Question Paper

Project Management-I (241): January 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. Value chain analysis is aimed at identifying the activities of the firm that are contributing value to the >
firm. Which of the following activities may be considered to be a support activity as per this analysis?
(a) Purchase of raw materials
(b) Creation of consumer awareness about the product
(c) Transportation of raw materials from stores to workshop
(d) Conversion of raw materials to finished products through mechanical processes
(e) Maintaining the standard of quality of a product.
< Answer
2. Last year per capita annual income level of the residents of Aharsha was Rs.96,000 and this year it is >
expected to be Rs.1,05,600 with a 3% increase in population. Actual demand of milk was 25,000 liters
in last year. Considering income elasticity of demand for milk is 1.10 how much milk would be in
demand this year?
(a) 22,123 liters (b) 22,464 liters (c) 28,597 liters (d) 29,548 liters (e) 30,152 liters.
< Answer
3. Which of the following is false with regard to market research? >

(a) Analysis with ready made primary data becomes comparatively easy
(b) Primary data is readily available easily and hence saves time of the research analyst
(c) Analysis with primary data is expected to be more accurate
(d) Secondary data may be collected from the annual reports of the existing companies
(e) Secondary data can be collected from the publications of government research organizations.
< Answer
4. The relationship between equipments, buildings and civil works is shown in >

(a) Organizational layout (b) Transport layout

(c) General functional layout (d) Communication layout
(e) Utilities layout.
< Answer
5. Which of the following facility layouts is suitable for manufacturing nuclear reactor? >

(a) Assembly lines (b) Product layouts (c) Process layouts

(d) Fixed position layouts (e) Operation layouts.
< Answer
6. Which of the following techniques is the most suitable, when NPV and IRR lead to inconsistent ranking >
due to life disparity between two or more projects?
(a) Modified Net Present Value (b) Modified Internal Rate of Return
(c) Uniform Annual Equivalent Cost/Benefit (d) Discounted Payback Period
(e) Net Benefit Cost Ratio.
< Answer
7. Expected NPV of a project is Rs.20,000 with a standard deviation of Rs.6,945. What is the probability >
that the actual NPV of the project will be greater than Rs.25,000?
(a) 0.0764 (b) 0.1841 (c) 0.2358 (d) 0.2843 (e) 0.4236.
< Answer
8. Which of the following is not a feature of traditional organization structure? >

(a) Budgeting and control are easier

(b) It has a hierarchical structure with the employees at each level reporting to the next higher level
with the exception of top and bottom levels
(c) Customer is the focus of the activities of all the departments
(d) Work flows downwards from top
(e) It is best suited for mass production.
 < Answer
9. Which of the following is true when a project is terminated by the method of inclusion? >

(a) The property and functions of the project are distributed among the existing departments of the
organization
(b) The project is included as a part of the parent organization, not as a separate division
(c) The personnel posted to the project continue to work and do not return to their respective original
departments
(d) This method of project termination is applied when the project is considered a failure that is
beyond redemption
(e) The entire project is considered as a separate business entity and is divested at a substantially
higher price.
< Answer
10. A project costs Rs.1 million and has a base case NPV of zero. If the firm invests, its debt capacity >
increases by Rs.5,00,000. The present value of interest tax shields on this debt is Rs.43,000. Assuming a
tax rate of 30%, the project’s adjusted net present value is
(a) Zero (b) Rs.43,000 (c) Rs.1,50,000 (d) Rs.1,93,000 (e) Insufficient data.
< Answer
11. A certain activity has a budgeted cost of Rs.80,000 and at the time of the periodic progress review it is >
estimated that 70 per cent of the work has been accomplished at the cost of Rs.61,096. Therefore cost
over-run (under-run) is
(a) 9.1% (b) 34.0% (c) (10%) (d) (9.1%) (e) 10%.
< Answer
12. Zebra Industries Ltd. is setting up an export oriented unit. While analyzing the profitability, it is seen >
that the Domestic Resource Cost (DRC) is Rs.49.50. The prevailing exchange rate is Rs.47.85 to a US
$. This implies that
(a) The project saves Rs.49.50 for every $ earned
(b) The project spends Rs.47.85 for every $ earned
(c) The project’s earning capacity is more than the official exchange rate and hence profitable
(d) To earn US $ 1 the project consumes Rs.47.85 that is cheaper than buying a $ from the market @
Rs.49.50 per $
(e) To earn US $ 1 the project consumes Rs.49.50 that is costlier than buying a $ from the market.
< Answer
13. Which of the following is true? >

(a) The independent float of an activity is the extra time available if the activity is started and
completed at the earliest
(b) The independent float of an activity is the extra time available for completing it under the most
unfavorable conditions
(c) The independent float of an activity is the extra time available if the activity is started at the
earliest and completed at the latest
(d) The independent float of an activity is the extra time available if the event is started at the latest
and completed at the earliest
(e) The independent float of an activity is the shortage of time if the activity is started at the earliest
and completed at the latest.
< Answer
14. A project manager faces uncertainty regarding how the economy may perform during the next year. >
According to the estimates available with him, three different states of economy may occur: strong
economic performance, moderate economic performance and weak economic performance. The
probabilities associated with the occurrence of these three states of economy and corresponding NPV of
the project are as stated below:
NPV of the project
State of Economy Probability
(in Rs. crore)
Strong 0.25 75
Moderate 0.60 45
Weak 0.15 30 The semi-variance of the
project’s NPV would be
(a) Rs. 46.55 crore2 (b) Rs. 78.05 crore2 (c) Rs. 87.08 crore2
(d) Rs.171.11 crore2 (e) Rs.258.19 crore2.
< Answer
15. Which of the following is true in the context of estimation of project cost? >
 (a) The order-of-magnitude approach is used by referring engineering data that are related to the
project
(b) In the order-of-magnitude approach, the estimate is made by interpolating the expenditures on
similar projects undertaken earlier
(c) In the approximate estimate of the cost of a project, the estimate may be made by adjusting the
expenditures on similar projects undertaken earlier corresponding to the changes in price levels
through indexation method
(d) The acceptable level of variations for definitive estimate lies within 15 percent of either side
(e) Estimates based on estimation manuals are inferior to that of the engineering data.
< Answer
16. In which of the following conditions would the implementation of a project, be easiest? >

(a) The project plan is prepared by the project manager and a representative of the top management,
without involving the managers of the concerned functional departments
(b) The project planning process involves the project manager, the managers of the concerned
functional departments and a representative of the top management
(c) The project plan is prepared by the project manager only, and the participating departments are
supposed to follow the same
(d) The project plan is jointly prepared by the project manager and the managers of the participating
departments, without any representation of the top management
(e) The project plan is prepared by the managers of the concerned functional departments and a
representative of the top management, without involving the project manager.
< Answer
17. Which of the following is correct? >

(a) The cost of equity capital estimated on the basis of the dividend discount model does not change,
although the growth rate in dividend per share may vary from year to year
(b) The cost of equity capital estimated by the CAPM approach is based on the total risk associated
with the equity share
(c) The realized yield approach should be applied for estimating the cost of equity capital when the
shareholders’ estimates of their expected returns are consistent with the past returns obtained from
the same stock
(d) In the bond yield plus risk premium approach, the cost of equity capital is estimated by arriving at
the risk premium mathematically
(e) The cost of equity capital estimated by the Earnings/Price ratio approach may be appropriate, if the
earnings per share of the firm will increase consistently from the next year onwards.
< Answer
18. During the secondary treatment phase of the treatment of water pollutants >

