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IAI' A< 1M Deportment of Xndustriol Engineering and
Management
Class Test

Sub: Project Engineering & Management (I M60051) Time: One

Hour M. Mark* 25

Q 1: A company is considering two mutually exclusive projects; A & B. Project A involve* an

outlay of Rs. 100 million which will generate an expected cash inflow of Rs. 25 million per
year for 6 years. Project B calls for an outlay of Rs. 50 million which will produce an
expected cash inflow of Rs. 13 million for 6 years. The company's cost of capital is 12%.
Calculate the NPV and IRR of each project. (05)

Q 2: A company is determining the cash flow for a project involving replacement of an old machine by
a new machine. The old machine bought a few years ago has a book value of Rs. 800, 000 and it can be
sold to realize a post-tax salvage value of Rs. 900, 000. It has a remaining life of five years after which
its net salvage value is expected to be Rs. 200, 000. It is being depreciated annually at a rate of 25
percent under the written-down value (WDV) method. The incremental working capital associated with
this machine is Rs. 500,000.
The new machine costs Rs. 3, 000, 000. It is expected to fetch a net salvage value of Rs. 1,
500, 000 after two years. The depreciation rate applicable to it is 25 percent under the WDV
method. The new machine is expected to bring a saving of Rs. 650, 000 annually in
manufacturing costs (other than depreciation). The tax rate applicable to the firm is 30
percent. Estimate the cash flow associated with the replacement project. (10)

Q 3: A project involving an outlay of Rs. 10 million has the following benefits associated with it.
j Year 1 Year 2 Year 3
Cash Flow i Probability Cash Flow (Rs in Probability Cash Flow (Rs in Probability
(Rs in Millions) Millions) Millions)
4 0.4 5 0.4 3 0.3
5 0.5 6 0.4 4 0.5
6 0.1 7 0.2 5 0.2

Assume that the cash flows are independent. Calculate the expected net present value and
the standard net present value assuming that i = 10 percent. (10)

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