project management-0406

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Question PaperProject Management (MB271) : April 2006

Section A : Basic Concepts (30 Marks)

• This section consists of questions with serial number 1 - 30.

• Answer all questions.

• Each question carries one mark.

• Maximum time for answering Section A is 30 Minutes.

1. Firms initiate various projects as part of their organizational strategy. In order to execute these projects,firms prepare the aggregate project plan to keep control over all the projects taken up by the firm.Which among the following is false with regard to Aggregate Project Plan?

(a) Firms prepare an aggregate project plan to assess the contribution of each project towardsachieving organizational goals

(b) Firms prepare an aggregate project plan to develop the corporate strategy(c) Firms prepare an aggregate project plan to develop project schedule(d) Firms prepare an aggregate project plan to assess the resource requirements of each project(e) Firms prepare an aggregate project plan to prioritize the different projects.

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2. Which of the following is false with regard to market research?

(a) Analysis with ready made primary data becomes comparatively easy(b) Analysis with primary data is expected to be more accurate(c) Primary data is available easily and saves time(d) Secondary data can be collected from the publications of government research organizations(e) Primary data is hard to available and consumes lot of time.

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3. Project management is a coordinated effort towards managing interrelated processes such as initiation,planning, controlling, implementing and closing of a project. Which among the following is not a partof the project planning process?

(a) Vendor selection (b) Scope planning(c) Activity sequencing (d) Resource planning(e) Cost budgeting.

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4. Effective exchange of information in a project requires good communication skills. The exchange ofinformation between project manager and the functional managers may be called

(a) Internal communication(b) Informal communication(c) Formal communication(d) Horizontal communication(e) Vertical communication.

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5. Project managers today face complex problems in the wake of the increase in the number ofinternational projects being handled across the globe. Which among the following is not correct formanagement of international projects?

(a) Political stability of a nation has a major impact on its economy and the business environment(b) If the differences in culture, tradition and language between the partners of the project are not

managed effectively, the project is bound to fail(c) The differences in the level of patent laws do not have much significance in managing projects

in different countries(d) In case of international projects, any dispute between the parties involved should be referred to a

proper and transparent legal framework as agreed upon in the contract(e) The level of diplomatic relation between two countries often plays an important role in

implementation of international projects.

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6. Which of the following is not a characteristic of project?

(a) Unique activities (b) Attainment of a specific goal(c) Sequence of activities (d) No time frame(e) Interrelated activities.

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7. Which of the following does not constitute to the data required for developing a project plan?

(a) Outputs of other planning processes(b) Historical information(c) Organizational policy(d) Stakeholder skills and knowledge(e) Change requests.

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8. Goenka group of industries is planning to invest Rs.50 crore in a project for the production ofpneumatic valves. They are also planning to sell-off this production unit after running it for five years.They expect a price of Rs.20 crore for this production unit during sell-off. If the cost of capital to thecompany is 15%, then the minimum annual cash inflow, beginning from the end of the second year, thecompany should expect from this project would be

(a) Rs.6.00 crore (b) Rs.8.32 crore(c) Rs.11.95 crore (d) Rs.13.11 crore(e) Rs.16.12 crore.

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9. Network diagram of a project schedule is as follows:

The time estimates related to each of these activities are represented in terms of number of weeks. Theslack (in weeks) related to the event C would be

(a) 1 (b) 2 (c) 3 (d) 4 (e) 5.

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10. Choice of technology for an upcoming project is influenced by which of the following?

I. Plant capacity.II. Principal inputs.III. Product mix.

(a) Only (I) above (b) Only (II) above(c) Both (I) and (II) above (d) Both (II) and (III) above(e) All (I), (II) and (III) above.

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11. Different time estimates of the activities related to a project are as follows:

Time Estimates (in weeks)Activity

to tm tp

1-2 1.0 2.0 3.02-3 1.0 1.5 2.51-3 1.5 4.0 6.5

The chance of this project getting completed in 3 weeks is

(a) 11.51% (b) 34.13% (c) 68.26% (d) 84.13% (e) 94.27%.

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12. Selection of contract type is influenced by the project manager’s level of uncertainty. A contract wherethe vendee bears all costs of the product or service and vendor is paid a fixed fee for supplying thesegoods is known as

(a) Fixed-Price contract(b) Cost-Plus-Fixed-Fee contract(c) Fixed-Price-Incentive-Fee contract(d) Savings contracts(e) Cost-Plus-Incentive-Fee contracts.

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13. “This is a structured technique administered by a coordinator. All the individual members prepare theirideas independently. Then they are requested to present the ideas before the other members, who ratethe ideas. The coordinator notes down all the ideas generated, the positive and negative arguments of

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each idea for future use.”

The above statement refers to which of the following creativity and idea generation techniques?

(a) Black box (b) Brainstorming(c) Delphi technique (d) Nominal group technique(e) Attribute listing.

14. Once the project is in the implementation phase, the project manager would like to make sure that theproject is moving ahead according to the plan. Which among the following is not true about a balancedcontrol system?

(a) Putting in more controls can reduce the risk of the project(b) Excessive control induces rigidity and tends to block creativity(c) A linear increment in the degree of control results in an exponential hike in the cost(d) A balanced control system focuses on correcting errors, rather than punishments(e) A balanced control system lays greater emphasis on short-term results rather than long-range

objectives.

