Home takes exam for Project Management

1. Explain the basic principles for measuring project cash flows with appropriate
examples?
2. What are components of cash flow stream? Explain with illustrations
Case Study-1: ABC Company is considering a new investment project about which the
following information is available.
1. The total outlay on the project will be $10 million. This consists of $6 million on plant
and equipment and $4 million on gross working capital. The entire outlay will be
incurred at the beginning of the project.
2. The project will be financed with $4 million of equity capital, $3 million of long term
debt (in the form of debentures), $2 million of short – term bank borrowings, and $1
million of trade credit. This means that $7 million of long – term funds (equity + long
term debt) will be applied towards plant and equipment ($6 million) and working capital
margin ($1 million) – working capital margin is defined as the contribution of long –
term funds toward working capital. The interest rate on debentures will be 15 percent
and the interest rate on short – term borrowings will be 18 percent.
3. The life of the project is expected to be 5 years and the plant and equipment would fetch
a salvage value of $2 million. The liquidation of value of working capital will be equal to
$4 million, the book value.
4. The project will increase the revenues of the firm by $8 million per year. The increase in
operating expenses on account of the project will be $3.5 million per year. (This includes
all items of expenses other than depreciation, interest, and taxes.) The effective tax rate
will be 50 percent.
5. Plant and equipment will be depreciated at the rate of 33.33 percent per year as per the
written down value method/ double-declining balance method. So the depreciation
charges will be ($ in Million)
First year………. 2.00 Fourth year ……. 0.593
Second year……1.333 Fifth Year ………. 0.395
Third year …….. 0.889

1
 Required:- Determine the cash flows for the above project from the point of view of long-
term funds.

Case study-2: Furtuna enterprise is assessing 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 Birr 90,000 and it can be sold for a Birr 90,000. It has a remaining life of 5 years after which
its salvage value is expected to be nil. It is being depreciation annually at the rate of 20%
(written down value method/ double-declining balance method).
The new machine costs Birr 400,000. It is expected to fetch Birr 250,000 after 5 years when it
will no longer be required. It will be depreciated annually at the rate of 33.33% (written
down value method/ double-declining balance method). The new machine is expected to
bring a saving of Birr 100,000 in manufacturing costs. Investment in working capital as
well as interest on short-term borrowings would remain unaffected. The tax rate applicable
to the firm is 50%.
 Required:- Determine cash flows associated with the replacement project?