Model Question Paper-IV

Q1. a. What are the applications of social cost-benefit analysis?

b. Discuss some of the challenges faced in social cost benefit analysis.
Ans. a. SCBA is relatively a new approach in the selection of a project. Generally, it is applied in government
projects as the government aims at the well-being of the society. On the other hand, private organizations
pay less attention towards the social costs and benefits associated with a project, as the social costs and
benefits do not directly affect the profit of the organization. As discussed earlier, with increase in government
regulations and environment consciousness, the SCBA approach is also being applied in private projects.
The applications of the SCBA approach in both the government and private sectors are explained as follows:
 Public Projects: Imply that the government plays a crucial role in the advancement of economy in
developing countries, such as India. The government undertakes projects for the well-being of the
society, not to earn monetary benefits. In other words, the social impact of a project is the major
concern for the government rather than the financial gain or loss from the project. Therefore, SCBA has
a significant role in selection of projects in the government sector. PMGSY, Delhi Metro, Bus Rapid
Transit System (BRTS) are some of the government projects in which the SCBA approach is applied.
 Private Projects: Imply that the role of SCBA is increased in private sector projects with increase in
social and environmental awareness, strict government regulations, and the sense of Corporate Social
Responsibility (CSR). Organizations that are more committed towards the society create better brand
equity, which, in turn, helps in building their goodwill and marketing their products and services.
POSCO Steel project in Orissa and Lavasa Hill City Project are some of the private sector projects in
which the SCBA approach was used.
b. SCBA involves several challenges that need to be identified before applying it in project selection. The social
costs and benefits considered in the SCBA approach are subjective in nature. Therefore, it is not practically
possible to measure the social costs and benefits of a project. The subjectivity of the approach poses various
challenges, which are as follows:
 Difficulty in identifying project beneficiaries: Refers to a problem faced by an organization in
determining who gets benefitted by a project and at what time. The social costs and benefits of a project
can have a wide temporal and spatial dimension. In most of the cases, the impacts of a project are not
limited to a particular time or place. For example, if we consider the Delhi metro railway project of
Delhi Metro Railway Corporation (DMRC), the benefit of the project (facilitation in travelling) would
be enjoyed by the generations to come. The benefit of the project would not remain limited for local
residents only and anyone travelling the city can avail it. In addition, it is not easy to identify who all are
affected from the project and when. Suppose an organization comes up with a project of setting up a
chemical factory beside a river. The water pollution caused by the chemical project can have harmful
effects on the population for longer time in the future.
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 Difficulty in valuation: Refers to the challenge faced by the organization in evaluating the actual
social costs and benefits involved in a project. As mentioned earlier, the social costs and benefits are
subjective in nature; therefore, it is not always possible to calculate them. For example, an industrial
project causes the emission of Chlorofluorocarbon (CFC) and affects the ozone layer of the
environment. In such a case, it is very difficult to estimate the harmful effect of the project on people.
Moreover, the social benefits generated by setting up the project cannot be easily estimated.
 Difficulty in compensating the affected people: Refers to one of the major challenges of SCBA.
Suppose an organization is planning to undertake a car manufacturing project and needs to acquire a
farmland for setting up the project. In such a case, it is very difficult for the organization to decide
compensation that should be given to farmers in exchange of the land, so that they can make their
livelihood. For example, when TATA Motors started the Nano car project in Singur, West Bengal, the
farmers protested against the project as the low compensation was given to them in exchange of the
land.
 Difficulty in resolving the conflicts of interest: Refers to differences in interests of different social
groups, regarding a particular project. A project has various social impacts on the society at large.
However, the society consists of various groups, such as businessmen, workers, consumers, and common
people, with different socio-economic backgrounds. The interests of various social groups are not
necessarily the same. For example, a project that is financially very profitable may have adverse effects
on the farmers who contributed their land for the project. Let us consider another example the
Mumbai-Pune Expressway project benefitted the people travelling on expressway, but it had also