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15. A loan of Rs.20 million along with interest is to be repaid in sixty equal monthly installments. If theloan carries an effective rate of interest of 12% p.a., then the amount of each installment would beapproximately

(a) Rs.2.00 lakhs (b) Rs.3.23 lakhs (c) Rs.4.45 lakhs(d) Rs.5.87 lakhs (e) Rs.6.15 lakhs.

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16. Which of the following is not a merit of NPV as a project appraisal criterion?

(a) It takes into account the time value of money(b) It considers the cash flow stream in its entirety(c) It represents the contribution to the wealth of shareholders(d) It enables to calculate the NPV of two or more mutually exclusive projects by simple addition of

NPV of individual projects(e) It gives the best results in choosing between mutually exclusive projects that have substantially

different economic lives.

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17. Jain group of industries started a project having a life of 10 years with an initial outlay of Rs.1000 crore.Cost of capital and modified NPV related to this project are 12% and Rs.400 crore respectively. Themodified IRR of this capital investment would be

(a) 12.2% (b) 13.7% (c) 14.3% (d) 15.8% (e) 16.1%.

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18. Which among the following is not true while screening the ideas for project?

(a) Assessment of the level of risk associated with selected ideas is a factor considered during initialscreening

(b) The project manager should ensure that the costs involved for implementation of the project arereasonable and provides an acceptable level of profits

(c) The project idea should be compatible with the interests and abilities of the person who ispromoting the project

(d) The project manager should consider the input requirements, their availability and cost whilescreening project ideas

(e) It is not necessary to estimate the present and future market demand for screening the projectideas.

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19. Technical analysis of a project idea includes an in depth study of all technical aspects related to basicmanufacturing operations, detailed design, assembling, modeling and prototype testing. Which amongthe following is/are true about technical analysis of a project idea?

I. The manufacturing processes do not depend on the availability and quality of the raw materials.II. Adoption of a particular technology requires an understanding of the need, readiness and the cost

of the technology.III. Plant capacity is determined on the basis of installed capacity, machinery and availability of

infrastructure and labour.

(a) Only (I) above (b) Only (II) above(c) Both (I) and (II) above (d) Both (II) and (III) above(e) Both (I) and (III) above.

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20. Benefit cost ratio (BCR) of an upcoming project is 1. Which of the following is true regarding internalrate of return (IRR) of the project?

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rate of return (IRR) of the project?

(a) IRR is equal to risk free rate of return(b) IRR is equal to cost of capital of the project(c) IRR is less than the risk free rate of return(d) IRR is higher than the cost of capital of the project(e) IRR can not be ascertained from the data furnished.

21. Which of the following analysis show how robust or vulnerable a project is, to changes in theunderlying variables?

(a) Decision-tree analysis (b) Scenario analysis(c) Simulation approach (d) Sensitivity analysis(e) Break-even analysis.

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22. Income elasticity of demand for residents of a city was 1.3636. Quantity demanded in year 1 was 500units while in year 2 it was 600 units. If the income in year 2 was Rs.16,196 what was the income inyear 1?

(a) Rs.11,500 (b) Rs.12,080 (c) Rs.12,500(d) Rs.13,000 (e) Rs.14,170.

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23. A project manager who adopts this approach of resolving conflicts is committed to his positions andconsiders relationships as secondary. This approach may be called

(a) Avoiding (b) Accommodating (c) Competing(d) Collaborating (e) Compromising.

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24. Which of the following models is a numeric model of selecting a project?

(a) Sacred cow (b) Scoring models(c) Comparative benefit (d) Q-sort technique(e) Competitive necessity.

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25. Which of the following is false with regard to data collection and analysis for conducting market anddemand analysis?

(a) Analysis with ready-made primary data becomes comparatively easy(b) Primary data is readily available and hence saves time of the research analyst(c) Analysis with primary data is expected to be more accurate(d) Secondary data may be collected from the annual reports of the existing companies(e) Secondary data can be collected from the publications of government research organizations.

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26. Which of the following statements is/are true regarding the project staff?

I. The size of the project office staff is generally decided based on the size of the project,technical complexity and its strategic importance.

II. A technical expert is preferred in comparison to a specialist in interpersonal skills, to be a projectmanager.

III. Entire project team is not part of project office.

(a) Only (I) above (b) Only (III) above(c) Both (I) and (II) above (d) Both (II) and (III) above(e) Both (I) and (III) above.

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27. Which of the following is a group creativity technique for the generation of ideas?

(a) Black box (b) Attribute listing (c) Directed dreaming(d) Delphi (e) Checklist.

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28. Which of the following statements is not true with regard to PERT/CPM?

(a) PERT cannot handle situations in which two or more projects have to be planned together to sharethe available resources

(b) CPM assumes that the cost associated with a project can be divided into two components: directcosts and indirect costs

(c) PERT is based on time and variance estimates that consist of six-value weighted averages(d) CPM and PERT techniques assume that the project has unlimited resources, and they can be

assigned for project activities(e) PERT can be used when there is a change in the precedence and sequential relationships of project

activities.

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29. Project communication planning involves determining the information and communicationrequirements of the various stakeholders of a project. Which among the following is/are true aboutproject communication planning?

I. The activity manager requires a detailed report because he is directly responsible for getting thework done.

II. The project manager requires status reports on all the tasks that are in progress during thereporting period.

III. Senior management usually prefers to get information in great detail about scheduling of variousproject activities.

(a) Only (I) above (b) Only (II) above (c) Only (III) above(d) Both (I) and (II) above (e) Both (II) and (III) above.

