion while the global banks have advanced around $5.9
billion with the rest being raised by tapping other sources of finance. Japanese and Chinese banks were
aggressive in providing loans to projects especially to infrastructure development projects in the Asian region.
The growth trends are likely to continue well into the future, especially with large economies like, India and
China requiring huge amounts of funds for their infrastructure projects. In India, much of the development
projects have been financed in the past through the planning commission allocations, both at the central and the
state level. However, with the liberalization of the economy, there has been a significant change in the project
financing activity in India. Today, private and public funding is also available for projects undertaken by the
government and the corporate entities.
The recognition of project finance as an important lending activity has enhanced the sources of funds for both
the governments and the corporate. The sources of project finance are categorized into equity markets,
preferential capital, internal accruals, term loans, debentures, working capital advances, venture capital and
international financial markets. Depending on the capabilities of the firm and the scope of the projects,
organizations use any one or a combination of these sources to meet the project financing requirements.
Earlier, much of the project-financing requirement was met through financing by development financial
institutions like, IDBI, IFCI, IDFC and SIDBI for SSI units. However, with the liberalization, new avenues of
project finance have emerged. Three broad factors have contributed directly to the emergence of alternative
source of project finance. First, the emergence of vibrant capital markets in India. Second, the opening up of the
economy, which has enabled even the medium sized companies in India to tap the foreign markets to the tune of
Rs.500 million without pre-approval, and finally the endeavors of the public and private sectors banks in India.
The number of sources that companies can tap is on a rise. Depending upon the risk-return profile of the project
and the extent of funding requirements, companies can tap one or a combination of sources to meet the funding
requirements. Just as the government sponsored development projects adopt different methods of project
financing for different kinds of projects, companies can also try to emulate the government models and
overcome the funding constraints.
Caselet 3
Read the caselet carefully and answer the following questions:
10. Discuss the common problems faced by a team while working for an integrated project.
(8 marks) < Answer >
11. What are the strategies that should be taken by the leader of the project team in order to dispel the fear of
failure among the team members?
(9 marks) < Answer >
Work teams have long been considered an effective device to enhance organizational efficiency. Since the
discovery of the importance of social phenomena in the classic Hawthorne Studies management theorists and
practitioners have tried to improve group identity and cohesion in the workplace. Indeed, much of the “human
relations” movement that occurred in the decades following Hawthorne is based on a group concept.
McGregor’s Theory Y, for example, spelled out the criteria for an effective work group and Likert called his
highest form of management the “participative group”. In today’s more complex and technologically
sophisticated environment, the group has re-emerged in importance in the form of project teams.
The project team is more or less a fixture in the current work environment. Technological complexity and
specialization have increased the need for the greater flexibility provided by matrix organizational structures.
Such structures, organized around a product or project, demonstrate greater adaptability to change and an
emphasis on common goals. A major challenge for a manager in a project environment is melding the talents of
diverse individuals with different professional orientations towards a larger task. Wilemon and Thamhain define
team building as “the process of taking a collection of individuals with different needs, backgrounds, and
expertise and transforming them by various methods into an integrated, effective work unit.”
While the purpose of creating an effective team is clear, the process of developing a team is more difficult to
determine. Effective project teams are characterized by both task and relationship factors. The task factors
include timely performance within budget, concern for quality, and technical results, while the relationship
issues center on the capacity to solve conflicts, trust, and communication effectiveness. Beckhard suggests that
team leaders often place more emphasis on the task issues such as improving work and solving problems, while
those who develop the teams (e.g., consultants) emphasize the group’s inner workings and relationships among
its members. As a consequence, the thrust of team development efforts depends on the viewpoint of those
involved.
The technical aspects of team development are more clearly delineated, easier to measure, and thus more
directly addressed. Hardaker and Ward, for example, describe a technique used at IBM known as Process
Quality Management (PQM) that focuses on understanding the mission, spelling out goals, and developing
specific lists of activities directed towards critical success factors. While such exercises can be useful for
understanding the task, they do not address some of the common misunderstandings that arise from the inner
workings of multidisciplinary groups. Indeed, such barriers as differing priorities and interests, role conflicts,
and power struggles can undermine the group process and quickly derail the task. Yet, these issues are the most
difficult to see and require a leader with the necessary sensitivity to effectively confront them.
Facilitating an effective project team is a delicate balancing act between the technical and the social, the
individual and the group, the group and the leader, and the group and its organizational constituency. Group
dynamics as well as interpersonal phenomena determine the potential success or the ultimate demise of such
group efforts. Organizations tend to focus on the technical factors when assembling such teams with the implied
hope that the interpersonal issues will work themselves out. While this approach may succeed, it is prudent to
recognize the more common roadblocks to group performance and to devise measures either to prevent or cope
with them. Much depends on the careful selection and development of team members and the symbiotic
relationship between the group and its leader. As project teams proliferate and increase in their scope and
complexity, the interpersonal dimension will no doubt become even more crucial.