created great suffering for the farmers who lost their farmland for the project.
 Difficulty in formulating decision criteria: Refers to conditions on the basis of which a project
can be accepted or rejected. In CBA, projects are selected on the basis of the financial profitability of the
projects. However, the real social costs and benefits of a project cannot be easily calculated. Therefore, it
is very difficult to select a project on the basis of social costs and benefits because of their subjective
nature.
Q2. Write note on the following:
a. Break-Even Analysis
b. Project Termination by Integration
Ans. a. Break-Even Analysis: Break-even analysis is a widely used technique in project management. Break-even
is a no profit and no loss situation for a project. In break-even analysis, all costs associated with a project are
divided into two heads, fixed costs and variable costs. The total fixed cost and the total variable cost are then
compared with the total return or revenue of the project. In a break-even scenario, the total of all fixed costs
or variable costs in a project is equal to the total revenue or return from the project. Therefore, a project can
be said to have reached its break-even when it does not have any profit or loss.
 Fixed Costs: Refer to the costs incurred at the initial stage of the project and does not depend on the
production level or operation level of the project. For example, cost of a machinery and rent.
 Variable Costs: Refer to the costs that depend on the volume of production. Wages and raw materials
are the examples of variable costs.
 Total Cost: Refers to the sum total of fixed costs and variables costs.
b. Termination by Integration: Termination by integration indicates the type of termination in which the
output of the project is integrated to the operating system of the organization. The deployed resources are
redistributed in the parent organization. For example, a manufacturing organization is planning to install a
new machine to enhance its productivity. After installation, the machine becomes a part of the entire
manufacturing facility of the organization. In such a case, the formal termination of the installation project is
known as termination by integration. In similar cases, when an organization implements any software
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package in the organization, the implementation project ends after integrating with the existing system of the
organization.
There is a significant difference between termination by addition and termination by integration. In termination
by addition, the project becomes a separate independent part of the organization. On the other hand, in
termination by integration, the successful project is integrated to the existing facility of the organization.
Termination by integration involves change management as the operational process changes after the
integration of the new system. Generally, an organization faces several issues after the project is successfully
integrated to the organization. For example, the installation of a new machine or software may create job
insecurity among the employees.
Q3. Discuss various project contracts in infrastructure projects.
Ans. Project contracts refer to various legally enforceable agreements among different project parties. Parties involved
in a project are legally bound to fulfil their roles and responsibilities, specified in their respective contracts. For
example, an O&M contract mentions the minimum acceptable standard of performance by the O&M
contractor. Similarly, there is an EPC contract for the EPC contractor and loan agreement for project financers.
Some of the key project contracts are explained as follows:
Name of the Contract Content of the Contract Objectives of the Contract
EPC Contract Specifies the responsibilities of an  Reducing and limiting the time and
EPC contractor. Generally, the cost needed for completing the project
EPC contract mentions the details facility.
of designing the installation process,  Mitigating the risk of non-
procuring raw materials, and performance
installing the project facility. In  Ensuring the minimum acceptable
addition, the EPC contract includes performance standards
the minimum acceptable standard
of performance by the EPC
contractor. If the EPC contractor
fails to meet the minimum standard
of performance, he/she is liable to
pay penalty that is mentioned in
the contract.
O&M Contract Mentions the responsibilities of an  Ensuring minimum standard of
O&M contractor. The O&M performance in the operation and
contract specifies the minimum maintenance of a project
standards of performance and  Reducing the risk of non-performance
penalties for not maintaining the to a certain level
minimum standard.
Loan Agreement Includes the details regarding the  Ensuring repayment obligations of the
amount of loan, tenor, and the rate loan
of interest. The loan agreement also  Preparing documents related to credit
mentions the conditions of limited enhancement mechanism
resource financing or full resource
financing, whichever is applicable.
The consequences and remedies, in
case of a default, are also
mentioned in the agreement.
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Name of the Contract Content of the Contract Objectives of the Contract