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30. The scope of a project is documented in the “Project Overview Statement” (POS). A good scopestatement would identify the goal of the project and describe how that goal can be achieved. Whichamong the following is not true for POS?

(a) The first part of a POS states the problem or opportunities that the project is going to address(b) The project goal, which forms the second part of POS, provides guidance to the entire project team(c) The third part of the POS defines the objectives of the project(d) The fourth part of the POS is the success criteria, which identifies the exact benefits that the

project can bring to the firm(e) The fifth section of the POS contains risk analysis and financial analysis of the project.

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END OF SECTION A

Section B : Problems/Caselets (50 Marks)

• This section consists of questions with serial number 1 – 7.

• Answer all questions.• Marks are indicated against each question.

• Detailed workings/explanations should form part of your answer.

• Do not spend more than 110 - 120 minutes on Section B.

1. Kadbury is an established brand of Coco Chocolate Milk. The company had done a market survey in Cyberabadcity for its brand Krunk. The income levels of Cyberabad are Rs.18,000 and Rs.22,000 for the years 2004 and2005. The consumption of Chocolate Milk is 80 ml per head per day and 100 ml for the years 2004 and 2005.

You are required to find

a. The income elasticity.b. The total demand when the projected income is Rs.23,500 and population is 50,000.

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2. Excellent Industries made an NCD issue for Rs.400 lakh, debenture at a face value of Rs.100 with interest at13.5% payable annually. The tenor of debenture is 7 years. The redemption value of NCD is Rs.108. The realizedvalue of NCD is Rs.97. Tax rate is 38.5%.

The company has option of writing off the difference between redemption value and realized value. D = 13.5%; T= 38.5%; F = 108; P = 97; n = 7 years.

You are required to find cost of debenture.

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3. The net cash flows associated with two projects are as follows:

Net Cash FlowsYearProject A Project B

0 –1,000 – 32,0001 1,400 2,00,0002 –100 – 2,00,000

You are required to calculate the unrecovered investment balances over the life of the project.


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4. The activities, duration and direct activity costs of a project are as follows:

Time in Weeks Cost (Rs.)Activity

Normal Crash Normal Crash1-2 12 6 4,500 9,0002-4 13.5 9 6,000 8,2504-6 4.5 3.75 15,000 16,8006-7 15 10.5 9,000 13,0501-3 7.5 4.5 6,000 12,0003-5 10.5 7.5 3,000 4,8005-6 9 3 6,000 10,2005-7 13.5 7.5 6,300 13,5002-5 7.5 1.5 12,000 18,000

You are required to determine

a. The critical path of the network after crashing the activity with the minimum cost-time slope in the table.b. The total direct cost associated with this network

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Caselet 1

Read the caselet carefully and answer the following questions:

5. Project ‘Saras’ got underway ten years after the feasibility study. According to you what could have been thereasons of the delay in the development of a prototype?


6. Project ‘Saras’ involved several organizations in the design and development of the prototype. According to youwhat kind of organizational structure will suit this kind of project? Discuss the advantages.


SARAS

For more than a decade, K.Yegna Narayana, director of the light transport aircraft (LTA) project at the NationalAerospace Laboratories (NAL) in Bangalore had little else than thinking, talking about and working on his project. AtNAL hangar near his office, the aircraft is getting finishing touches. The 14-seater LTA, now named Saras and lookingimpressively big near tiny two-seaters designed and made by NAL, is set to roll out on 4th February. It will fly by theend of June.

Saras is the first civilian aircraft to be designed and manufactured completely in India. India is entering the civil aircraftindustry this year. India contributes 0.1% to the world aircraft manufacturing market of $350 billion. Saras is the firstserious attempt to address this anomaly.

The project was conceived by Roddam Narsimha, who was the director of NAL in 80s and early 90s. Narsimha haddecided that NAL needed to design aircraft and not just do research. The first attempt was an assembly: theexperimental light canard aircraft. NAL then designed the two-seater Hansa, the only all-composite two-seater in theworld. Hansa got certified in 2000. Even while the Hansa work was in progress, NAL decided to make Saras. The firstfeasibility study was done in 1989. Russia’s Myasischev Design Bureau was a partner. But Saras got stuck due to lackof funding. The Russians pulled out due to economic difficulties. By the end of 90s, it seemed that Saras would neverbe developed.

In 1999, the Department of Science and Technology’s technology development board (TDB) agreed to help. TDBsanctioned a grant of Rs.65 crore for the development of Saras. The estimated development cost was Rs.132 crore. TheCouncil of Scientific and Industrial Research, of which NAL is a part, put in Rs.52 crore. Hindustan Aeronautics (HAL)and the ministry of Civil Aviation put in Rs.9 crore and Rs.5 crore respectively. The project got underway by end-1999, 10 years after the feasibility study.

A number of companies worked on the project. HAL designed and developed the landing gear, electrical systems andfew other parts. Taneja aerospace made most of the sheet metal parts. NAL did the design and development, structuraland qualification testing and the project management. The Central Mechanical Engineering and Research Institute,Durgapur, developed the throttle control box. About 20 firms in Bangalore did the machine tooling.

To reduce development costs, developers used off-the-shelf components as much as possible. T.S. Prahlad, who wasNAL’s director till recently, says, “Saras is specially designed for Indian conditions.” It can take off from shortrunways, in hot conditions and on high altitudes. It can fly in any kind of weather.

