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Hbc2202:Project Appraissal Question Paper
Hbc2202:Project Appraissal
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2012
QUESTION ONE (30 MARKS) (a) (i) Explain the term ‘investment projects’ and indicate the main requirements of a project for appraisal. (5Marks) (ii) Explain the term project appraisal and indicate its importance in investment decisions. (5Marks) (iii) Give five major requirements for effective project appraisal. (5Marks)
(b) MUCST hospital wishes to buy a state of the art X-ray machine at a cost of Kshs. 372,890 to improve the productivity of the hospitals X-ray department. The machine is expected to reduce the operating cost and result in cash savings of Kshs. 100,000 for each of the first four years and Kshs. 90,000 in the fifth year. The existing machine will not be required and will be disposed of at a price of Kshs. 3,790. Additional initial working capital of Kshs. 10,000 will however be required and will be recovered in full in the fifth year. The new machine will have an expected useful life of five years and a disposal value of Zero in year five. The required rate of return is 8%. (i) Compute the investment cost of the new machine. (3Marks) (ii) Compute the relevant cash inflows for the five years. (3Marks) (iii) Calculate the net present value and indicate whether the project is acceptable. (3Marks) (iv) Calculate the internal rate of return and indicate whether the investment is acceptable. (3Marks) (v) What other factors apart from the quantitative ones like NPV and IRR would you consider to enable you make a sound recommendation on the purpose of the machine. (3Marks)
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QUESTION TWO (a) Explain the five phases of the project development life cycle. (5Marks) (b) Explain the main aspects of technical and economic appraisal of projects indicating why such appraisal is undertaken. (6Marks) (c) Distinguish between private and social cost benefit analysis and explain why the latter is needed, giving examples. (6Marks) (d) A company has invested in a new machine to make a product which it contemplates selling at a price of Ksh. 40 per unit. The variable cost per unit is Ksh. 30 and budgeted fixed cost amounts to Ksh. 70,000. The budgeted sales are 8,000 units per year.
Required: (i) Calculate the break-even level of sales in units and value. (1.5Marks) (ii) Compute the margin of safety and explain its meaning in relation to sensitivity analysis. (1.5Marks)
QUESTION THREE (a) (i) What is sensitivity analysis and why is it important. (4Marks) (ii) Explain four methods of dealing with risk in project appraisal apart from sensitivity analysis. (6Marks) (b) X Contractors Ltd is planning to buy equipment costing Kshs. 120,000 to improve its material handling system. The equipment is expected to save Ksh. 40,000 in cash operating cost per year. Its estimated useful life is 6 years and will have zero terminal disposal value. The required rate of return is 14%. Required: (i) Calculate the NPV and indicate whether the equipment should be bought. (3Marks) (ii) What is the minimum cash savings per annum that will make the equipment desirable on NPV basis? (3Marks) (iii) When might a manager calculate the minimum cash saving described in (ii) above rather than use the Ksh. 40,000 savings in cash operating cost per year to calculate the NPV. (4Marks)
QUESTION FOUR A company wants to purchase equipment with a useful life of 8 years to enable it to expand its operations. The project analyst has prepared financial statements covering the 8years of the expected useful life of the equipment. The top management has suggested that the relevant ratios to be computed to enable them understand and interpret the projected financial statements.
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Required: (a) Why is it important to use ratios in financial statement analysis? (2Marks) (b) What standard of comparison could the company use to facilitate understanding of the expected performance and what would be their major shortcomings. (6Marks) (c) The management wants to know whether the proposed investment will improve the company’s liquidity and profitability. Explain any two ratios that could be used in each case. (8Marks) (d) What are the major limitations of financial ratio analysis? (4Marks)
QUESTION FIVE (a) XYZ Limited invested in a project that cost Sh. 30,000 and yields the following uncertain cash flows: Year Cash Flow (Sh) 1 12,000 2 14,000 3 10,000 4 6,000 The uncertainty equivalent coefficients of the project have been estimated as follows:- 0 = 1.00 1 = 0,90 2 = 0.70 3 = 0.50 4 = 0.40 The Treasury bill rate is 10%.
Required: (i) Compute the net present value of the project indicating whether the company should continue with the project or abandon it. (8Marks) (ii) What if the risk was ignored, what could be the decision? (4Marks)
(b) Describe the steps involved in sensitivity analysis. (8Marks)
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