END OF SECTION E

END OF QUESTION PAPER

 Suggested Answers
Project Management – II (242) : October 2004
Section D : Case Study
1. a. Cost of project:
(in Rs. lakh)
A Land:
i. Basic cost land 25.00
ii. Stamp duty @ 16% 4.00
iii. Cost of leveling the site 0.50
iv. Cost of laying internal roads 2.50
v. Cost of approach roads 0.30
vi. Cost of boundary walls and main gate 1.25
vii. Cost of digging a deep bore well 0.45
34.00 34.00
B Building and civil works:
i. Main process building 95.25
ii. Hydraulic room 22.35
iii. Pneumatic room 24.40
iv. Pump house 22.50
v Administrative building 25.00
vi. Other buildings 17.50
207.00 207.00
C Plant and machinery:
i. Rolling machine form Viscon 1600.00
ii. Custom duty on imported capital equipment @ 35% 560.00
iii. 64 numbers of stalled torque motors 80.00
iv. Furnace 54.00
v. Hydraulic system 15.00
vi. Pneumatic system 10.00
vii. 4 numbers of pump-motors 5.00
viii. Pipe lines 0.80
ix. Electric panels and control gears 30.00
x. Cables 100.00
xi. 2 numbers of EOT cranes 460.00
xii. Excise paid (iii + v + vi + vii + viii + ix + x + xi) × 0.16 112.13
xiii. Additional charges (iii + iv + v + vi + vii + viii + ix + x + xi) × 0.04 30.19
xiv. Erection charges (i + iii + iv + v + vi + vii + ix + xi) × 0.10 235.48
xv. Cost of laying pipelines (500 × 680 × 10–5) 3.40
xvi. Cost of laying cables (10,000 × 350 × 10–5) 35.00
Total cost of plant and machinery 3331.00 3331.00
D Miscellaneous fixed assets (MFA) 15.00
E Preliminary expenses (Less issue expenses)
i. Legal charges for memorandum and articles of association 0.40
ii. Cost of market survey 0.75
iii. Cost of preparing feasibility report 0.35
1.50 1.50
F Pre-operative expenses
i. Traveling expenses 0.50
ii. Postage 0.07
iii. Printing and stationery expenses 0.18
iv. Advertisement expenses 25.00
v. Insurance premium during construction 2.75
28.50 28.50
G Contingencies
i. (B + C + D) x 0.10 355.30
H Margin money for working capital 879.73
Total cost of the project (Less the public issue expenses)
= (A + B + C + D + E + F + G + H)
= 34.00 + 207.00 + 3331.00 + 15.00 + 1.50 + 28.50 + 355.30 + 879.73 = 4852.03 lakh
Money to be raised through public issue = 4852.03 – 2500 – 900 = Rs.1452.03 lakh
1452.03
0.95
∴ Size of the issue = = Rs.1528.45 lakh and so the issue expenses = Rs.76.42 lakh.
∴ Total preliminary expenses = 76.42 + 1.50 = 77.92 lakh.
∴ Total cost of project = 4852.03 + 76.42 = Rs.4928.45 lakh.

b. Means of finance: (in Rs. lakh)

Equity
– Promoters 900.00
– Public 1528.45
Term loan 2500.00
Total 4928.45
Computation of working capital (in Rs.lakh)
 Period
Particulars Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5
(months)
Raw materials 1.0 610.00 710.00 820.00 1020.00 1020.00
Consumables 3.0 52.50 61.25 70.00 87.50 87.50
Finished goods 1.0 714.67 827.75 951.08 1175.58 1178.25
Debtors 2.0 2011.00 2346.17 2681.33 3351.67 3351.67
Working expenses 1.5 130.75 146.00 161.63 189.63 193.63
Total 3518.92 4091.17 4684.04 5824.38 5831.05
Bank finance 2639.19 3068.38 3513.03 4368.29 4373.29
Margin money 879.73 1022.79 1171.01 1456.09 1457.76 <
TOP >