(a) The undesirable chemicals, particles and suspended matters are removed
(b) Pollutants in the form of chemicals like, detergents, pesticides and petrochemicals are removed
from the effluents
(c) The effluent becomes suitable to be released into the environment after the treatment
(d) The effluents are degraded into methane and other gases by using bacteria
(e) Harmful chemicals are converted into other harmless substances through oxidation.
< Answer
19. In which of the following conditions the linear programming approach cannot be meaningfully used for >
deciding on the optimal combination of the projects?
(a) The benefits from the project can be quantified
(b) The projects must be accepted or rejected in totality
(c) The constraints faced by the firm in making the optimal selection can be represented in the form of
linear equations or inequations
(d) The resources available with the firm are equally useful for all the projects under consideration
(e) The objective of the firm can be represented in the form of a linear function.
< Answer
20. The network diagram for a project shows three activities on the critical path viz., P, Q and R (in that >
order). The activities are independent of each other. The time estimates for the three activities are given
below:
 Time estimates (in weeks)
Activity Optimistic Most likely Pessimistic
P 1 2 3
Q 2 3 4
R 3 4 5 The standard deviation of the
duration of the critical path is
1/ 2 1/ 3 2/3
(a) week (b) 1/9 week (c) week (d) week (e) 4/9 week.
< Answer
21. Which of the following statement(s) is\are not true in relation to the risk adjusted investment appraisal >
techniques?
I. The certainty equivalent coefficient generally assumes a low value for the initial years while a high
value for the later years during the life span of the project.
II. Simulation is done by imitating real world situations in order to generate all possible combinations
of the constraints from which the optimal solution is to be obtained.
III. In sensitivity analysis, the impact of the changes in one or two variables on the criterion of merit
is/are generally studied.

(a) Only (II) above (b) Only (III) above

(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
< Answer
22. Which of the following is\are the difference(s) between the Capital Market Line (CML) and Security >
Market Line (SML)?
I. In SML, the measure of risk of individual security is its variance whereas in CML, the measure of
risk is its covariance of its return with the market return
II. The SML reflects the relationship between inefficient portfolios whereas the CML reflects the
relationship between risk and return of the efficient portfolios.
III. The slope of SML is the ratio between the portfolio risks to market risk while it is beta of the
portfolio in case of CML.

(a) Only (II) above (b) Only (III) above

(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) Both (I) and (III) above.
< Answer
23. Given that, the value of call option is Rs.8.50, the present value of exercise price is Rs. 33.80, and the >
value of put option is Rs.3.75, if put-call parity holds the present price of the stock will be
(a) Rs.29.05 (b) Rs.33.80 (c) Rs.38.55 (d) Rs.42.30 (e) Rs.46.05.
< Answer
24. Which of the following statement(s) is\are true regarding the project staff? >

I. The size of the project office staff is generally decided based on the size of the project,
technical complexity and its strategic importance.
II. A technical expert is preferred in comparison to a specialist in interpersonal skills to be a project
manager.
III. Entire project team is not part of project office.

(a) Only (I) above (b) Only (III) above

(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) Both (I) and (III) above.
< Answer
25. Which of the following statement(s) is/are true with regard to the Life Cycle Costing technique of >
budgeting?
I. It helps to achieve the optimal utilization of the resources by evaluating alternative courses of
actions.
II. It is a cheaper proposition and hence is suitable for any project.
III. It needs the repetition of the entire budgeting exercise following the changes in the requirements.

(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
26. M/S. Soundsleep Ltd has sold the following mattresses during the quarter October –December 2004: >

Month Units
October 25,000
November 28,000
December 26,000 The sales manager has forecasted to sell 30000
mattresses per month during the last quarter. If the adjustment factor is 0.25, the forecast for the next
quarter as per exponential smoothing method is
(a) 28,580 units (b) 29,500 units (c) 77,250 units
(d) 85,750 units (e) 87,250 units.
< Answer
27. In spite of the best planning, projects often fail. Which of the following is/are common reason(s) for >
project failure?
I. Change of business strategy of the parent firm.
II. Non-occurrence of time and cost overruns.
III. Technological changes.

(a) Only (I) above

(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above.
< Answer
28. Which of the following is a group creativity technique for the generation of ideas? >

(a) Black box (b) Attribute listing (c) Directed dreaming

(d) Delphi (e) Checklist.
< Answer
29. The report of social cost benefit analysis of a project is as follows: >

Economic rate of return : 5%

Effective rate of protection : 30%
Domestic resource cost : Rs.58.50
The implicit rate of foreign exchange is
(a) Rs.44.85 (b) Rs.45.00 (c) Rs.45.95 (d) Rs.47.25 (e) Rs.55.71.
< Answer
30. Which of the following is a phase of project life cycle according to David Cleland? >

(a) Conceptual phase (b) Contracts phase

(c) Procurement phase (d) Construction phase
(e) Termination/absorption phase.

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. Kajaria Petrochem Ltd., a renowned oil and gas exploration company in India, decided to search for oil and natural
gas in the Sundarban area of West Bengal. Considering the importance of the project and the commitment of large
sum, the geologist of the company prefers to test the quality of the soil at a depth of 400 feet from the ground level
through seismic wave. The project manager of the company considers the following two possibilities:

• • To perform seismic test by spending an amount of Rs.1,50,000

• • To proceed without performing any test

If no test is conducted, the probabilities of getting either crude oil or natural gas are 0.5 each. While the project
related to this exploration work might end up with any of the following three different types of performances:
Performance Good Moderate Bad
Probability 0.10 0.30 0.60 If the soil test is conducted, the underlying soil may be
obtained as: Filled soil, soft soil or rock soil. However, filled soil may offer the best result for exploration of crude
oil. In this case, the possibilities of getting different types of soil are as follows:
Type of Soil Filled Soil Soft Soil Rock Soil
Probability 0.40 0.50 0.10 On the other hand, the probabilities of getting,
crude oil and natural gas from different types of soils are as follows:
Probabilities
Type of Soil Filled Soil Soft Soil Rock Soil
Crude Oil 0.70 0.50 0.20
Natural Gas 0.30 0.50 0.80 Consequently, the probabilities of the performance
of the project, given the soil types and the type of output (crude oil or natural gas), are as follows:
Type of Soil Nature of Output Good Moderate Bad
Filled Soil Crude Oil 0.70 0.20 0.10
Natural Gas 0.10 0.20 0.70
Soft Soil Crude Oil 0.30 0.40 0.30
Natural Gas 0.30 0.40 0.30
Rock Soil Crude Oil 0.20 0.20 0.60
Natural Gas 0.60 0.20 0.20 The expected NPV from the project at
each level of performance has been assessed as:
Performance Level Good Moderate Bad
Crude Oil Rs.20,00,000 Rs.8,00,000 – Rs.5,00,000
Natural Gas Rs.25,00,000 Rs.10,00,000 – Rs.6,00,000 You are required to:
a. Draw the necessary diagram for aiding the project in the decision making process.
b. Advice the project manager regarding the selection of the best alternative.
c. Find the mean and standard deviation of NPV of the best alternative.
(6 + 3 + 4 = 13 marks) < Answer >