India’s feeder airline services are poorly developed; even existing services like Vayudoot have stopped operations.

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Other than poor management, two major problems have been lack of cheap Indian aircraft and poor economies of scalefor maintenance. Saras could solve both. NAL now estimates an Indian market of 200 planes in the next 10 years.

The aircraft industry has a considerable influence on the economy of a country. The economic impact of aviation on theworld’s GDP is about 10%. After Saras, the next civil aircraft project is the 100-seater from HAL. Can these twoprojects kickstart an aircraft industry in the country?

Caselet 2

Read the caselet carefully and answer the following questions:

7. If you were the project manager, which method would you use, and why?


Cincinnati Equipment Company, which specializes in the manufacture of modern construction equipment, will bebuilding a facility to house a new foundry. The company has selected a project manager and team to follow the projectthrough to completion. The project team is very interested' in selecting an appropriate scheduling technique for theproject. The project manager has thus set the following guidelines for the selection process simple: able to showdurations of events, the flow of work, and the relative sequence of events; able to indicate planning and actual flow;which items may proceed at the same time and how far they are from completion. The assistant project manager favorsthe Gantt chart, the finance representative likes PERT, and the construction supervisor prefers CPM.

END OF SECTION B

Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 8 - 9.

• Answer all questions.• Marks are indicated against each question.

• Do not spend more than 25 -30 minutes on section C.

8. “Project Status review meetings are used to review the status of projects. They are not general discussions ormeetings trying to solve a generic problem but focus on a single project with specifically timed agendas”. Explainabout the various kinds of reviews conducted during the project life cycle.


9. “Techniques like variance analysis, trend analysis and earned value analysis help the project manager tounderstand the cost performance”. Explain in detail about the performance measurement in project costmanagement.


END OF SECTION C

END OF QUESTION PAPER

Suggested AnswersProject Management (MB271) : April 2006

Section A : Basic Concepts

1. Answer : (b)

Reason : Corporate strategy is decided by the top management basedupon information related to organization’s requirements andcompetitor’s analysis. Aggregate Project Plan follows thecorporate strategy. It ensures that all the projects under theorganization’s umbrella are in line with the overall corporatestrategy. Then it is followed by formulation of projectstrategy and project activities.

All other alternatives are true for Aggregate Project Plan.Hence the correct answer is (b).

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2. Answer : (c) < TOP>

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Reason : If the data required is collected from the field/market in rawform solely for a particular purpose by the user then that iscalled primary data, and if the data required is collectedfrom somebody which was originally collected with a viewto use in some other purpose then that data is calledsecondary data.

As the primary data is collected solely for the purpose ofdirect study the accuracy of study with the primary data isvery high. Hence, (b) is correct. Once the primary data iscollected, the analysis becomes very easy because in data theinformation required specifically for the purpose of study iscollected recently. Hence (a) is correct. So the alternative (c)is false. Secondary data as explained can be collected fromexternal sources such as Market Research Organizations,Trade Associations and Government ResearchOrganizations. Hence, (d) is also correct.

3. Answer : (a)

Reason : Vendor selection is a part of the implementation process. Itis a process of accepting bids, quotations or proposals andevaluating vendors. The technical and commercial sectionsof the proposals are evaluated separately after the receipt ofthe proposal. A vendor is selected when it meets therequirement on both parameters.

All other alternatives form the part of project planningprocess. Therefore the correct answer is (a).

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4. Answer : (d)

Reason : Horizontal communication is the exchange of informationbetween the project manager and his/her peers: functionalmanagers, other project managers, the client’s representativeon the project and other individuals in similar managementpositions. So, the alternative (d) is the answer.

Internal communication is the exchange of informationwithin the project environment. So, the alternative (a) is notthe answer.

Informal communication is the exchange of information ininformal groups. So the alternative (b) is not the answer.

Formal communication conveys information using theformal communication channels established in theorganization. So the alternative (c) is also not the answer.

Vertical communication falls into two categories: (i) upwardcommunication, which involves project managercommunicating with the top management and (ii) downwardcommunication, which involves communicating with one’ssubordinates. However alternative (e) is not the answer.

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5. Answer : (c)Reason : Some countries overlook the importance of guarding

intellectual property because they lack the required patentlaws to regulate unfair trade practices. A foreign companyentering such countries has to bear a high risk becausetransferring technical know-how will result in diluting itstechnological superiority.

The other statements are true about risks involved inmanaging international projects. The correct answer is (c).

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6. Answer : (d)

Reason : Every project has a specific start date and completion date.The time limit is either self-imposed or it is specified by theclient. All other alternatives are a characteristic of project.Therefore the correct answer is (d).

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7. Answer : (e)

Reason : In the process of project plan development, the projectmanager collects the following data:

Outputs of other planning process, Historical information,organizational policy, Stakeholder skills and knowledge,Limitations and assumptions. The change requests are notrequired while designing project plans. Therefore the correctanswer is (e).

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8. Answer : (e)Reason : Let the minimum annual cash inflow be Rs x Crore.

∴ x PVIFA (15, 4) PVIF(15, 1) + 20 PVIF (15, 5) = 50

or, 2.855 × 0.870x + 20 × 0.497 = 50

or, x =

50 9.94

2.48385

−= 16.12.

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9. Answer : (b)Reason :

Slack period for event C would beLOT (c) – EOT (c)= 4 – 2=> 2.