2. Profitability Statement: (in Rs. crore)

Year 1 Year 2 Year 3 Year 4 Year 5
Sales 120.66 140.77 160.88 201.10 201.10
Raw material 73.20 85.20 98.40 122.40 122.40
Consumables 2.10 2.45 2.80 3.50 3.50
Power 2.34 2.52 2.64 3.00 3.00
Fuel 4.88 5.68 6.56 8.16 8.16
Repairs and maintenance 0.74 0.78 0.81 0.85 0.90
Depreciation 3.78 3.78 3.78 3.78 3.78
Salaries and wages 1.80 1.98 2.18 2.40 2.64
Administrative overhead 0.70 0.72 0.74 0.76 0.79
Selling overhead 6.03 7.04 8.04 10.06 10.06
Interest on term loan 3.50 2.80 2.10 1.40 0.70
Interest on WC loan 3.17 3.68 4.22 5.24 5.25
Preliminary expenses written 0.16 0.16 0.16 0.16 0.16
off
Profit before tax 18.26 23.98 28.45 39.39 39.76
Tax 4.39 7.21 9.39 13.68 14.16
Net profit after tax 13.87 16.77 19.06 25.71 25.60
Working Notes:
1. 1. Sales volume:
2.
 Year 1 Year 2 Year 3 Year 4 Year 5
i. Rods (million tons) 0.060 0.070 0.080 0.100 0.100
 0.5  0.306 0.357 0.408 0.51 0.51
 (i) × 98 
 
ii. Scales (thousand tons)
 1.5  0.918 1.07 1.22 1.53 1.53
 (i)  98 
 
iii. Cobbles (thousand
tons)
2. Sales Value: (Rs. crore)
3.
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
i. Rods 120.00 140.00 160.00 200.00 200.00
ii. Scales 0.11 0.13 0.15 0.18 0.18
iii. Cobbles 0.55 0.64 0.73 0.92 0.92
Total 120.66 140.77 160.88 201.10 201.10
3. Raw Materials:
Year 1 Year 2 Year 3 Year 4 Year 5
 1  0.061 0.071 0.082 0.102 0.102
(output) × 0.98 
 
i. Billets (in million tons)
ii. Cost of raw materials @ Rs.12,000 per ton 73.44 85.68 97.92 122.40 122.40

4. 4. Allocation of contingencies and pre-operative expenses on different fixed assets:

5.
Pre-operative
Cost Contingencies Total
expenses
Buildings 2.07 0.20 0.017 2.287
Plant and machinery 33.31 3.33 0.267 36.907
MFA 0.15 0.02 0.001 0.171
Total 35.53 3.55 0.285 39.365
5. Depreciation for IT purposes:
(a) Buildings:
Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance 2.287 2.058 1.852 1.667 1.500
Depreciation @ 10% 0.229 0.206 0.185 0.167 0.150
Closing balance 2.058 1.852 1.667 1.500 1.350
(b)
Plant and machineries & MFAs:
 Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance 37.078 27.809 20.857 15.643 11.732
Depreciation @ 25% 9.27 6.952 5.214 3.911 2.933
Closing balance 27.809 20.857 15.643 11.732 8.799
Total depreciation 9.50 7.158 5.399 4.078 3.083
(c)
Depreciation for company law purposes:
Buildings @ 3.34% : 0.0764
Plant and machinery and others @ 10% : 3.7078
3.7842
6. 6. Power Consumption:
Year 1 Year 2 Year 3 Year 4 Year 5
Output (million tons) 0.60 0.70 0.80 0.10 0.10
Power Consumption (million units) 3.90 4.20 4.40 5.00 5.00
Power Bill (Rs. crore) 2.34 2.52 2.64 3.00 3.00
7. Term loan repayment schedule:
Year Opening balance Amount repaid Closing balance Interest @ 14%
1 25.00 5.00 20.00 3.50
2 20.00 5.00 15.00 2.80
3 15.00 5.00 10.00 2.10
4 10.00 5.00 5.00 1.40
5 5.00 5.00 0 0.70
8. Short-term banks finance: (in Rs. crore)
Year Amount of Short-term loan Interest @12%
1 26.39 3.17
2 30.68 3.68
3 35.13 4.22
4 43.68 5.24
5 43.73 5.25 9. Computation of
Tax:
Year 1 Year 2 Year 3 Year 4 Year 5
Profit before tax 18.26 23.98 28.45 39.39 39.76
Add: Depreciation (SLM) 3.78 3.78 3.78 3.78 3.78
Less: Depreciation (WDV) 9.50 7.16 5.40 4.08 3.08
Taxable income 12.54 20.60 26.83 39.09 40.46
Tax @ 35% 4.39 7.21 9.39 13.68 14.16 <
TOP >
3. Cash flows from long-term funds point of view:
•
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial cash flow (49.28)
Operating cash flows:
(+) PAT 13.87 16.77 19.06 25.71 25.60
(+) Interest on term loan (1-T) 2.28 1.82 1.37 0.91 0.46
(+) Depreciation 3.78 3.78 3.78 3.78 3.78
(+) Preliminary expenses 0.16 0.16 0.16 0.16 0.16
written off
(–) Increase in WC margin 0.0 1.43 1.48 2.85 0.02
Terminal cash flows:
(+) Net salvage value of
16.72
fixed assets
(+) Net salvage value of
14.58
WC* margin
Total (49.28) 20.09 21.10 22.89 27.71 61.28
• Assumption that increases in margin money will be met out of internal cash accruals.
• • Terminal value of land is considered as Rs.0.34 crore
Terminal value of the plant and machineries as well as the miscellaneous fixed assets is obtained as
= (Rs. 39.37 crore – Rs.3.78 crore × 5) × 0.8 = Rs.16.38 crore.
< TOP >
4. a. Cost of equity = 15%
Cost of debt = 14%
Tax rate = 35%
25 (49.28 −25)
×14 ×0.65 + ×15
49.28 49.28
∴ Weighted average cost of capital =
= 4.62 + 7.39 = 12.01 ≅ 12.00 percent.
The required NPV may be calculated as:

20.09 21.10 22.89 27.71 61.28

+ + + +
1.12 (1.12) 2 (1.12)3 (1.12) 4 (1.12)5
– – 49.28 +
= – 49.28 + 17.94 + 16.82 + 16.29 + 17.61 + 34.77 = –49.28 + 103.43 = Rs.54.15 crore.
b. Terminal value of intermediate cash flows @ 6.00 percent
= 20.09 × (1.06)4 + 21.10 × (1.06)3 + 22.89 × (1.06)2 + 27.71 × (1.06) + 61.28 = Rs.166.87 crore
TV
− IO
(1 + k) n
Modified IRR may be calculated from: =0
where, TV = Terminal value k = Modified IRR
n = Life of the project IO = Initial outlay
Terminal value
− IO = 0
(1+k) 5
Then
 166.87
− 49.28 = 0
(1 + r)5
or,
1/ 5
166.87 
 49.28 
 
or, (1 + r) =
or, r = (1.2763 – 1)
or, r = 27.63 percent.
As the modified IRR is more than the cost of capital, so the project may be recommended.
c. The discounted payback period for the project may be calculated as follows:
Year Cash inflows PV of cash flows @ 12.00% Cumulative PV of cash flows
1 20.09 17.94 17.94
2 21.10 16.82 34.76
3 22.89 16.29 51.05
4 27.71 17.61 68.66
5 61.28 34.77 103.43
As we see from the above table that initial investment of the project is being recovered by the 3rd year.
Hence, the project may be accepted for such a lower pay back period.
d. Estimation of yearwise debt service coverage ratio:
Year 1 Year 2 Year 3 Year 4 Year 5
PAT 13.87 16.77 19.06 25.71 25.60
Depreciation 3.78 3.78 3.78 3.78 3.78
Preliminary expenses 0.16 0.16 0.16 0.16 0.16
Interest on term loan 3.50 2.80 2.10 1.40 0.70
Principal Repaid 5.00 5.00 5.00 5.00 5.00
DSCR 2.51 3.01 3.54 4.85 5.31
As we see
from the above table that the expected DSCR is always more than or equal to 2.50, the project may be
financed by the term lenders.
< TOP >
5. A work breakdown structure (WBS) is similar to a decision tree diagram that represents the work to be done
systematically. It divides a very complex project like, setting of an integrated steel plant or petro-chemical plant
into several tasks, thereafter tasks are classified into subtasks and lastly, the subtasks are disintegrated into a
number of work packages. The division starts with the program when assignment of the multiple projects is
undertaken. The work breakdown structure provides a higher possibility that every major and minor activity
will be accounted for the successful completion of the entire project. The benefits of WBS are as follows:
• Provides a snapshot picture for the entire project
• Better planning can be performed at a least time by using the work packages
• Better planning leads to an efficient estimation of the time and cost
• Effective estimation of the time and cost helps to prepare the required budget
• Project objectives can be easily linked to the availability of the company resources
• Performance of the project can be conveniently reported to the sponsors
• Adverse variation of the performance can be easily traced and corrective measures may initiated in order to
reverse the trend
 • Networking and control planning can be easily started
• The responsibility of every team can be easily assigned and correspondingly their performance may be
easily measured.
< TOP >
Section E: Caselets
Caselet 1
6. Opportunity management is the other side of the risk management process that explores the possibilities of
exploiting positive impacts of various risks. It identifies and analyzes the opportunities, treat the same and
finally monitor those opportunities for their proper exploitations. The opportunities may be identified through
the following techniques:

• • SWOT Analysis: It is performed after having a brain storming session that lead to the flow of
different ideas from the project personnel. These ideas are motivated to work out the positive and negative
sides of the project.
• • Constraint Analysis: The constraints in a project are required to be analyzed carefully whether these
may be relaxed or not. Thereafter, one should examine whether any opportunity arises following these
relaxations.
Exploitation of the opportunities depends on prompt and well-timed actions. Treatment of opportunities needs
proper and well planned strategies that are minor images of the risk. The different strategies for opportunity
treatment are as follows:
• • Exploit the opportunity: It is suitable when the possibility of the opportunities is almost certain and
hence also termed as the golden opportunities as the exploitation of these lead to high profitability. Hence,
the scope of the project should also consider this, without leaving it to the fate of the project sponsors as
well as the changing project objectives. Hence, the project should be done in a different manner.
• • Share the gains: The stakeholders of the project should be taken into confidence as they are assuming
the downside risk of the project.
• • Enhance the gains: Under this approach, the project manager is required to take proactive approach
to enhance the possibility of the gains as well as the amount of the same.
< TOP >
7. There are five steps in the process of project risk management. These are as follows:
Risk Identification: It is definitely a brainstorming process to uncover the risks associated with the project.
Several ideas are taken into account from risk perception of the team members of the project following the
documentation process that are evaluated properly to uncover the risks inherent to the project. The other
alternative way is to paint a picture of the project success. Thereafter, one should move backwards, duly
considering the adverse developments that may affect the path to achieve success. Once the risks are identified,
these may be placed as a sticky note on the process of project schedule, process map, etc.
Risk Analysis: In this step, the overall magnitude of the risk and its expected losses are estimated. In order to
achieve the best outcome, the risk event drivers are determined and the probable worst impact of the same
assessed. Identification of the risk event drivers can be termed as the foundation of the risk management
process as it helps us to mitigate the same.
Risk Prioritization: In this stage, the risks are compared on the basis of their probability of occurrences as
well as the expected amount of losses, if the worst thing is going to occur in future. The risks are listed on the
basis of the resultant product of the above two factors. This steps guides the project manager for the allocation
of the resources to manage the risks actively. Since the resources are limited, the project manager should
choose the risks carefully, which have the higher impact on the organization.
Risk Planning: Once the risks are short listed for their active management, the action plan is also framed
accordingly. The following kinds of actions may be adopted:
 • Acceptance: It is adopted when the consequences are negligibly small
• Avoidance: It is the best way of dealing the risk by taking suitable precautionary measures that may rule
out the possibility of the occurrence of the event.
• Transfer: It is another good alternative where the consequences of losses are transferred to a third party
like a contractor or insurer at some nominal expenses.
• Self-financing: Here, on the basis of the past experience of the organization, a separate fund is built up
which is used to meet the consequences for the occurrence of the risk.
The actions described above are broadly categorized as the prevention plans and contingency plans. The first
one is the proactive one while the second one is reactive one and accordingly the resources should be kept ready
to meet the risks.
Risk Monitoring: It is the final step of the process of project risk management but it is repeated regularly
throughout the execution of the process of the project. This step consists of the following processes:
• • How the actions plans for the actively managed risks are progressing.
• • Removal of the risks that have mitigated effectively or cannot be expected to occur.
• • Addition to the actively managed risks that has occurred as the execution of the project is underway.
Therefore, monitoring of the risks is the repetition of the other risk management processes as the circumstances
are changing with the passage of time. Incorporating risk management into the projects requires a lot of time
and effort, even if it is scaled down. One should work in advance in order to avoid the occurrence of the
consequences of the risks that will result in predictable outcomes from the project.
< TOP >
8. The salient features of the infrastructure projects are as follows:
• • These projects need a very high amount of initial outlay e.g. the cost of setting the metro railways in
Kolkata or Delhi was in the range of few thousand crores of rupees.
• • The gestation period of these projects is relatively longer e.g. for an infrastructure project, the average