Shareholders’ Agreement Specifies the shareholding pattern  Ensuring the availability of equity
and the decision-making process. financing in accordance to the
The agreement also specifies the requirement of the SPV
shareholder’s representation in  Assuring a fair and transparent
management and their exit process. decision-making process
In addition, it outlines the minority  Clearing ambiguity related to
protection rights. monetization of shareholding by a
shareholder

Q4. Discuss various international sources of project financing

Ans. Various international sources of project financing are as follows:
 American Depository Receipts: ADR is a certificate issued by a US bank to its investors to buy
securities or shares of a foreign company operating in the US. It is an important source of raising capital
from the international market. ADRs help the US investors in purchasing the shares of foreign organizations
in cross-currency transactions. All the transactions, such as buying, selling, and paying dividend, of ADR is
denominated in the US dollar. ADRs provide a right to claim dividend on the purchased shares to the
buyer. However, ADRs do not provide a voting right to the investors. It was introduced in the US market
for the first time by J P Morgan in 1927. The major commercial banks, which are acting as depository banks
for the ADRs are J P Morgan, Deutsche Bank, Citibank, and the Bank of New York Mellon.
 Global Depository Receipts (GDRs): GDR is another type of financial instrument that is used for
sourcing capital from foreign countries. It provides a right to foreign organizations to issue shares in various
markets. They are depository receipts offered by the depository bank of the respective country to the foreign
organizations to participate in the stock trading of that country. Mostly, the GDRs transactions are
denominated in the US dollar. It provides opportunity to emerging organizations to expand their markets in
foreign countries by offering their shares. GDRs and ADRs are similar in terms of pricing of shares but vary
in terms of settlement of shares. Some of the international banks, which offer GDRs, are JP Morgan Chase,
Deutsche Bank, Citibank, and the Bank of New York Mellon.
The GDRs help the investors to buy the shares of foreign organizations. The stocks of the company are
available to the investors in the domestic country denominated in the domestic currency. Though, these
shares are traded in the domestic market, but facilitate the buyer to sell them around the globe in branches
of that bank. GRDs are treated at par with the share and its holder enjoys the voting and dividend right. On
the request of investors, the GDRs can be converted into equity shares by the cancellation of it with the help
of depository bank. In general, 1 GDR is equal to 10 shares.
 European Stock Market: European stock market includes various stock exchanges operating in various
locations of Europe. All these stock exchanges provide user-friendly environment to investors and help them
in generating profit from the investment. In addition, they provide opportunities to investors to diversify
their portfolio for reducing risk and securing high returns. The economic freedom and liberalization
prevailing in the European countries permitted the investors across the globe to trade in European stock
exchanges. The international equity issued by European stock exchanges in 2004 was $5.4 billion (US
dollar), which became $ 10.1 billion in 2005. The market trend showed the steep growth in the international
equity investment and reached to $23.9 billion in the year 2006. The global recession has hampered the
growth of market in the last two years and the investment has shrunk to $9.3 in 2007-08.
 Asian Stock Market: Asian stock market is one of the integral parts of international financial market. It
includes various stock exchanges located in different parts of Asia. Bombay Stock Exchange (BSE) is the
oldest Asian stock exchange. The contribution of Asian stock market in the international equity offering was
nearly 16 % in 2004, which increased to approximately 25% in the year 2006. The recession that paralyzed
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the growth of developed nations had a little impact on the growth of the Asian stock market. Most of the
MNCs operating around the world have shifted their investment from the developed nations to the Asian
nations. The Asian countries that contributed towards the growth of Asian stock market are Japan, China,
India, and Korea. The emerging power of Asian countries, such as Philippines, Thailand, Malaysia, and
Hong Kong, has shown considerable growth in their international operations. The international equity
offered by the Asian stock market in 2004 was $33.6 billion (US dollar), which further increased to $56.9
billion in 2005. This figure further rose to $82.6 billion in 2006.
Q5. Describe various types of project termination.
Ans. The most common types of project termination are as follows:
 Termination by Extinction: Refers to the sudden and deliberate termination of a project due to success or
failure of the project. The term extinction signifies discontinuation of all project activities as soon as the
project is terminated. Termination by extinction is also known as termination by murder. This type of
termination occur in the following cases:
 Completing and delivering the project successfully
 Suspending the project because of external factors, such as recession or change in technology
 Failing to achieve the desired objectives
 Exceeding the expected cost of the project
 Receiving inadequate support from the management of the organization
A project is terminated and delivered to the concerned stakeholders after its successful completion. However,
a project may also be terminated, if it fails to generate the expected returns. Termination by extinction
because of project failure is very common in the software industry. A software development project may be
terminated in case of similar software is already available in the market. Apart from this, termination by
extinction can take place due to merger or demerger of the parent organization. For example, NCR
Corporation, a computer manufacturing organization, was acquired by AT&T in 1991. As a result, NCR
had to abandon most of the on-going projects. The projects were terminated by extinction as all project
activities were stopped immediately after the termination.
The most prominent features of termination by extinction are as follows:
 Ceasing all project activities immediately after termination
 Providing no obvious signals of project closure
 Termination by Addition: Signifies the termination of a project when the successful project becomes a
part of the organization. The successful project may take a form of a new department or division or
subsidiary in the organization. Termination of addition occurs in case of expansion projects (opening of new
branch or division). Therefore, most of these projects are in-house projects. Generally, the resources
(personnel, machineries, and raw materials) deployed in the project are transferred to the new division.
Similar to termination by extinction, all activities of the project are ceased after termination by addition. An
organization needs to follow certain procedures to make the project its formal part. However, with passage
of time the new division takes full economic responsibility.
 Termination by Integration: Indicates the type of termination in which the output of the project is
integrated to the operating system of the organization. The deployed resources are redistributed in the
parent organization. For example, a manufacturing organization is planning to install a new machine to
enhance its productivity. After installation, the machine becomes a part of the entire manufacturing facility
of the organization. In such a case, the formal termination of the installation project is known as termination
by integration. In similar cases, when an organization implements any software package in the organization,
the implementation project ends after integrating with the existing system of the organization.
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There is a significant difference between termination by addition and termination by integration. In