2. A project consists of the following activities and their time estimates are as shown below:
 Time (Months)
Activity
to tm tp
1–2 0.50 1.00 1.50
1–3 1.00 2.00 3.00
1–5 6.00 8.00 10.00
2–4 1.50 3.00 4.50
4–6 5.00 7.00 9.00
4–5 2.00 3.00 4.00
5–7 1.00 2.00 3.00
3–6 4.00 5.00 6.00
3–8 8.00 10.00 12.00
6–8 2.00 3.00 4.00
6–9 4.00 5.00 6.00
7–9 3.00 4.00 5.00
8 – 10 3.00 4.00 5.00
9 – 10 2.00 4.00 6.00 After two months from start of the project, the Project Manager
noted the following points in the status review meeting:
i. Activity (1 – 2), (1 – 3) and (2 – 4) were on schedule.
ii. Activity (1 – 5) was started but could not be continued because, the electric motor of an imported machine had
burnt due to sudden high voltage. It needs to be replaced immediately but it may take six months to get the new
one.
Considering the need of the situation, the Project Manager decides to re-allocate the existing resources in such a
way that the following schedule may be maintained:
(a) The activity (1 – 5) is estimated to take 4 months more than its expected time.
(b) For the shortage of man power, the activities (3 – 6) and (3 – 8) each may take 4 months more to complete whereas
the duration of the activity (4 – 6) is estimated to be extended by 2 months.
You are required to
a. Draw the network diagram as per initial plan and determine its duration.
b. Find the probability that the project will be completed by 22 months, as per initial plan.
c. Draw the network diagram for the revised plan and show the critical path.
(3 + 3 + 3 = 9 marks) < Answer >
3. The Korean energy major Sown Lee, is planning a host of projects in India. It is focusing primarily into thermal
power projects, hydel power projects, various power distribution systems, river dams, irrigation canals, natural gas
exploration projects etc.
One thermal power project of 100 MW is planned at Kamwar, Madhyapradesh. In another project the distribution
network for the proposed thermal power plant is planned. If both the projects are taken up then combined cash
outflows for these two projects will be decreased by 5% and the NPV will be increased by 10%.
The hydel power project of 20 MW is at Saran, Madhyapradesh. The hydel power project will be undertaken in-
house. The proposed site is in a hilly terrain. The project of distributing power from the proposed hydel power
station is planned to be outsourced from experienced local contractors. However, if the power distribution project
is done in-house, then it will cost 10% less but the expected NPV will also be 8% less, mainly due to anticipated
breakdowns in the distribution line. If the hydel power project as well as the power distribution project are
accepted by the company (whether or not the power distribution project is outsourced), then the combined cash
outflows will decrease by 5% and the combined NPV will increase by 10%.
Either a dam or a canal is planned in southern region of Uttaranchal. The initial outlay is lesser in case of setting
up canals compared to the dams but life of the project is lesser compared to that of a full-fledged river dam in the
same locality.
The company is also planning for natural gas exploration project in Krishna belt. However, this project can be
delayed by one year. But in that case, the cashflows would not really change considerably but the NPV of the
project will reduce by 7%.
The NPVs and cash outflows with regard to different projects are as follows:
(Rs in crore)
Cash
Sl. Net Present Cash outflow in
Project outflow in
No. Value year 2
year 1
1. Thermal Power Plant 35.00 50.00 75.00
2. Project of power distribution from proposed
thermal power plant 60.00 20.00 40.00
3. Hydel Power Project 15.00 35.00 10.00
4. Project of power distribution from proposed hydel
power station. (Outsourced) 25.00 8.00 12.00
5. River dam 67.00 80.00 65.00
6. Irrigation canal 7.00 17.00 10.00
7. Natural gas exploration project 22.00 72.00 0.00
The Managing Director of the company indicates that budgetary support during first and second year will be Rs.
200 crore and Rs. 150 crore. He makes a special emphasis on the prospect of not outsourcing the project relating to
distribution of power from hydel power plant. He asks the analyzing team to see its feasibility in the larger context
of the company’s project portfolio.
You are required to develop an integer programming formulation for the above problem.
(10 marks) < Answer >
4. A project involving an initial investment of Rs.60 lakh has the following probability distribution of net cash flows
during its life of five years:
(Rs. in lakh)

Year 1 Year 2 Year 3 Year 4 Year 5

Net Net
Net Proba- Proba- Proba- Net Proba- Net Proba-
Cash Cash
CashFlow bility bility bility CashFlow bility CashFlow bility
Flow Flow
10.00 0.30 12.50 0.30 10.00 0.10 7.50 0.10 20.00 0.20
12.50 0.60 15.00 0.50 12.50 0.60 10.00 0.50 25.00 0.50
15.00 0.10 20.00 0.20 17.50 0.30 12.50 0.40 35.00 0.30
The
cash flows for the various years are independent of each other. The net present value of the project is expected to
be approximately normally distributed. The risk free rate is 5.50 percent.
You are required to find out the probability that the internal rate of return of the project will exceed the risk free
rate.
(8 marks) < Answer >
5. A French company is working in two metropolis-illumination projects in India. The names of the projects are
‘Lahar’ and ‘Bahar’. Both the projects are started at the same time. The new regional manager of the company,
Santha Henry, is going through the performance reports of these two Indian projects, which have high cost as well
as time overrun. 50% of the scheduled work of both the projects should have been completed by now. She finds
that the cost variance of Lahar is three times of Bahar and the schedule variance of Bahar is 1.5 times that of
Lahar. The cost variance of both the projects put together is Rs. 20 crore and the schedule variance of both the
projects together is Rs. 30 crore. The estimated cost performance index of Lahar is 0.8 times that of the Bahar. The
total budgeted cost of Lahar is 20% more than that of Bahar. The managers of these two projects are asking for a
total of Rs. 120 crore of additional funds to complete the projects, 60% of this amount will go to Lahar.
You are required to compute cost performance indices and schedule performance indices for both the projects.
Indicate whether the variances are adverse or favorable.
(10 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. A clear statement of work (SOW) is essential to avoid problems in implementation of a project. Ideally, end users
of the project should prepare SOW. But end users tend to use too much of jargon, which makes it difficult for the
project team to understand. So, project manager generally assigns the job of preparing the SOW to a few people in
the project team.
What are the guidelines that should be kept in mind while preparing a statement of work?
(10 marks) < Answer >
7. The termination process of a project represents an important phase in the life cycle of a project. In order to
terminate a project effectively, the objectives should be very clear. Discuss the objectives that should be kept in
mind while initiating the termination process. What kind of caution the project manager should exercise during the
termination process?
(10 marks) < Answer >

END OF SECTION C

END OF QUESTION PAPER

 Suggested Answers
Project Management-I (241): January 2005
Section A : Basic Concepts
1. Answer : (a) < TOP >

Reason : As per the value chain analysis the primary activities are
i. Inbound Logistics: Activities like receiving, storing and distributing inputs, transportation of
inputs etc.
ii. Operations: Activities that convert the inputs into the final product.
iii. Outbound Logistics: Activities related to collecting, storing and distributing final product.
iv. Marketing and Sales: Activities relating to creation of customer awareness about the product.
v. Service: Activities aimed at enhancing or maintaining the value of a product
But purchase of raw materials is considered as a supporting activity and hence, the option (a)
is the answer.
2. Answer : (c) < TOP >

