What is payback period
Project Management 2
CASE STUDY 1
Anand Enterprises is broadly diversified company with presence in a variety of sectors such as cement, textile, chemicals. After a thorough review of various capital projects undertaken in the last 5 years the executive committee of Anand Enterprises felt that the quality of market and demand analysis of most of the projects was somewhat patchy. As a marketing analyst you have been invited by Arvind Swami, the managing director of Anand Enterprise, to do a seminar on market and demand analysis for the business heads of the company. Among other things, he wants you to address the following issues.
Q1. How should one evaluate secondary information?
Q2. What are the sources of undertainities in demand?
Q3. Discuss the steps in a sample survey?
Q4. Briefly describe the various methods of demand forecasting?
CASE STUDY 2
Sagar Ltd is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined the company as a financial analyst reporting to Shekhar Dhawal, the CEO of the company. He has provided you the following information about three projects A, B & C they are being considered by the Executive Committee of Sagar Ltd.
a) Project A is an extension of an existing line. Its cash fund will decrease over time.
b)Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time.
c) Project C is concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed by a huge benefit for one year. However, in the year following that a substantial cost will be incurred to raze the pavilion.
The expected net cash flows of the 3 projects are as follows :-
Year Project A Project B Project C
0 (5000) (5000) (5000)
1 3500 1000 15000
2 2500 3000 (10000)
3 1500 4000
Shekhar Dhawal believes that all the 3 projects have risk characteristics similar to the average risk of the firm and hence the firm’s cost of capital viz. 12% will apply to them.
Q1. What is payback period and discounted Payback period?
Q2. Find the payback periods and the discounted payback periods of Projects A & B?
Q3. What is the Net Present Value (NPV)? What are properties of NPV? Calculate the NPV’s of Projects A, B & C?
Q4. What is internal rate of return (IRR)? What are the problems with IRR? Calculate the IRRs for A, B & C?
CASE STUDY 3
A project consists of 12 activities and their time estimates are shown below.
Activity Time (in weeks) ta tm Tp
(1–2) 4 6 10
(1–3) 3 7 12
(1–4) 5 6 9
(1–7) 2 4 6
(2–4) 6 10 20
(2–6) 3 4 7
Q1. Draw the network diagram?
Q2. Determine the critical path?
Q3. Calculate event slacks and activity floats?
Q4. Find the standard deviation of the critical path duration?
Q5. Compute the probability of completing the project in 30 weeks?
CASE STUDY 4
Microelectronics Corporation is currently at its target debt equity ratio of 5:1. It is considering a proposal to expand capacity, which is expected to cost Rs 500 million and generate after tax cash flows of Rs 130 million per year for the next 8 years. The tax rate for the firm is 30 percent. Mahesh the CEO of the company, has considered two financing options.
a) Issue of equity stock. The required return on the company’s new equity is 20 per cent and the issuance cost will be 12 per cent.
b) Issue of debentures at a yield of 13 percent. The issuance cost will be 3 per cent.
Q1. What is the WACC for Micro-electronics?
Q2. What is Microelectronics weighted average flotation cost?
Q3. What is the NPV of the proposal after taking into account the flotation costs?
Q4. Do you have any suggestion to Mahesh?