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10. Answer : (e)

Reason : Choice of technology is influenced by a variety ofconsideration like, plant capacity, principal inputs,investment outlay, production cost, product mix, latestdevelopments, case of absorption etc. So, certainly option (e)is correct.

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11. Answer : (a)

Reason :

Activity to tm tp te σ

1 – 2 1.0 2.0 3.0 2.0 1

3

2 – 3 1.0 1.5 2.5 1.58 1

4

1 – 3 1.5 4.0 6.5 4 5

6

Probability (t ≤ 3) =

3 4P Z

5/ 6

− ≤

=

6P Z

5

− ≤

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= P(Z ≤ – 1.2) = 11.51%.12. Answer : (b)

Reason : In Cost-Plus-Fixed-Fee contract, the vendee bears all thecosts of the product or service and the vendor is paid a fixedfee for supplying these goods. This fixed fee is usually apercentage of the actual cost of the goods supplied or thework done. This type of contract is taken up only when thereis no possibility of arriving at an exact price for the contract.

Therefore the correct answer is (b).

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13. Answer : (d)

Reason : Black box and attribute listing are individual creativitytechniques. Brainstorming, Delphi Technique and NominalGroup Technique are techniques used for encouraging groupcreativity to elicit more and better ideas.

Brainstorming is a conference technique by which a groupattempts to find a solution for a specific problem byamassing all the ideas spontaneously contributed by itsmembers. Here any kind of criticism, judgment or commentsis not allowed.

In Delphi Technique of decision making members don’thave face-to-face discussion. The decision is arrived atthrough written communication in the form of filling upquestionnaires often through mails.

In Nominal Group Technique verbal communication isrestricted during the decision making process. Ranking isdone after individuals present their best idea to the group.

Hence the correct answer is (d).

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14. Answer : (e)

Reason : Greater emphasis has to be given to long-range objectivescompared to short-term results for a balanced controlsystem. A balanced control system exercises only theminimum control that is required to achieve the projectgoals. All other alternatives are true for balanced controlsystems. Therefore the correct answer is (e).

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15. Answer : (c)

Reason : Principal loan amount = Rs.200 lakhs or Rs.20 million.

Repayment : in sixty equated monthly installments.

Implicit interest rate = 12% p.a. or 1% per month.

∴ Equated monthly installments are of the size

)60%,1(PVIFA

200

= 955.44

200

= Rs.4.44899 lakhs ≅Rs.4.45 lakhs.

So, alternative (c) is the answer.

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16. Answer : (e)

Reason : NPV is not the best measure for appraisal of projectsbetween mutually exclusive projects that have substantiallydifferent economic lives. Uniform Annual Equivalent (UAE)gives you the best measure then.

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17. Answer : (d)

Reason : Let say terminal value of the cash inflows are x thenmodified NPV.

=10

x1000

(1.12)−

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or 400 =10

x1000

(1.12)−

or x = 1400 × 1.1210

= 4348.19.

Let the modified IRR be r

∴ (1 + r)10 =

Terminal value

Initialoutlay

or r =

1/104348.19

11000.00

−

= 1.158 – 1

= 0.158.

∴ Modified IRR = 15.8%.

18. Answer : (e)

Reason : The project manager should estimate the potential for growthand the return on investment for the proposed project ideas.When screening the project ideas, the project manager shouldconsider factors like present domestic market demand,expected future demand, number of competitors and theirmarket shares, and entry barriers for the new entrants.

All other alternatives are true for the screening of projectideas. Hence the correct alternative is (e).

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19. Answer : (d)

Reason : The manufacturing process is also determined by theavailability and quality of raw materials. For example, thequality of limestone decides whether wet or dry process is tobe used in a cement plant.

Other statements are true for the technical analysis of theproject idea. Therefore the correct answer is (d).

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20. Answer : (b)

Reason : BCR = outflowsofPV

inflowsofPV

BCR = 1 implies PV of cash inflows at cost of capital isequal to initial outlay and NPV is equal to zero.

IRR is that rate of interest at which the PV of inflows isequal to initial outlay or NPV is equal to zero. Hence, BCR= 1 or NPV = 0 implies that the projects IRR is equal to costof capital. Hence, (b) is correct.

As a risk-free rate of return has no relevance for the projectis IRR, alternatives (a) & (c) are incorrect. And as IRR isequal to cost of capital, alternatives (d) & (e) are incorrect.

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21. Answer : (d)

Reason : Sensitivity analysis is used to find out how sensitive theresults of a particular financial model (i.e. NPV of a project)are to changes in input variables.

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22. Answer : (e)

Reason : Suppose, income in year 1 is I1

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1.3636=)16196I(

2

1/)I16196(

)600500(2

1/)500600(

11 +−

+−

or, I1= Rs.14,170.

23. Answer : (c)

Reason : A competing conflict resolving approach does generate illwill that is costly and unpleasant; it does have its advantagesin the situations like – in emergencies, during announcingunpopular decisions etc. A person who adopts this approachis committed to his position or perspective and considersrelationships as secondary issues. So, the alternative (c) isthe answer.

Avoiding approach focuses away from the conflictaltogether. So, the alternative (a) is not the answer.

While avoiders shut themselves out, accommodators neglecttheir own concerns in order to satisfy the concerns of others.So, the alternative (b) is also not the answer.

The collaborating approach focuses on satisfying bothparties to the greatest degree. It is cooperative in nature. So,the alternative (d) is not the answer.