Reason : Lets the total consumption in next year is X liters and total population in this year is Y.
X
25,000
1.03Y Y
∴ Consumption per head in next year is ; consumption per head in current year is =
Now as income elasticity model
X 25, 000
-
1.03 Y Y 96, 000 +1, 05, 600
×
X 25, 000 1, 05, 600 - 96, 000
+
1.03 Y Y
= 1.1
x − 25, 750 2, 01, 600
×
x + 25, 750 9, 600
or, = 1.10
x − 25, 750
x + 25, 750
or = 0.05238.
or x × (1 – 0.05238) = Rs.25,750 × 1.05238
1.05238
Rs.25, 750 ×
0.94762
or x =
= 28,596.68 liters @ 28,597 liters.
Hence, the expected demand for milk for this would be = 28,597 liters.
3. Answer : (b) < TOP >

Reason : If the data required is collected from the field/market in raw form solely for a particular purpose by the
user then that is called primary data, and if the data required is collected from somebody and is used
by some other individual or organization then it is called secondary data. Collection of primary data
needs a lot of time and efforts of the observer and hence it is costly. So, the alternative (b) is false.
Once the primary data is collected, the analysis becomes very easy because in data the information required
specifically for the purpose of study is collected recently. Hence (a) is correct. As the primary data is
collected solely for the purpose of direct study, the accuracy of study with the primary data is very
high. Hence, (c) is correct. Secondary data as explained can be collected from external sources such as
Market Research Organizations, Trade Associations, Annual Reports of the existing companies and
Government Research Organizations. Hence, the options (d) and (e) are also correct.
4. Answer : (c) < TOP >

Reason : The relationship of the buildings, civil works and the equipments is shown in General Functional
 Layout. This layout is designed in such a way that the entire process of receiving raw materials,
processing and the outward movement of the finished goods takes place smoothly and efficiently.
Organizational layout shows number of people required, their requirement at each part of the project
site, and their hierarchical relationship.
Communication Layout shows the communication lines between the various divisions – the model
and their numbers.
Utilities Layout shows the points of availability and consumption of each utility at each point. Transport
Layout shows the distances between various facilities outside the production line and the modes of
transport between them.
5. Answer : (d) < TOP >

Reason : Fixed position layout is suitable for producing items like ship building, aircraft building, nuclear
reactor, rotary kiln of any cement plant etc. as the item to be produced is very difficult to move from
one place to another for the subsequent operations.
6. Answer : (c) < TOP >

Reason : When there is disparity between the life of projects, then Uniform Annual Equivalent of cost/benefits
is the most suitable method.
7. Answer : (c) < TOP >

x− x
25, 000 − 20, 000
σ 6, 945
Reason : Z = = = 0.7199 @ 0.72
From normal table, P(Z > 0.72) =0.50 – 0.2624 = 0.2358
8. Answer : (c) < TOP >

Reason : In traditional organization, the customer satisfaction is not the focus of the activities, as all
the departments are concerned only with those activities related to their functions. The
features mentioned at the other options may be considered to be the features of the
traditional form of organizations.
9. Answer : (c) < TOP >

Reason : In project termination through integration, the property and functions of the project are absorbed into
the parent company and thereafter distributed among existing departments. In the method of inclusion,
the project is absorbed with the parent organization as a separate division. The personnel posted to the
project continue to work and do not return to their respective original departments. Extinction method
of project termination is applied when the project is considered a failure beyond redemption. The fact
considered in the option (e) is generally used when the objectives of the project does not fit
strategically with that of the organization and to make some capital gains.
10. Answer : (b) < TOP >

Reason : Base case NPV = 0

Present value of interest tax shield=Rs.43,000
∴Adjusted NPV = 0 + 43,000 = Rs.43,000
11. Answer : (a) < TOP >

Reason : Cost over-run (under-run)

ACTW 61, 096
-1 = -1
BCTW 80, 000 × 0.70
= = 9.10%
12. Answer : (e) < TOP >

Reason : Exchange rate Rs./$ = 47.85

DRC= Rs.49.50
So, in order to save $1, the project consumes Rs.49.50 that is higher than the cost of dollar. Hence, the
project is undesirable.
13. Answer : (d) < TOP >

Reason : The independent float of any activity is the extra time available if the activity is started at the
latest occurrence time of its preceding event and is completed by the earliest occurrence time of its
 succeeding event. Hence, the alternative (d) is correct, others are not.
14. Answer : (b) < TOP >

∑p i (R i −R ) 2
Reason : Semi-variance =
(R i )
−R <0
Where

0.25 × 75 + 0.60 × 45 + 0.15 × 30 =

NPV
Here expected = 50.25.
∴ Semi – variance = [0.60 (45 – 50.25) + 0.15 × (30 – 50.25) ]
2 2

= 16.5375 + 61.5094 = 78.0469 ≅ 78.05.

So, the alternative (b) is the answer.
15. Answer : (c) < TOP >

Reason : a. The order-of-magnitude approach is used when the project is in the conceptual phase,
without using any engineering data.
b. In the order-of-magnitude approach, the estimates are made on the basis of the past experience of
project manager. But in the method of approximate estimate, it is done by interpolating the
expenditures on similar projects undertaken earlier.
c. In the approximate estimate of the cost of a project, the expenditures on similar projects
undertaken earlier may be adjusted to reflect the changes in price levels etc. The adjustment is
generally made by using rules of thumb, indexation method, parametric curves and other methods
that are simple to use. Hence, the option (c) is true.
d. The definitive estimates are more accurate than approximate estimates. Hence the definitive
estimates should be used when the estimated project cost is required to be more accurate than the
approximate estimate. The acceptable level of variations for definitive estimate is expected to be
less than 5 percent.
e. Estimates based on estimation manuals are superior to the estimates based on engineering data.
16. Answer : (b) < TOP >

Reason : Here, the correct answer is (b). Because, the implementation of a project is easiest when the project
planning involves the project manager, the managers of the other departments that are concerned and a
representative from the top management level.
Under the conditions, as mentioned in the other options, implementation of the project will not be so
easy as the project will not get cooperation and support from every party involved in that process.
17. Answer : (c) < TOP >

Reason : a. According to the dividend discount model the cost of equity capital = D1/P0 + g
Hence if g (growth rate in dividend per share) varies from year to year, then the cost of
equity capital will also change consequently.
b. According to the CAPM, the cost of equity is calculated as: ke = ki + βi(Rm – Rf)
Hence, the cost of equity capital estimated by the CAPM approach is based on the systematic risk
(βi) associated with the equity share.
c. c. The realized yield approach assumes that the past returns from a security will continue in the
future. Hence, the shareholders should set their expected future returns on the basis of the past
performance of the stock.
d. d. In the bond yield plus risk premium approach, for the estimation of the cost of equity capital,
the risk premium is subjectively determined.
e. The cost of equity capital estimated by the Earnings/Price ratio approach by assuming that the
earnings per share will remain constant from the next year onwards.
18. Answer : (d) < TOP >

