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FM09

                                                                             Project Appraisal and Finance

(For CNM Cases)

                                                                                             Assignment II

Assignment Code: 2016FM09A2                                                                              Last Date of Submission: 30^th April 2016

                                                                                                                                             Maximum Marks: 100

Attempt all the questions. All the questions are compulsory and carry equal marks.

                                                                         Section-A

1          How do venture capital investors value their investment in a company?  What are some   of the                 factors that could influence this valuation?

2          Compare the following four methods of raising finance with the help of an example:

                      (a)          Public Issue

                      (b)          Rights Issue

                      (c)          Private Placement

                      (d)          Preferential Allotment

3          Write short notes on Global Depository Receipts

4          Explain the types of project risk and the measures of risk.

Section-B

Case Study

The government is considering a multi-purpose river valley project which would involve construction of a dam, a reservoir, a power house, and several irrigation canals. The project would supply water for irrigation, generate electricity and provide a measure of protection against floods. The following information has been gathered by the project control board.

The project will require the following during the construction stage:

1. Indigenous power equipment costing Rs. 200 million.
2. Imported power equipment costing $10 million.
3. 20,000 tonnes of steel produced indigenously and made4 available to the project at Rs. 800 a tonne.
4. 3,50,000 tonnes of cement produced indigenously and made available to the project at Rs. 800 per tonne.
5. Other construction materials (sand, bricks etc costing Rs. 100 million.
6. 25 million mandays of unskilled labour for which the project control board has decided to pay a daily wage rate of Rs. 10.
7. Skilled labour costing Rs. 100 million.

Once commissioned the operating and maintenance cost of the project would be Rs. 35 million per year.

The annual benefit expected from the project would be as follows:

1. 3,00,000 acres of land will be irrigated.
2. 120 million units of electricity will be generated for domestic use.
3. Flood damages to the extent of 10 million Rs. Will be saved annually.

The following additional information is available:

1. Power equipment produced indigenously is a tradable item whose FOB value is 4 15 million.
2. A gift of $ 10 million available from a foreign agency, can be used for acquiring imported equipment. This gift however, is not project-tied. Hence, if it is not assigned to the project, it can be used for some other purpose.
3. The Shadow price per dollar is Rs. 12, though the official price is Rs. 10.
4. Steel is a tradable item whose FOB value is $ 400 per tonne.
5. Cement is not a tradable item. One-half of the cement required for the project will come from additional domestic production which has a cost of Rs. 700 per tonne, one-half of the cement required for the project will come from diversion from other consumers who are willing to pay on average, Rs. 1,200 per tonne.
6. Other construction materials are non-tradable items. The requirement of the project will be met by way of additional production. The cost of this production will be Rs. 80 million.
7. The shadow price of unskilled labour is Rs. 5 per day.
8. The compensation paid to skilled labour reflects what others are willing to pay for their services.
9. The operating and maintenance cost of Rs. 35 million reflects economic value as well.
10.  The water levy by the project control board would be Rs. 100 per acre. However, the value of additional output per acre, attributable to the water supplied by the project will be Rs. 400 a year.
11. The electricity tariff charged by the project control board would be 30 paise per unit. The consumer willingness to pay, however would be, on an average, 50 per cent more than the tariff charged.
12. The project control board is not able to collect anything for the protection provided against floods.

Required:

Define the costs and benefits from the private (project control board’s) and economic point of view.