time required to get a satisfactory return on investment is about 15 years.
• • The economic life of the infrastructure thus built is also longer e.g. the working life of a river bridge is
more than a century.
• • These projects generally break geographical barrier e.g. road or railways or telephonic connectivity
generally brings people nearer irrespective of the geographical distance among them.
• • In many cases, these projects are undertaken for greater interest of the society e.g. the jobs like, road
or railways or telephonic connectivity are generally undertaken for the convenience of the masses.
• • The risk of technological obsolescence is less. The construction of the infrastructure projects is a
matter of great challenge. Thereafter, as long as the facilities are required, it will be useful to the people.
• • Execution of the project is generally a very complex task. As the projects needs a very high volume of
work, for example setting the east-west corridor for a length of more than 2000 kilometers, the erection and
execution of the project is complex in nature.
< TOP >
9. As per the given caselet, the infrastructure projects are mostly being financed by the planned allocation of the
Planning Commission of India and partially by the banks. The choice of the project, amount of allocation and
time of disbursement are seriously influenced by actions of the political leaders. Therefore, economically
unviable projects are also getting financed as these are considered to be socially desirable by the politicians in
order to protect their vote bank. Therefore, a large amount of government money will be wasted, causing severe
hardship to the taxpayers. It is correct that the government should also have some social goals. But the social
commitment should outweigh the business requirements in a country like, India where the industry is sharpen
 their competitive edge with the support of a better infrastructure. Such growth will lead to higher employment
and better standard of living and thereby overall development of the economy. While for the bank financing,
the project finance is available for a very short term, while the gestation period for any project is long term to
very long term. Therefore, one cannot rule out the possibility of the asset-liability mismatching that may be
inconvenient to the lenders as well as the borrower.
Infrastructure projects generally need a significant amount of capital investment where the gestation period
varies from long term to very long term. Therefore, we are required to find out such a type of liability where
the cash flows match the liabilities, ruling out the possibility of asset-liability mismatches. Bank finance or the
other debt instruments as presently available in the markets cannot fulfill such requirements. The sponsor
should consider equity investment in this context for the development of any infrastructure facilities in any part
of the country. Apart from it, the recently formed private insurers as well as the upcoming pension fund
providers can be offered some incentives for making investments in this sector – either in the form of equity or
debt. Since their liabilities are long term in nature, there will not be any asset-liability mismatch. These
investments will help to achieve the growth of the infrastructure facilities in the country while the private
players will get a lucrative opportunity to invest in the fund starved sector.
The government has to play a key role for the success of the financing requirements by the Indian infrastructure
sectors. It is required to formulate clear and consistent policy in this regard. The investors should be properly
compensated for the risk assumed by them by making an investment. Wherever possible, the government
should also assure the means of getting adequate returns from such investment. Simultaneously, the uniformity
of these policies must have to be maintained, irrespective of the ideology of party ruling the country. In this
context, the Enron episode, related to the Dabhol Power Company cannot be forgettable as one government run
by one party signed the agreement while the successive government run by the another party scrapped the
same, causing widespread frustration among the investors.
< TOP >
10. A common myth is that the assembly of talented and committed individuals results in synergy and renders such
a team impervious to many of the barriers to effective performance described next.
• • Different Points of View: The purpose of a project team is to harness divergent skills and talents
towards specific objectives. Coming from different departments or even organizations, there is a strong
likelihood that team members will see the world from their own points of view. The tendency to stereotype
and devalue other views is heightened when the project is highly technical and members speak their own
codes and languages. If there is any history of conflict among organizational units, the representatives from
these units may carry their prejudices into the team, potentially subverting attempts to create common
objectives. Often these factors are not apparent until the team actually begins work.
• • Role Conflict: Project or matrix organizations are not only the product of ambiguity, but they create
ambiguity as well. Team members are in multiple roles and often report to different leaders, possibly