Reason : a. During the primary treatment phase of treatment of water pollutants, the undesirable chemicals,
particles and suspended matters are removed.
b. During the tertiary treatment phase of treatment of water, pollutants in the form of chemicals like,
detergents, pesticides and petrochemicals are removed from the effluents.
 c. Following the secondary treatment phase of treatment of water pollutants, the effluents are not
released into the environment, as these are not suitable to do so. These are carried out
subsequently for the tertiary treatment.
d. During the secondary treatment phase of treatment of water pollutants, the effluents are also
treated by using bacteria that do not need oxygen for decomposition during the anaerobic process.
In this case, first, the organic matters are degraded into fatty acids and alcohols and thereafter
into methane and other gases.
e. During the tertiary treatment phase of treatment of water pollutants, the pollutants like, harmful
chemicals are converted into other harmless substances through the oxidation process.
19. Answer : (b) < TOP >

Reason : a. The linear programming approach can be meaningfully used for deciding on the optimal
combination of projects when the benefits from the project can be quantified.
b. The linear programming approach cannot be meaningfully used for deciding on the optimal
combination of the projects when the projects must be accepted or rejected in totality.
c. The linear programming approach can be meaningfully used for deciding on the optimal
combination of projects when the constraints faced by the firm in making the optimal selection
can be represented in the form of linear equations or inequations.
d. The linear programming approach can be meaningfully used for deciding on the optimal
combination of projects when the resources available with the firm are equally useful for all the
projects under consideration.
e. The linear programming approach can be meaningfully used for deciding on the optimal
combination of projects when the objective of the firm can be represented in the form of linear
function.
20. Answer : (c) < TOP >

Reason :
Activity to tm tp

P
1 2 3

Q
2 3 4

R
3 4 5
σ2
Variance of the duration of the critical path ( ) = Var (P) + Var (Q) + Var
(R)
1 1 1 3 1
+ + = =
9 9 9 9 3
=

1
( σ) =
3
∴ Standard deviation of the critical path week.
21. Answer : (d) < TOP >

Reason : Certainty equivalent method is based on the utility of the decision maker for the return obtained by
taking each additional unit of risk. The certainty equivalent coefficient generally assumes a high value
for the initial years while a low value for the later years during the life span of the project. Because,
the latter the period is considered for the assessment of cashflows, the higher will be level of
uncertainty associated with the same. Hence, the statement (I) is not correct.
In the method of simulation, the real world situations are imitated by using a mathematical model that
captures the characteristic features of the system as it encounters the random events in time. The
results are obtained by using all possible combinations of the constraints from which the optimal
solution is to be chosen. Hence, the statement (II) is correct.
 Sensitivity analysis is based on the view that only those projects that can stand the possible changes in
future in the critical elements which have a vital bearing on the costs/benefits of the project need to be
undertaken. In such analysis the factors that are likely to change during the life of the project are first
identified and then the extent of change in the NPV or other criterion chosen for evaluation with
change in the factor is measured. However, the impact of change in only one variable at a time is
considered. Hence, the statement (III) is not true and hence, the answer is (d).
< TOP >
22. Answer : (a)
Reason : CML shows the relation between return and risk for efficient portfolios and SML represents the return
expected on individual assets or securities. CML can be written as
Rm − Rf
σp
σm
E(Rp) = Rf + .
While, SML represents the return expected from individual assets or securities and is written
as: E(Rj) = Rf + βj[E(Rm)-Rf].
The measure of risk in case of CML is the standard deviation of return on the security whereas in case
of SML it is the covariance of its return with the market return. Hence, the statement (I) is not correct.
The measure of market risk is the variance of return on the market in case of SML whereas in case of
CML it is the standard deviation of return on the market. Hence, the statement (II) is true.
The slope of CML is the ratio between the portfolio risk to market risk while it is beta of the portfolio
in case of SML. Hence, the statement (III) is not correct and the answer is (a).
< TOP >
23. Answer : (c)
Reason : If put-call parity holds,
Value of put option = Value of the call option + Exercise price – Stock price
3.75 = 8.50 + 33.80 – Stock price => Stock price = Rs.38.55.
24. Answer : (e) < TOP >

Reason : The size of the project office staff is generally decided based on the size of the project, technical
complexity and its strategic importance. Hence, the statement (I) is correct All those who work for the
project are not the part of project office. Only those who are entrusted with the job of assisting the
project manager in discharging his duties belong to the project office. Hence, the statement (III) is true.
But a project manager’s job is to get things done by others working on his project and hence, he needs
to be specialist in inter personal skills. Hence, the statement (II) is not correct. So, the option (e) is the
answer.
25. Answer : (d) < TOP >

Reason : Life cycle costs are the total cost of acquiring and maintaining (ownership) of the system for the
organization. Life cycle system is a method of evaluating alternative courses of action early in the life of
a project, so that the resources can be committed to the best. Therefore, it leads to the optimum
utilization of the resources by evaluating alternative courses of actions. However, the drawbacks of this
technique are as follows:
i. Life cycle costing is expensive to perform and is hence suitable only for large projects.
ii. The entire exercise will have to be repeated whenever the requirements change.
iii. It assumes that the life of the products is finite and is known.
Hence, both the statements (I) and (III) are true and hence the option (d) is the answer
26. Answer : (e) < TOP >

Reason : Forecast for the next quarter according to exponential smoothing method is equal to
Ft+1 = µDt + (1-µ)Ft
Where, Ft+1 = Forecast for the next quarter,
µ = Adjustment factor
Ft = Forecast for the quarter
Hence, in the given case forecast for the next quarter will be equal to
 0.25 × 79,000 + 0.75 × 90,000 = 87,250 units
27. Answer : (e) < TOP >

Reason : The common reasons of project failure are:

i. Lack of understandings of the objectives by planners.
ii. Attempt to achieve too much through a single project.
iii. Non availability of the required data
iv. Loopholes in the estimates.
v. Failure to ensure that adequate manpower of the required quality is available.
vi. Frequent change of personnel into and out of the projects.
vii. vii. Inaccurate financial projections.
viii. viii. Inability of the project manager to meet the time, cost or technical performance
requirements.
ix. ix. The project has become obsolete due to technological changes
x. x. The parent firm has changed its business strategy and consequently, the project
does not fit its strategic plan.
28. Answer : (d) < TOP >

Reason : The techniques that help in individual creativity are: Attribute listing, Checklist, Black box and
Directed dreaming.
While the techniques that help in group creativity are: Brainstorming, Delphi and Nominal group
technique. Hence, the option (d) is the correct choice.
29. Answer : (b) < TOP >

Reason : Domestic resource cost = (1 + Effective rate of protection) × Exchange rate

or 58.50= (1 + 0.3) × ER

58.50
1.30
or ER = = 45.00
30. Answer : (a) < TOP >

Reason : According to David Cleland, the project life cycle consists of five phases, these are: (i) the
conceptual phase, (ii) the validation phase (iii) the full scale development phase (iv) the
production phase (v) the development phase.
 Section B : Problems

1. a.