Though compromising approach is also cooperative innature but here the cooperation is dictated by self interest.So, the alternative (e) is not the answer.

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24. Answer : (b)

Reason : The non-numeric models are sacred cow, Extension productline, Operating necessity, Competitive necessity,Competitive benefit, Comparative benefit, Q-sort technique.

The numeric models of selecting a project areProfit/Profitability models, Scoring models and Iterativerating methods. Therefore the answer is (b).

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25. Answer : (b)

Reason : If the data required is collected from the field/market in rawform solely for a particular purpose by the user, then it iscalled primary data, and if the data required is collected fromsomebody and is used by some other individual ororganization then it is called secondary data. Collection ofprimary data needs a lot of time and effort of the observerand hence it is costly. So, the alternative (b) is false.

Once the primary data is collected, the analysis becomesvery easy because the data has been collected specifically forthe purpose of study and that too it has been collectedrecently. Hence (a) is correct. As the primary data iscollected solely for the purpose of direct study, the accuracyof study with the primary data is very high. Hence, (c) iscorrect. Secondary data as explained can be collected fromexternal sources such as Market Research Organizations,Trade Associations, Annual Reports of the existingcompanies and Government Research Organizations. Hence,the options (d) and (e) are also correct.

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26. Answer : (e)

Reason : The size of the project office staff is generally decided basedon the size of the project, technical complexity and itsstrategic importance. Hence, the statement (I) is correct. Allthose who work for the project are not the part of projectoffice. Only those who are entrusted with the job of assistingthe project manager in discharging his duties belong to theproject office. Hence, the statement (III) is true. But a

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project manager’s job is to get things done by othersworking on his project and hence, he needs to be specialist ininterpersonal skills. Hence, the statement (II) is not correct.So, option (e) is the answer.

27. Answer : (d)

Reason : The techniques that help in individual creativity are:Attribute listing, Checklist, Black box and Directeddreaming.

The techniques that help in group creativity are:Brainstorming, Delphi and Nominal group techniques.Hence, option (d) is the correct answer.

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28. Answer : (e)

Reason : PERT cannot be used when there is a change in theprecedence and sequential relationships of project activities.PERT works in a standstill framework of precedences andsequential relationships.

CPM and PERT techniques assume that the project hasunlimited resources, and they can be assigned for projectactivities. However, in reality, project resources are usuallylimited. Sometimes activities may be delayed because of thenon-availability of resources. That is why the projectmanager recalculates the activity schedules keeping in mindthe availability of resources.

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29. Answer : (d)

Reason : Senior management usually prefers to get information in theform of graphs and pictorial representation. As seniormanagers have very limited time for reviewing a projectreport, a report submitted to them is best limited to a singlepage with the milestones of the project highlighted.

Other statements are true for project communicationplanning. Therefore the correct answer is (d).

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30. Answer : (e)

Reason : The fifth section of the POS consists of Assumptions, Risksand Obstacles. It mentions all organizational orenvironmental factors that may affect the outcome of theproject. The project manager uses this section of the POS toalert senior management about the risks or obstacles thatmay influence the project activities. This part of the POSalso mentions the contingency plans to be prepared toreduce the impact of the above risks on the project.

However Risk Analysis and Financial Analysis report is alsosometimes given with the POS, but it is presented as anattachment to the main document. All other alternatives aretrue for POS, so the correct answer is (e).

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Section B : Problems/Caselet

1. a. Income elasticity

=

2 1 2 1

2 1 2 1

Q Q g g

g g Q Q

− +×

− +

=

100 80 22,000 18,000

22,000 18,000 100 80

− +×− +

=

20 40,0001.11

4,000 180× =

b. Change in per capita income

=

23,500 22,000 1,5000.0329

23,500 22,000 45,500

− = =+

Projected per capita demand

= 100 ml ((1 + 0.0329) × 1.11)

= 100 ml (1.146519) = 114.6519 ml.

Total demand in the city

= Estimated population × Projected per capita demand

= 50,000 × 114.6519 = 57,32,595 ml.< TOP >

2. Cost of debenture kd =

( ) F PD 1 T

nF P

2

−− +

+

=

( ) 108 9713.5 1 0.385

7108 97

2

−− +

+

=

8.3025 1.57149.63%

102.5

+ =.

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3. Project A

IRR at 32%,

= –1,000 + ( )2

1, 400 1000

1 r 1 r− =

+ +

= – 1,000 + ( )2

1, 400 1003.21

(1.32) 1.32− =

At 33%, –1,000 + ( )2

1, 400 1003.90

(1.33) 1.33− = −

32% + (33% – 32%)

3.2132.45%

3.21 3.90=

+Project A has got only one real root

r = 0.3245⇒ 1 + r = 1.3245

Unrecovered Investment Balance

F0 (1.3245) = –1,000

F1 (1.3245) = –1,000 (1.3245) + 1,400 = 75.5

F2 (1.3245) = 75.5 (1.3245) – 100 = 0

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Project BIRR

= –32,000 +2

2,00,000 2,00,0000

(1 r) (1 r)− =

+ +

Multiplying this equation by ( )21 r+ we get

–32,000 (1 + r)2 – 2,00,000 (1 + r) – 2,00,000 = 0

Solving this as a quadratic equation, we get

(1 + r) = 12.5 and (1 + r) = 5.00 i.e., r = 25% & 400%

Unrecovered Investment Balance

r = 25%

F0(0.25) = –32,000

F1(0.25) = –32,000 (1.25) + 2,00,000 = 1,60,000

F2 (0.25) = 1,60,000 (1.25) – 2,00,000 = 0

r = 400%

F0 (4.00) = –32,000

F1(4.00) = –32,000 (5.00) + 2,00,000 = 40,000

F2 (4.00) = 40,000 (5.00) – 2,00,000 = 0.< TOP >

4. a. Before crashing

1 2 46

753

12 13.50 4.50

15

13.5010.50

7.507.50

9

The critical path of the network is 1-2-4-6-7 and the duration is 45 weeks.