creating conflicting loyalties. Many individuals often do not know which constituency to satisfy. The
“home” group or department has a set of expectations, perhaps including certain benefits from
representation on the team. Once it starts on the task, the team develops a life of its own with norms, values,
and expectations that might vary from those of departments. For example, a department may be run in a
mechanistic, hierarchical fashion while the project team may be more democratic and participatory. Team
members might also experience time conflicts due to the demands of project meeting that compete with
traditional job responsibilities. The pull of these conflicting forces can be either exhilarating or a source of
tension for team members.
• • Implicit Power Struggles: While role conflict often occurs horizontally (i.e., across units), conflict
can also occur vertically, because different authority levels are represented on the team. Individuals who
occupy powerful positions elsewhere can try to recreate or exercise that influence in the group. Often such
attempts to impose ideas or to exert leadership over the group are resisted, especially by others in similar
positions. There can be subtle attempts to undermine potentially productive ideas with the implicit goal of
“winning the day” rather than looking for what is best for the team. In addition, lower status individuals
may be ignored, thus eliminating a potentially valuable resource.
• • Groupthink: Groupthink refers to the tendency for a highly cohesive group, especially one working
on special projects, to develop a sense of detachment and elitism. To maintain cohesion, the group creates
 shared illusions of invulnerability and unanimity. There is a reluctance to examine different points of view,
as these are seen as threats to the group’s existence. As a result, group members may censor their opinions,
and the group proceeds to rationalize the inherent quality and morality of its decisions.
< TOP >
11. The following strategies to be taken by a project leader may be taken to dispel the fear of failure among the
members of a project team:
a. a. Creating a culture and process that foster accountability of each member: Accountability is the
assignment of responsibility and evaluation of its righteous fulfillment, thereafter it assess the motivation
for learning and implementation of the same in future.
b. b. Differentiating the terms ‘failure’ and ‘success’: Many organizations consider not reaching a target
as a “failure”, ironically “failing” to see their potential for successful and valuable learning. An exceptional
leader redefines “failure” as a “failure to learn” from a mistake, rather than the mistake itself. More
importantly, the same leader will define “success” as continuous improvement, which of course is based on
learning.
c. c. Set both benchmark and stretch goals: An exceptional leader will encourage the team to set two
goals. The first one is a “Benchmark Goal” that may be defined as “the minimum we will expect of
ourselves”. It is a base goal and one the team is prepared to guarantee. The second goal is to be far more
ambitious, being a “Stretch Goal”. This needs to be a real “reach for the stars” target which might seem
well out of reach, and even maybe even currently impossible. The entire team is encouraged to achieve an
overall performance that should not be less the bench mark level.
d. d. Set a practical continuous improvement approach and methodology: One simple yet effective
approach is to take a little time out between each identifiable project and the next and follow the steps like
learning opportunities, prioritization, implementation of the plans, and evaluation of the key performance
indicators. Once a team that gauges success by learning and continuous improvement knows it has a tool to
extract learning from any situation, positive or negative, the fear of failure is further diminished.
e. e. Be infectiously optimistic: A leader should believe that the people are capable of greater things.
Optimism should be used as an antidote to avoid the fear of failure. Hence, he or she must also seek out and
leverage from other optimists within their team, placing them in situations where their positive approach
infects others.
f. f. Recognize and reward innovations and calculated risk taking: The team environment should
encourage ideas irrespective of being their effectiveness, small or far-fetched. This will signal that it is safe
to generate more of them; even the poor ones are not blamed. In the absence of those fears, innovation will
flourish to raise the team above the obstacles.
g. g. Lead the whole person: By acknowledging the whole person, a leader makes it possible to be
dissatisfied with one aspect of a team member e.g., their understanding of a task (cognitive), whilst still
acknowledging and appreciating another, e.g. their level of commitment and motivation (affective), in
staying behind to better understand the task.
h. h. Be skilled in feedback: Many leaders determine the quality of feedback simply by its demonstrable
content accuracy. Given that the one central purpose of effective feedback is to generate improvement,
accuracy of content alone will not be enough to affect any change.
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