Note: In the above diagram, N.G. stands for natural gas.

b. Expected PV at C1, C3, C4 and C5 are
EPV (C1) = Rs.165,000 EPV (C3) = Rs.10,66,000
EPV (C4) = Rs.870,000 EPV (C5) = Rs.13,16,000
Expected PV of Selected
Decision Point Alternative Expected PV
Alternative
D2 D21 Rs.10,66,000 Rs.10,66,000
D22 0
D3 D31 Rs.870,000 Rs.870,000
D32 0
D4 D41 Rs.13,16,000 Rs.13,16,000
D42 0
On the basis of the above information, the alternative selected at the decision points D 2, D3 and D4 are
D21, D31 and D41 respectively. The expected PV, assigned to D2, D3, D4 are Rs.10,66,000, Rs.870,000 and
 Rs.13,16,000 respectively.
Now, expected PV at C2 is Rs.10,66,000 × 0.40 + Rs.8,70,000 × 0.50 + Rs.13,16,000 × 0.10 = Rs.9,93,000

Now lets see the expected PVs of different alternatives of decision point D1.

Alternatives Expected NPV (Rs.)

D11 Rs.165,000
D12 (Rs.9,93,000– Rs.150,000)
= Rs.8,43,000
So, the best alternative for the
company is D12, which says the company should go for a soil test before installing the machine.
c. Path, Probabilities and PV
Probabilit NPV (N)
Path
y (Pi) (Rs.)
D12 – C21 – D21 – C31– C311 0.196 20,00,000 – 1,50,000 = 18,50,000
D12 – C21 – D21 – C31– C312 0.056 8,00,000 – 1,50,000 = 6,50,000
D12 – C21 – D21 – C31– C313 0.028 –5,00,000 – 1,50,000 = –6,50,000
D12 – C21 – D21 – C32– C321 0.012 25,00,000 – 1,50,000 = 23,50,000
D12 – C21 – D21 – C32– C322 0.024 10,00,000 – 1,50,000 = 8,50,000
D12 – C21 – D21 – C32– C323 0.084 –6,00,000 – 1,50,000 = –7,50,000
D12 – C22 – D31 – C41– C411 0.075 20,00,000 – 1,50,000 = 18,50,000
D12 – C22 – D31 – C41– C412 0.100 8,00,000 – 1,50,000 = 6,50,000
D12 – C22 – D31 – C41– C413 0.075 –5,00,000 – 1,50,000 = –6,50,000
D12 – C22 – D31 – C42– C421 0.075 25,00,000 – 1,50,000 = 23,50,000
D12 – C22 – D31 – C42– C422 0.100 10,00,000 – 1,50,000 = 8,50,000
D12 – C22 – D31 – C42– C423 0.075 –6,00,000 – 1,50,000 = –7,50,000
D12 – C22 – D41 – C51– C511 0.004 20,00,000 – 1,50,000 = 18,50,000
D12 – C22 – D41 – C51– C512 0.004 8,00,000 – 1,50,000 = 6,50,000
D12 – C22 – D41 – C51– C513 0.012 –5,00,000 – 1,50,000 = –6,50,000
D12 – C22 – D41 – C52– C521 0.048 25,00,000 – 1,50,000 = 23,50,000
D12 – C22 – D41 – C52– C522 0.016 10,00,000 – 1,50,000 = 8,50,000
D12 – C22 – D41 – C52– C523 0.016 –6,00,000 – 1,50,000 = –7,50,000

ΣNPVi × pi
NP V
= = Rs.8,43,000

Variance (NPV) = Σpi × NPVi2 – (

NP V
)2
= 0.196 × 342.25 + 0.056 × 42.25 + 0.028 × 42.25 + 0.012 × 552.25 + 0.024 × 72.25 + 0.084 × 56.25 + 0.075
× 342.25 + 0.100 × 42.25 + 0.075 × 42.25 + 0.075 × 552.25 + 0.100 × 72.25 + 0.075 × 56.25 + 0.004 ×
342.25 + 0.004 × 42.25 + 0.012 × 42.25 + 0.048 × 552.25 + 0.016 × 72.25 + 0.016 × 56.25 = 200.25 –
71.065 = 129.185
So, σ(NPV) = 11.365.
So, the standard deviation of NPV is Rs.11,36,500.
< TOP >
2. a.
Activity to tm tp Expected time Variance
1–2 0.50 1.00 1.50 1.00 0.0278
1–3 1.00 2.00 3.00 2.00 0.1111
1–5 6.00 8.00 10.00 8.00 0.4444
2–4 1.50 3.00 4.50 3.00 0.2500
4–6 5.00 7.00 9.00 7.00 0.4444
4–5 2.00 3.00 4.00 3.00 0.1111
5–7 1.00 2.00 3.00 2.00 0.1111
3–6 4.00 5.00 6.00 5.00 0.1111
3–8 8.00 10.00 12.00 10.00 0.4444
6–8 2.00 3.00 4.00 3.00 0.1111
6–9 4.00 5.00 6.00 5.00 0.1111
7–9 3.00 4.00 5.00 4.00 0.1111
8 – 10 3.00 4.00 5.00 4.00 0.1111
9 – 10 2.00 4.00 6.00 4.00 0.4444

Duration of the different paths may be obtained as follows:

Path
1 – 2 – 4 – 6 – 9 – 10
1 – 3 – 6 – 8 – 10
1 – 2 – 4 – 5 – 7 – 9 – 10
1 – 3 – 8 – 10
1 – 5 – 7 – 9 – 10
Duration
: 1 + 3 + 7 + 5 + 4 = 20 months
: 2 + 5 + 3 + 4 = 14 months
:1 + 3 + 3 + 2 + 4 + 4 = 17 months
: 2 + 10 + 4 = 16 months
: 8 + 2 + 4 + 4 = 18 months

∴ Critical path of the project is 1 – 2 – 4 – 6 – 9 – 10 and its duration is 20 months. The variance of the
expected duration has been estimated as 1.2777 months2. So the corresponding standard deviation of critical
time estimates of this project in 1.13 months
b. The desired time for completion of the project is given by 22 months while the expected time is 20 months
and the variance is 1.2777 months2. Therefore, the corresponding z-value in this case will be:
D-E 22 − 20
s 1.13
z= = = 1.7694 @ 1.77 (Say)
From the standard normal table, the corresponding probability has been obtained as: 0.5 + 0.4616 = 0.9616 =
 96.16 percent.
c) c) Now the expected times of the activities have been rearranged as follows:

Activity Old time estimate Time increase/ decrease due resource reschedule
1–2 1.00
1–3 2.00
1–5 8.00 + 4.00 months
2–4 3.00
4–6 7.00 + 2.00 months
4–5 3.00
5–7 2.00
3–6 5.00 + 4.00 months
3–8 10.00 + 4.00 months
6–8 3.00
6–9 5.00
7–9 4.00
8 – 10 4.00
9 – 10 4.00 Let the starting point
after two months be ‘X’

Time estimates for completing each paths:

1 – 2 – X – 4 – 6 – 8 – 10 : 1+1+2+9+3+4 20 months
1 – 2 – X – 4 – 6 – 9 – 10 : 1+1+ 2+9+5+4 22 months
1 – 2 – X – 5 – 7 – 9 – 10 : 1 + 1 + 12 + 2 + 4 + 4 24 months
1 – 2 – X – 4 – 5 – 7 – 9 – 10 : 1+1+2+3+2+4+4 17 months
1 – 3 – 6 – 9 – 10 : 2+9+5+4 20 months
1 – 3 – 8 – 10 : 2 + 14 + 4 20 months
1 – 3 – 6 – 8 – 10 : 2+9+3+4 18 months So, the critical
path of the project is 1 – 2 – X – 5 – 7 – 9 – 10 and duration of the project increases to 24 months.
< TOP >
3. Let the decision variables of the different projects be as follows:
Setting up of a thermal power plant XT
Project of power distribution from thermal power plant XDT
Setting up a hydel power plant XH
Project of power distribution from hydel power station (Outsourced) XDoH
Project of power distribution from hydel power station (In house) XDIH
Setting up of a river dam XRD
Setting up Irrigation Canal XIC
Natural Gas exploration project XGE
Setting up thermal power project along with distribution channel XTDT
Setting up hydel power project along with distribution channel (Outsource) XHDOH
Setting up hydel power project along with distribution channel (In house) XHDIH
Natural Gas exploration project deffered by one year XGED
The particulars about the projects are as follows:
NPV Cash Outflow Cash outflow Notations
(Year 1) (Year 2)
Thermal Power Plant 35 50 75 XT
Project of power distribution from proposed 60 20 40 XDT
thermal power plant
Hydel Power Project 15 35 10 XH
Project of power distribution from proposed 25 8 12 XDOH
hydel power station. (Outsourced)
River dam 67 80 65 XRD
Irrigation canal 7 17 10 XIC
Natural gas exploration project 22 72 0 XGE
Project of power distribution from hydel 23 7.2 10.8 XDIH
power station (In house)
Setting up thermal power project along with 104.50 66.5 109.25 XTDT
distribution channel
In house hydel power project along with 44 40.85 20.9 XHDOH
outsource distribution project
In house hydel power project along with in- 41.80 40.09 19.76 XHDIH
house distribution project
Natural Gas exploration project differed by 20.46 0 72 XGED
one year
So the objective function would be to maximize NPV
Maximize:
35XT + 60XDT + 15XH + 25XDOH + 67XRD + 7XIC + 22XGE + 23XDIH + 104.5 XTDT + 44XHDOH + 41.8XHDIH +
20.46XGED
Subject to :
50XT + 20XDT + 35XH + 8XDOH + 80XRD + 17XIC + 72XGE + 7.2XDIH + 66.5XTDT + 40.85XHDOH + 40.09XHDIH +
0XGED £ 200 …………………….Constraint due to cash budget during the first year
75XT + 40XDT + 10XH + 12XDOH 65XRD + 10XIC + 0XGE + 10.8 XDIH + 109.25XTDT + 20.90XHDOH + 19.76XHDIH +
72XGED £ 150 ………………Constraint due to cash budget during the second year.
XDT £ XT……………….Unless thermal power plant comes up power cannot be distributed
XDOH £ XH…………..Unless hydel power plant comes up power cannot be distributed.
XDIH £ XH…………..Unless hydel power plant comes up power cannot be distributed
XT + XDT + XTDT £ 1 ……The Project of thermal power plant and its distribution are complementary in nature
XDOH + XDIH £1 ………. The distribution of hydel power may be done in house or outsourced
XH + XDIH + XDOH + XHDOH + XHDIH £1…The project of hydel power plant and its distribution are
complementary in nature
XRD + XIC ≤ 1 ………. Project river dam and project irrigation canal are mutually exclusive.
XGE + XGED £ 1…………….. Project of gas exploration may be done now or 1 year later i.e. both the projects
 are mutually exclusive.
{ 0,1}
Xj = …………
< TOP >

4. The IRR will exceed a given hurdle rate if the NPV at the hurdle rate is positive. Hence the probability that IRR
will exceed the risk-free rate (hurdle rate) is equal to the probability that NPV will be positive at the risk free rate.
Year 1 Rs.12.00 lakh
= (10 × 0.30) + (12.50 × 0.60) + (15.00 × 0.10)
A1

σ 21 2.25 (Rs. lakh)2

=0.30 × (10 – 12)2 + 0.60 × (12.50 – 12)2 + 0.10 × (15 – 12)2
Year 2 Rs.15.25 lakh
= ( 12.50 × 0.30) + (15 × 0.50) + (20 × 0.20)
A2

σ 22 6.8125 (Rs. lakh)2

= 0.30 × (12.5 – 15.25)2 + 0.50 × (15 – 15.25)2 + 0.2 × (20 – 15.25)2
Year 3 Rs.13.75 lakh
= (10 × 0.10) + (12.50 × 0.60) + (17.50 × 0.30)
A3

σ 23 6.5625 (Rs. lakh)2

= 0.10 × (10– 13.75)2 + 0.60× (12.50 – 13.75)2 + 0.30 × (17.50 –
13.75)2
Year 4 Rs.10.75 lakh
=(7.50 × 0.10) + (10.00 × 0.50) + (12.50 × 0.40)
A4

σ 24 2.5625 (Rs. lakh)2

= 0.10 × (7.50 – 10.75) + 0.50 × (10– 10.75) + 0.40 × (12.50 –
2 2

10.75)2
Year 5 A5 Rs.27.00 lakh
=(20.00 × 0.20) + (25.00 × 0.50) + (35.00 × 0.30)

σ 25 31.00 (Rs. lakh)2

= 0.20 × (20 – 27)2 + 0.50 × (25 – 27)2 + 0.30 × (35 – 27)2

Expected NPV:
5 At
NPV = ∑ −I 12.00
+
15.25
+
13.75
+
10.75
+
27.00
−60 = Rs.6.12 lakh
t =1 ( 1 + i) t 1.055 1.0552 1.0553 1.0554 1.0555
=
1/ 2 1/ 2
5 σ2   2.25 6.8125 6.5625 2.5625 31.00 
σNPV = ∑ t   + + + + 
 t =1 ( 1 + i ) 2t  ( 1.055 ) 2 ( 1.055 ) 4 ( 1.055 ) 6 ( 1.055 ) 8 (1.055)10 
   
=
1 1

(2.022 + 5.499 + 4.759 + 1.670 + 18.148) 2 (32.098) 2

= = = Rs.5.67 lakh
It is assumed that the NPV of the project will be approximately normally distributed.
P(NPV is positive) = P(NPV >0)
0 − 6.12
5.67
P(NPV>0) = P( – 1.08 < Z < 0) + 0.50 [ where z = = – 1.079 @ – 1.08]
= 0.3599 + 0.50
= 0.8599 @ 86% (approx.)
∴ The probability that the NPV will be positive is 86 percent. Hence the probability that the IRR will exceed the
risk-free rate is 86%
< TOP >
5. The actual cost of work performed for projects Lahar and Bahar are denoted as ACWP1 and ACWP2 respectively.
The budgeted cost of work performed for projects Lahar and Bahar are denoted as BCWP1 and BCWP2
respectively
The budgeted cost of work scheduled for projects Lahar and Bahar are denoted as BCWS1 and BCWS2
respectively.
The budgeted cost of the total work for projects Lahar and Bahar are denoted as BCTW1 and BCTW2 respectively.
The total cost variance is Rs. 20 crore
If the cost variance of project Bahar is x then that of Lahar is 3x
i.e. 4x = 20
Or, x = 5
So, the cost variance of project Bahar is Rs. 5 crore (Adverse)
and the cost variance of project Lahar is 3 × 5 or Rs. 15 crore (Adverse)
So, we can write that ACWP1 - BCWP1 = 15 ………………………………(1)
and ACWP2 - BCWP2 = 5 ……………………………………………………..(2)