Activity Cost Slope

1–2 4500/6 = 750

2–4 2250/4.50 = 500

4–6 1800/0.75 = 2400

6–7 4050/4.50 = 900

1–3 6000/3 = 2000

3–5 1800/3 = 600

5–6 4200/6 = 700

5–7 7200/6 = 1200

2–5 6000/6 = 1000

The activity with the least cost-time slope is 2–4. Hence crash 2–4. After crashing 2–4 the network looks asbelow:

1 2 46

753

12 12 4.50

15

13.5010.50

7.50 7.50 9

16

Path (after crashing) Total duration in weeks

1–2–4–6–7 43.50

1–3–5–7 31.50

1–2–5–7 33.00

1–3–5–6–7 42.00

1–2–5–6–7 43.50

Hence critical path after crashing is 1–2–5–6–7

b. Total direct cost

= 4500 + 6000 + 15000 + 9000 + 6000 + 3000 + 6000 + 6300 + 12000 = Rs.67800.

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Caselet 15. Project ‘Saras’ started ten years after the feasibility study was done. This is a common problem with such kind of

projects. In a project which is highly R&D oriented and does not have industry backing usually don’t find anytakers and the progress is slow. The main hindrance faced by such projects is their lack of funds. As aircraftindustry has always been dominated by American and European companies, they have gained some reputation forquality and reliability. The other reason is the lack of trust by Indian aviation sector on the local manufacturers.They have good reasons to have such opinion also. Although there has been lot of thrust by the government ondevelopment of Missile technology and launch vehicles, there has been hardly any progress in development oftransport aircraft.

Since this project was undertaken by ‘NAL’ which comes under CSIR, it also suffered the effect of sanctions byUSA after the pokharan nuclear tests. There was a blanket ban imposed by USA on all government runlaboratories and R&D centre which were in some way associated with the nuclear program. As the case states itsuffered a major setback when their Russian collaborators pulled out of this project due to lack of funding.

Moreover this being the first project of this kind has its unique problem. There was no previous data available,against which the project schedule could be benchmarked. Even arriving at cost estimates would also suffer fromthe same problem. Only after the two-seater ‘Hansa’ was ready, they had something to benchmark with.

The project ‘Saras’ also suffered from the problem of coordination. Since the development involved a number ofcompanies and laboratories, it was difficult to maintain a tight control in such projects. In a typical engineeringproject there are some activities which are parallel in nature and some are in series. The processes which are inseries can not be performed unless the previous one is accomplished. So any delay in the modeling of initialcomponents can have a cascading effect on the development of the components which follows after them.

There are also reasons specific to products such as aircraft. Once a prototype is ready it has to meet certaintechnical standards and it is tested for airworthiness by DGCA and a clearance has to be taken from them. It cango up in the air only when all the clearances required are attained. Bureaucratic hurdles also play its role in thedelay in the execution of such projects.

Projects like ‘Saras’ require strong industry funding and support to sustain and develop world class product whichcan compete with the likes of Boeing, Airbus and Concorde which has strong financial muscle and have access tobig funds from Government and industrial houses.

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6. Although the project ‘Saras’ was conceived and was undertaken by NAL, a number of other companies wereinvolved in the development of the prototype. It also received funds from several organizations to complete it.Some of them were HAL, CSIR, TDB, CMERI, Taneja aerospace and several small companies in Bangalore. Tosuccessfully execute the project with such wide participation and involving diverse technology a close anddedicated team pooled from different functional and technical experts is required.

The organization should have a matrix structure. This provides the advantage of both traditional and productorganization structure. In this form , there are two lines of reporting one to the functional heads and other to theproject managers. The project manager is given the overall responsibility for the implementation of the project.

Having such structure provides a close interaction and informality among the project group. Any problem whichentails several technologies could be undertaken by a group of engineers with different background. This will helpin the quick remedy and faster progress of the project. The functional heads can take up the problems related totheir area and provide the required help to the project team.

The advantages from such structure could be as follows:

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� The project manager has full control over the project and can be made accountable for it.

� The project manager is free to commit the resources of the firm and can react quickly to the needs of the firm.

� Conflicts are few and can be resolved fast.

� Projects can be completed with low costs and time, as people can be shared.

� Control and coordination are better.

� Motivation levels of the employees are better.

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Caselet 27. The basic approach of all scheduling techniques is to form an actual or implied network of activity and event

relationships that graphically portray the sequential relations between the tasks in a project. The most commonapproach to project scheduling is the use of the Gantt charts, and the network techniques such as PERT and CPM.

The Gantt chart shows planned and actual progress for a number of tasks displayed against a horizontal time scale.It is particularly effective and easy-to-read method of indicating the actual current status for each of a set of taskscompared to the planned progress for each item of the set. It is useful in expediting, sequencing, reallocatingresources among tasks, and keeping track of how things are going.

