Question

Question 3 (a) Financial evaluation is an import step in the project management.

(i) Explain what is meant by Cost Benefit Analysis and, using two project examples, discuss benefits of such analysis. [2 marks]

(ii) Discuss the advantages and disadvantages of three techniques used for project investment appraisal. [4 marks]

(iii) Projects A and B are competing for funds. With an original investment of €1,000 and returns given in Table Q3, determine using appropriate project financing evaluation techniques whether the company PTO 5 should choose projects A or B? Provide calculations to justify your recommendation. Use 10% discount rate in your calculations.

Table Q3 – Table of project returns Project A Project B Year 1 €200 €0 Year 2 €500 €0 Year 3 €400 €700 Year 4 €0 €700 Year 5 €500 €500 [7 marks]

(b) There is a variety of organization structures. (i) Discuss each type of structure and draw their schematic diagram. [4 marks]

(ii) For each type of structure summarize in a tabular form: • What is the Project Manager’s authority (range: little, limited, moderate high, total) • Who controls the project budget (range: Functional Manager, Project Manager) • Project manager’s role (range: full-time, part-time). Use this information to explain major differences between them. [3 marks]

Answer 1

Ans a: -

• Financial evaluation in project management is done to select the most suitable project and then it is submitted to the financial institutions for obtaining necessary funds.
• Finance is required to of establish any kind of business.
• The decision should not only be based on present consideration but future possibilities should be taken into account.
• Financial considerations are mainly concerned with the
  • Cost of capital
  • Sources of finance
  • Cost of production
  • Working capital requirement and its financing
  • Estimates of working results
  • Projected cash flow
  • Raising of capital
  • Cost of formation
  • Taxation liability etc
• The funds can be raised either form internal sources or external sources.
• Financial institutions evaluates the project by using various financial tools.
• The evaluation relates to the determine the capacity of the firm to pay interest charges of repayment of debt and not only for measuring profitability.

Ans 1:- Cost-volume-profit analysis is a technique for studying the relationship between cost, volume and profits. The 3 components of CVP i.e. cost, volume and profit are interconnected and dependent on one another.

Eg. Profit depends upon sales, selling price depends upon cost and cost depends upon the volume of production.

​​​Ans 2- Advantages of Pay back period:-

• It is easy to calculate and understand
• It saves cost as it requires less time and labour
• It helps in project evaluation quickly

Limitations of payback period

• It ignores the time value of money
• It ignores the risk of future cash flows.
• It is not a measure of profit.
• It does not take all cash flows after the payback point.

Advantages of Net Present Value:-

• It considers all the cash flows
• It considers time value of money
• It considers the risk of future cash flows
• It takes into consideration the objective of maximum profitability

Disadvantages of Net Present Value:-

• It requires estimation about the cost of capital
• It is complex to calculate
• It may not give good results while comparing projects with unequal investment.

Advantages of Average Rate of Return

• It uses entire earnings of project in calculation
• It is easy to understand and calculate
• It is based on accounting concept of profit so it can be calculated from financial data.

Disadvantages of Average Rate of Return:-

• It cannot be applied to those project where investment in project is made in parts
• It ignores  the 'time value' of money
• It ignores the pattern of cash flow