The total schedule variance is Rs.30 crore

If the schedule variance of Lahar is y then the same for Bahar is 1.5y.
i.e. 2.5y = 30
or, y = 12
So, the schedule variance of project Lahar is Rs.12 crore (Adverse)
and the schedule variance of project Bahar is 1.5 × 12 or Rs. 18 crore (Adverse)
So, we can write that BCWS1 - BCWP1 = 12 ……………………………….(3)
and BCWS2 - BCWP2 = 18 …………………………………………………….(4)
We know that 50% of the total work of project should have been completed by now.
So, BCWS1 = 0.5 × BCTW1………………………………………………………..(5)
and BCWS2 = 0.5 × BCTW2 …………………….…………………………………(6)
We also know that bugeted cost of total work in Lahar is 20% more than that of Bahar
That means BCTW1 = 1.2 × BCTW2 ……………………………………………..(7)
Now putting the value of BCTW1 in equations (5)
So, BCWS1 = 0.5 × 1.2 × BCTW2 = 0.6 × BCTW2……………………………………..(8)

Putting the value of BCWSs from equation (6) and (8) in equation (3) and (4) we get
0.6 × BCTW2 – BCWP1 = 12 ……………………………………………………..(9)
0.5× BCTW2 – BCWP2 = 18 ……………..……………………………………..(10)
By equation (1) - equation (9), we get,
ACWP1 – 0.6 × BCTW2 = 3 ………………………………………………………(11)
By equation (2) - equation (10) we get,

ACWP2 – 0.5 × BCTW2 = -13 ……………………………….…………………..(12)

Now by 0.5 × (11) - 0.6 × (12) we get,

0.5 × ACWP1 – 0.6 × ACWP2 = 9.3 …………………………..……………………..(13)

It is also known that estimated cost performance index of project Lahar is 0.8 times that of Bahar

Total additional cost of completion is Rs. 120 crore.

Of which, 60% would go to Lahar and remaining 40% for Bahar.

So, Additional costs to complete the projects are Rs. 72 crore and Rs. 48 crore for Lahar and Bahar
respectively.
We can represent that in the form of equations as follows:
BCTW1 BCTW2
= ×0.8
ACWP1 + 72 ACWP2 + 48

But, we know that BCTW1 = 1.2 × BCTW2

So, the equation is
1.2 × BCTW2 BCTW2
= ×0.8
ACWP1 + 72 ACWP2 + 48
 Or, 1.2 × ACWP2 + 57.6 = 0.8 × ACWP1 + 57.6
Or, ACWP1 = 1.5 × ACWP2 …………………………………………………….(14)

Putting the value of ACWP1 from equation(14) in equation (13) we get

0.5 × 1.5 × ACWP2 – 0.6 × ACWP2 = 9.3

Or, 0.15 × ACWP2 = 9.3
Or, ACWP2 = 9.3/0.15 = 62
So, ACWP1 = 1.5 × 62 = 93

The perormance indices of project Lahar:

From equation (1) we get : BCWP1 = ACWP1 – 15 = 93 – 15 = 78
So, the cost performance index of this project is 78/93 = 0.84
from equation (3) we get: BCWS1 = BCWP1 + 12 = 78+12 = 90
So, the schedule performance index is 78/90 = 0.87
The performance indices of project Bahar:
From equation (2) we get: BCWP2 = ACWP2 – 5 = 62 – 5 = 57
So, the cost performance index of this project is = 57/62 = 0.92
From equation (4) we get: BCWS2 = BCWP2 + 18 = 57+18 = 75
So, the schedule performance index of this project is 57/75 = 0.76
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Section C: Applied Theory

6. The following guidelines may be kept in view while preparing a Statement of Work (SOW):
i. The project manager should appoint a team for preparation of the SOW. The team should consist of experts in
the areas involved – fabrication, testing operations, safety, etc.
ii. Before the team starts working on the SOW, the project manager should keep the management informed of
the brief contents of the Contract Work Break-down Structure (CWBS) and the proposed SOW. The SOW
prepared by the team should be based on the information given to the management.
iii. Specific parts of the SOW may be assigned to specific members of the team, based on the complexity
involved and the competence of the member. The project manager should communicate to the member the
compliance specifications and design criteria that must be included in the SOW. Assistance of suitable
personnel may also be provided to each member depending on the necessity.
iv. The project manager or the leader of the SOW team if any should develop a detailed checklist of the
mandatory items and the optional items that should be included in the SOW. Their sequence in the report, and
whether they should be in the main body of the report or in the appendix should also be indicated.
v. Before starting work, the members of the team or their leader should review the documents that have been
prepared giving authorization to the project. They should also review the contracts and other documents
relating to the work done so far on the project, if any.
vi. The members should take care to see that the SOW follows the Contract Work Break-down Structure to the
utmost detail.
vii. Standard codes should be developed for materials, components and subsystems not if already in use. Codes
should be assigned to subsystems and assemblies due to be developed as well. All the members should use
the standard codes only.
viii. Estimates of the project cost should be reviewed by the SOW team. The objective of the team in reviewing
should be to identify any non-essential items in the project that are pushing up the costs disproportionately.
Attempt should be made to remove such items or replace with other items, keeping in view the requirement
and the cost.
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7. The Termination Process:

The termination process is a very important phase in the life cycle of a project. It should be handled skilfully to
avoid a hangover in the minds of the employees and the clients. The objectives of the termination process should
be:
i. Bringing the work to a halt in accordance with the agreements entered into with the customer.
ii. Making preparations for the next stage, such as training the personnel in operational and maintenance
aspects, installation, etc.
iii. Closing the project office and disposing off the leftover assets.
iv. Identifying and following up for any other business that can be obtained either by showing off the experience
gained in handling the project to other prospective clients, or by trying for miscellaneous assignments such as
periodical maintenance from the same client.
It is often difficult – almost impossible to terminate a project in such a way that it makes all those involved happy.
But, there are certain points of caution that will be of help to the project manager in making it more acceptable and
systematic:
i. A close-out plan should be drawn up clearly identifying the responsibilities of the various functional
managers and the project manager. Any items still to be delivered should be mentioned along with their
budget allocations.
ii. The project manager should try to understand the feelings and emotions of the people involved and should try
to build up a friendly atmosphere.
iii. The project team members should be taken into confidence about their future after integration into the parent,
or the future prospects through follow-on business from the same client, etc. to boost up their morale.
iv. An effective flow of communication should be maintained so that technical as well as personnel problems
can be identified and tackled quickly.
v. The services of a legal expert should be obtained for handling matters related to contractual obligations and
for follow up of payments.
The process of termination can be studied in two parts: one, the decision to terminate, and two, the implementation
of the decision to terminate. Some authorities argue that the standard capital budgeting models are not suitable for
the termination decision, as the information requirements for such a decision are complex and change from time to
time. But others feel that the models are useful, as the number of complex projects is small. Another argument
against the use of cash flow models is that the probability of technical completion is 1.00 at the beginning, reduces
as the project progresses and the uncertainty of technical completion goes on increasing as more and more
technical problems become known. The counter argument is that while evaluating whether or not to terminate a
project, the focus is on whether it is achievable within the laid down time and cost, but not on the technical
feasibility alone. In terms of cash flows, it can be said that if the present value of cash flows realizable if a project
is abandoned at a particular time are more than the present value of the cash flow realizable if the project is
continued through its life, then the project should be abandoned at that time.
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