In application, PERT has primarily been used for R&D projects for which it was originally developed though itsuse is more common on the development side of R&D than it is on the research side.

CPM was designed basically for construction projects and has been generally embraced by the constructionindustry. However, there are many exceptions to these generalities.

Originally, PERT was strictly oriented to the time element of projects and used probabilistic activity timeestimates to aid in determining the probability that a project could be completed by some given date. CPM, on theother hand, used deterministic activity time estimates and was designed both, to control the time and cost aspectsof a project. Moreover, in CPM, activities can be crashed (expedited) at extra cost to speed up the completiontime.

Analyzing the above features of the Gantt charts, PERT and CPM techniques of networking, I would have usedthe CPM method rather than the other two. The basic reason for such a selection, beside others, is that CPMembraces the construction industry more than the other two methods and our project in concern is also aconstruction project.

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Section C: Applied Theory8. PROJECT STATUS REVIEW MEETINGS

Project status review meetings are used to review the status of projects. They are not general discussions ormeetings trying to solve a generic problem, but focus on a single project with specifically timed agendas. Variouskinds of reviews are conducted throughout the project life cycle. For a project to be called a successful one, thetiming of reviews is important. A project undergoes the following reviews during its lifecycle:

Status review - reviews the status of cost, performance, schedule and scope.

Design review - reviews the design of the product or service to ensure that it meets

client requirements.

Process review - reviews the processes and checks for the possibility of any improvements.

Status ReviewThe most frequently conducted review is the status review. A status review can be comprehensive or cursory.Generally, a cursory review is conducted on a weekly basis while a comprehensive review is conducted on amonthly basis. Generally, for a project of one-year duration, a weekly cursory review and a monthlycomprehensive review will suffice. When the project runs into difficulties, the frequency of reviews increases untilthe problem is solved. To avoid micromanagement, tile frequency of status reviews should be limited. A statusreview should, ideally solve problems, not punish people. It is always advantageous to know the kinds of problemsexisting in a system, the factors causing these problems and the corrective measures required to solve them.

Design Review

A design review ensures that the product or service being developed matches customer requirements. Generally,such reviews are conducted when a milestone has been reached. If a product is poorly designed, it will not meetcustomer expectations. Therefore, the design review focuses on the performance component 'rather tl1an on cost,time and scope of the project. :

The project manager has to keep in mind some guidelines while conducing design reviews. It is necessary toinclude the conditions for manufacturing and servicing in the design review. Ensuring optimization by integratingdesign with manufacturing specifics like tooling and economics of process and specialty machines, is also 'the

18

responsibility of a design review. A design review also considers the specifications of the working conditions suchas storage of inventory, ease of accessing the materials and tools, safety in operating and maintaining and damageprotection. .

Process Review

The process review is focused on reviewing the “how” aspect of an activity.. This review tries to find out how anactivity can be carried out in a better manner. Process reviews typically take place at the milestones or once everytwo or three months. This type of review tries to improve those activities that are not being carried out well.

It is important to discuss the outcome of the different types of reviews with all the parties involved in the project.

The activity manager reports the status of the project on a weekly basis to the project manager, who in turn reportsto senior management on a biweekly basis. Thus it becomes appropriate to conduct project status review meetingsonce in every two weeks. Though the duration of the status review meeting depends on tile size of the project, it isusually limited to one hour. The list of people attending the review meeting varies across the project life cycle,depending on the need of the person and the situation. Though status review meetings have a flexible format asinfluenced by the need of the project, the top-down approach is commonly used. The minutes of the meeting arecirculated, revised for errors and follow ups and filed in the project notebook.

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9. Performance MeasurementTechniques like variance analysis, trend analysis, and earned value analysis help the project manager tounderstand the cost performance. Variance analysis compares the actual project results to the planned results. Thecost variations are measured at every stage of the project and the causes of these variances are determined. Trendanalysis examines the project results over a period of time to find out if the cost performance is improving or not.

Earned value analysis is a technique that measures the project performance by integrating the scope, cost andschedule measures of the project. According to this analysis, three values are important. These are: Budgeted CostWork Schedule, Actual Cost Work Performed (ACWP) and Earned Value (also called Budgeted Cost of WorkPerformed, (BCWP)).

The Budgeted Cost Work Schedule is the approved cost estimate planned for a project activity for a given period.The Actual Cost Work Performed is the total costs (both direct and indirect) incurred while implementing anactivity in a given period. The Earned Value is a percentage of the total budget equal to the percentage of workcompleted.

These three values along with certain measures like Cost Variance (BCWP-ACWP), the Schedule Variance(BCWP-BCWS) and the Cost Performance Index (BCWP/ ACWP) help. the project manager to determinewhether the work is progressing according to the schedule and whether it is within the budget. The cumulativeCost Performance Index for the entire project (total of BCWPs of all project activities divided by total of allACWPs) forecasts the project cost at completion. .

The project manager prepares revised cost estimates, budget updates, and Estimates At Completion (EAC) anddecides what corrective actions should be taken. The project manager prepares revised cost estimates by makingmodifications to the current cost information. These revised cost estimates should be communicated to all projectstakeholders.

In budget updates, changes are made to the approved cost baseline. The EAC is a forecast of the total project costson the basis of the project performance. Here, the completion times are estimated as actual work completed plus anew estimate for remaining work. The project manager also documents all the lessons he has learnt in controllingproject costs.

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