Icfai P. A. Risk Analysis

Project Appraisal – Risk Analysis Exercises 1. You are the financial manger of Bharat polymer products Ltd.(BPPL) a highly profitable company. BPPL is planning an injection moulding plant at Silvasa. Your project staff has developed the following cash flow for the moulding plant project. ___________________________________________________________ Rs. in million Year 0 Years 1-10 Investment (250) Sales 200 Variable costs( 60% of sales) 120 Fixed costs 20 Depreciation 25 Pre-Tax profit 35 Taxes 10 Profit after taxes 25 Cash flow from operations 50 Net cash flow 50 The range of values that the underlying variables can take is shown below: Underlying Variable Pessimistic Expected Optimistic Investment 300 250 200 (Rs. in million ) Sales (Rs. in million ) 150 200 275 Variable cost as percent 65 60 56 of sales Fixed costs 30 20 15 Cost of capital (%) 14 13 12 1) What is the NPV of the project? Assume that the cost of capital is 13% 2) Calculate the accounting and the financial break-even point. Assume (i) useful life = 10 years (ii) salvage value = 0 (iii) depreciation rate 10% (SLM) 3) Calculate the effect of variations in the values of the underlying variables on NPV 2. The following data relates to the probability distribution of the cash flows for the first year of a project being floated by Fine Chemicals Ltd. Cash flow Probability 1350 0.13 2500 0.25 4000 0.35 4500 0.27 Calculate a. Range b. Mean Absolute Deviation (MAD) c. Standard Deviation

d. Coefficient of variation e. Semi-variance 3. An investment project involves a current outlay of Rs. 1,00,000. The life of the project is four years. The mean and standard deviation of the cash flows are as given below: Year Mean cash flow Standard deviation (Rs.) (Rs.) 1 50,000 15,000 2 30,000 10,000 3 40,000 20,000 4 30,000 12,000 Required: Calculate the expected Net Present Value and the standard deviation of the Net Present Value. 4. Magna Oil is wondering whether to drill for oil in a certain basin The prospects are as under: Depth of Well Total Cost Cumulative Present Value of Oil (in meters) (Rs. in crore) Probability of (Rs. in crore) Finding Oil 500 4 0.5 10 750 5 0.6 9 1000 6 0.7 8 Required: Draw a decision tree depicting this decision situation. Recommend a strategy to be followed by Magna Oil.