termination by addition, the project becomes a separate independent part of the organization. On the other
hand, in termination by integration, the successful project is integrated to the existing facility of the
organization. Termination by integration involves change management as the operational process changes
after the integration of the new system. Generally, an organization faces several issues after the project is
successfully integrated to the organization. For example, the installation of a new machine or software may
create job insecurity among the employees.
 Termination by Starvation: Refers to the indirect termination of a project by squeezing the lifeline (fund
and labor) of the project. The unsuccessful projects or the least important projects become subject to budget
cut and less support from the management. Sometimes, the senior management does not intend to admit
project failure. Therefore, the management starves the project by not providing adequate budget and
support to the project. This kind of termination does not result in immediate closure of the project activities.
The project still continues as a separate entity. Therefore, there is a different school of thought that claims
the termination by starvation to be no termination at all.
Q6. Discuss some of the applications of Microsoft Project.
Ans. The main applications of Microsoft project are as follows:
 Project Planning: Helps in planning the project by determining necessary project activities, setting
milestones, assigning task to the team, and relating inter-project dependencies.
 Project Scheduling: Helps in executing the set project plan, to achieve the goals and objectives of the
project. The Microsoft Project software provides a personalized calendar to adjust the schedule of the tasks
assigned.
 Resource Management: Helps in defining the resources of an organization, allocating them in various
project activities, and organizing them for resource loading activities.
 Project Review: Helps in accessing the progress of the project with the help of review charts, such as
Gantt chart, Critical Path Management (CPM), and PERT. It helps in fixing the project baseline and
conducting the value analysis of the project.
 Preparation of Charts: Helps in Gantt and PERT charts, which are used to manage the different
activities of a project. The success or failure of a project depends on the proper management of project
activities.
 Tracking Project Progress: Helps in checking whether the project activities are performed as per the set
project plan. If the project is underperformance then the improvements can be made for the successful
completion of a project.
 Generating Automatic Report: Helps in preparing the project report by tracing the progress of the
project automatically. The Microsoft Project software automatically forecasts the success and failure of the
project on the basis of the project report.
Q7. The durations of various activities of a project is given below:
Activity Duration(in Days)
1-2 5
2-4 6
1-3 4
3-4 7
4-7 9
3-5 12
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Activity Duration(in Days)

4-6 10
6-7 7
7-9 6
5-9 12

a. Draw the network diagram of the project.

b. Find out the critical path/paths of the network and calculate the minimum duration at
which the project can be completed.
Ans.

a. The following table shows the various paths in the network:

Path Length
1-3-5-9 28
1-3-4-6-7-9 34
1-3-4-7-9 26
1-2-4-6-7-9 34
1-2-4-7-9 26

b. We can see that there are two paths (1-3-4-6-7-9 and 1-2-4-6-7-9) in the network which have the maximum
length (34). Therefore, 1-3-4-6-7-9 and 1-2-4-6-7-9 are the critical paths of the network. Therefore, the
project can be completed in minimum 34 days.
Q8. Imagine the total initial outlay of project A is Rs 10,000. The project is expected to generate a
cash flow of Rs 4000, Rs 3000, Rs 5000 Rs 2000 respectively at the end of every year for next 4
years. Suggest whether the project should be selected or not.
Ans. The NPV of the project X = Rs {4000/(1+0.10) + 3000(1+0.10)2 + 5000/(1+0.10)3 + 2000(1+.10)4 }- 10,000
= Rs {3636.36+2479.33+3756.57+1366.02}-10,000
= Rs 11238.28-10,000
= 1238.28
Therefore, the NPV of the project is greater than 0. Therefore the project should be selected.