Class Test 2

Project Appraisal & Financing

Prof Pradip Lath

10 Marks - 12 Minutes (Class Test-2)

State True or False (Reasons necessary for obtaining marks). If required, give examples in support of your answer.

1)

a. Interest on term loan during construction period is considered preliminary expenses

b. It must be written off over a period of time

2) Changes in working capital requirements due to increase in the scale of operations is considered differently in the case of equity fund basis of cash flows Vs total funds basis of cash flows (True)

3)

a. Advertising cost for the brand promotion of a new product to be launched before the start of the commercial production is a related pre-operative expense (False)

b. It should be added to the cost of the relevant fixed assets as the expense is incurred before the start of commercial production (False)

4) Installation expenses of machinery incurred at project site is deferred revenue expenses

5)

a. Preliminary expense is an intangible asset

b. Such amount of preliminary expense is added to the cost of fixed assets

6) In a project wherein there is debt component, depreciation should be computed without finalizing the term loan amount (False……. Depreciation is related to term loan; without finalizing term loan, depreciation will not be true value as the interest component changes, depreciation value will change)

7) Cash flows for calculation of IRR/NPV by way of any method of cash flows can be computed without making the cash flow statement and balance sheet (True…. It can be done using Depreciation, PAT, working capital etc. details)

8) The debt equity (leverage) ratio is the only criterion for fixation of the term loan amount (False …. There are 3 other criterions like – Credit rating, Margin money contribution by customer, Debt servicing capacity of the firm)

9) In the case of multiple projects: there will always be a conflict between NPV & IRR for 2 mutually exclusive projects with NPV profiles having a fisher intersection. Justify the answer with diagram (2 Marks) (True …… The diagram shows the conflict as before point of intersection, Pa has higher NPV, but after the point, Pb has better NPV ….. hence, NPV and IRR shows a conflict for 2 mutually exclusive projects)