B.
Tech IV Heavy Construction and Project Management CE 401
Tutorial No. 06
PROJECT FINANCE AND APPRAISAL
1. A contractor has been awarded for doing a job requiring equipment procurement. Two
brands A and B, are available. Brand A requires an initial investment of INR 7,00,000/-,
while brand B requires INR 4,00,000/-. The annual maintenance cost of this equipment is
given in the table. Which brand should be chosen if the interest rate is 8 percent?
Maintenance cost details year-wise (in INR)
Option
1 2 3
Brand A 3,00,000 3,00,000 3,00,000
Brand B 5,00,000 5,00,000 5,00,000
2. Cash flow projections for a proposal are shown in the table given below. Calculate NPV of
the cash flow at an interest rate of 15% throughout. Suggest whether the project is worth
executing or not.
Year 0 1 2 3 4 5 6 7 8
Cash Flow
-200 35 35 35 35 35 35 35 37
(in ‘000)
3. A contractor analyzes the purchase of manufacturing equipment that will cost Rs. 20 lakhs.
The annual cash inflows for the next three years will be:
Year Cash Flow (Rs.)
1 10,000
2 9,000
3 6,500
a. Determine the internal rate of return using interpolation.
b. With a cost of capital of 12 percent, should the machine be purchased?
4. A construction company is considering two investments, costing Rs. 100 lakhs each. The
cash flows are as follows:
Year Project A Project B
1 Rs. 120 lakhs Rs. 100 lakhs
2 Rs. 80 lakhs Rs. 60 lakhs
3 Rs. 60 lakhs Rs. 160 lakhs
a. Which of the two projects should be chosen based on the payback period method?
b. Which of the two projects should be chosen based on the net present value method?
Assume a cost of capital of 10 percent.
c. Should a firm usually have more confidence in answer a or answer b?
B.Tech IV Heavy Construction and Project Management CE 401
5. Warner Business Products is considering the purchase of a new machine at the cost of Rs.
11,070 lakhs. The machine will provide Rs. 2,000 lakhs per year in cash flow for eight
years. Warner’s cost of capital is 13 percent. Using the internal rate of return method,
evaluate this project and indicate whether it should be undertaken.
6. A construction company will invest Rs. 110 lakhs in a project that will produce the
following cash flows. The cost of capital is 11 percent. Should the project be undertaken?
(Note that the fourth year’s cash flow is negative.)
Year Cash Flow (Rs.)
1 36 lakhs
2 44 lakhs
3 38 lakhs
4 (44) lakhs
5 81 lakhs
7. What is IRR method? Enlist the merits and demerits while using the IRR method.
8. PQR construction company is in the process of selecting the best project among the
following three mutually exclusive projects as given. Which of the projects should be
chosen based on the net present value method? Assume a cost of capital of 12%.
Project Initial Investment Annual Revenue Life (Years)
A1 Rs. 6,00,000 Rs. 2,00,000 10
A2 Rs. 9,00,000 Rs. 2,30,000 10
A3 Rs. 4,00,000 Rs. 80,000 10
9. Elaborate the types of various appraisal for heavy construction projects and explain each
one of them.
10. What are the characteristics of project finance?
11. What is the role of financing bodies? Enumerate major financing institutions in India.
12. What is BEP analysis? What are its limitations?
13. One company is engaged in producing a specific component sold at a uniform price of
Rs.15 each. The variable cost of producing the component amount to Rs.8.00 per unit while
the fixed cost amount to Rs.34000. How many units of components must be produced and
sold so that the company breaks even? How many sales would be made at this activity level
if the firm desires a profit of Rs.18000?
14. A concrete mixer has the following cash flow details:
Initial purchasing price = ₹ 5,00,000/-
Annual Operating and maintenance cost = ₹ 35,000/-
Salvage Value = ₹ 2,50,000/-
B.Tech IV Heavy Construction and Project Management CE 401
Useful life = 10 years
In addition, one operator is required to operate the concrete mixer at cost of ₹ 40 per hour.
The production rate of concrete mixer is 0.20 m3 per hour. The revenue generated from
production of 1 m3 of concrete is ₹ 1,000. The interest rate is 10% per year. How many m3
of concrete needs to be produced per year so that the revenue generated break evens with
the expenditure?
Division A Division B
Date of Tutorial: 04/11/2022 04/11/2022
Date of Submission: 15/11/2022 15/11/2022
