ASSIGNMENT CEL 779

Answer all questions. You may form a group of 4-5 students and solve the questions collectively.
Submit the soft and hard copies (one per group) of the assignment.

1. Fill in the blanks.

a. Rs. 50,000 now is equivalent to Rs. __________________after 10 years at a rate of
interest 10%.
b. Rs. 50,000 is equivalent to an annual payment of Rs. _______________for a period of 10
years at an interest rate of 10%.
c. The present value of a sum of Rs. 129,700 to be received 10 years hence at an interest
rate of 10% is Rs. _________________.
d. Rs. 8137.50 every year for next 10 years at a rate of interest of 10% for next 10 years is
equivalent to a future sum of Rs. _________at the end of 10 years.
e. Rs. 50,000 payable at the end of 10 years is equivalent to Rs.___________________at
present at an interest rate of 10%.
f. At an interest rate of ___________%, Rs. 5 Lakhs invested today be worth Rs. 10 Lakhs
in 9 years?
2. Write short notes on the Payback period method.
3. A construction company is contemplating purchase of crawler excavator costing Rs. 60 lacs. The
finance officials have identified the cost and benefits of the investments which are given below.
Company proposes to use the excavator for 4 years. The required rate of return is 16%. Ascertain
the payback period and discounted payback period.

1st yr 2nd yr 3rd yr 4th yr

(Initial investment
60 Lakhs 15 Lakhs 22 Lakhs 28 Lakhs 35 Lakhs

4. A project is estimated to cost 2.4 crores and is expected to be completed in 12 months. You may
assume the following:
 10% of the work is completed in the first two months. Take the progress to be
3% and 7% in the first and second month respectively.
 80% of the work is completed during the next 8 months
 10% of the work is completed in the last two months. Take the progress to be
8% and 2% in the eleventh and the twelfth month respectively.

The following data may also be useful.

 The contractor has to submit an Earnest Money Deposit of 10% of the estimated
cost at the time of the submitting his tender in the form of demand draft. This
amount is to be retained by the Client as Initial security deposit.
 The contractor needs to be paid a mobilization advance of Rs 16 lakhs at
initially, which can be recovered in four equal installments, beginning with the
third running bill.
 An amount equivalent to 5% of the gross amount due is to be retained in each
bill towards (additional) security deposit.
 50% of the total security deposit is to be returned to the contractor at the end of
6 months after the project has completed, and the remaining part after another
6 months.
 10% recovery is to be made towards Income tax. Payment to the department of
 income tax is to be made at the end of the project.
 The contractor submits monthly bills on the first day of the following month
 On the client’s side, it takes about 20 days to process a bill, and payment is
made only on the last day of the same month in which the bill is submitted.
 Client maintains his funds with the bank and is paid an interest of 5%
compounded monthly.
 Rate of interest on borrowing from the bank is 15% per annum, compounded
monthly

Based on the information provided: (a) Clearly show how much cash the client needs at different
points in time as the project progresses. (b) How much money does the client need to borrow at
different points of time, and what will be his TOTAL liability at the completion of the project
(say at the end of month 24). Clearly outline all the assumptions you make in your analysis.

5. A newly opened toll bridge has a life expectancy of 25 years. Considering rise in construction
and other costs, a replacement bridge at the end of that time is expected to cost Rs 60,000,000/-.
The bridge is expected to have an average of 100,000 toll paying vehicles per month for the 25
years. At the end of every month the tolls will be deposited into an account bearing annual
interest of 11 per cent compounded monthly. The operating and maintenance expenses for the
toll bridge are estimated at Re 0.80 per vehicle.

a. How much toll must be collected per vehicle in order to accumulate Rs 60,000,000 by the
end of 25 years?
b. What should be total toll per vehicle in order to include both operating and maintenance
cost as well as replacement cost?
c. What annual effective interest rate is being earned?
6. A small shopping complex can be constructed for Rs 5,000,000/-. The financing requires Rs
500,000/- down (you pay) and a Rs 4,500,000 loan at 10 % with equal annual payments. The
gross income for the first year is estimated at
Rs 600,000/- and is expected to increase 5% per year thereafter. The operating and maintenance
costs and taxes should average about 40 % of the gross income and rise at the same 5 % annual
rate. The resale value in 30 years is estimated at Rs 10,000,000/-. Find the rate of return on this
investment over the 30 year life. Try problem assuming the increase follows (i) arithmetic
gradient, and (ii) geometric gradient (Hint: Try between 10% and 15%).

7. Due to increasing age and downtime the productivity of a contractor’s excavator is expected to
decline with each passing year. Using that data below, calculate the price in terms of rupees per
cum that the contractor must charge to cover the cost of buying and selling the excavator.

Cost new = Rs 2,200,000/-

Resale price @ EOY 6 = Rs 900,000/-
Contractor borrows at i = 10%
Production decline at r = (-) 6%
Production for year 1 = 160,000 cum
Assume all funds are credited at end of year.
8. A contractor has a contract to construct a 3600 metre long tunnel in 30 months. He is trying to
decide whether to do the job with his own forces or subcontract the job. You are to calculate the
equivalent monthly cost under each alternative. His i = 1.75 % percent per month. Production
under both alternatives will be 120 m per month.
 Alternative A:

Buy a tunneling machine and work with own force.

a) Cost of tunneling machine = Rs 20 million
b) Salvage value of machine at end of month 30 = Rs 4 million
c) Cost of labour and material = Rs 10,000/m for the first 10 months, and increasing by 0.5 % per
month at EOM each month thereafter (i.e. Rs 10050/m at EOM11, Rs 10100.25 at EOM 12, etc.)

Alternative B:

Subcontract the work. Cost is Rs 27,000 per metre of tunnel.

9. A sewage treatment plant has three possible schemes of sewage carriage and treatment systems. If
the life of the scheme is 20 years which scheme should be recommended as the most economic?
Scheme Installation cost, Rs Annual running cost, Rs
in Lakhs in Lakhs
A 182. 50 72.50
B 202.00 46.00
C 242.00 40.00

Use 15 % to represent the cost of capital. If the cost of capital was 10 % would the
recommendation alter?

10. A town built on a river is considering building an additional bridge across the river. Two
proposals have been put forward for bridges at different sites. The costs of each proposal are
summarized as follows:

Description Bridge A Bridge B

Initial cost of bridge Rs 6,500,000 Rs 5,000,000
Initial cost of Road works Rs 3,500,000 Rs 3,000,000
Annual maintenance of bridge Rs 50,000 Rs 90,000 for first 15 years&
1,10,000 thereafter
Annual maintenance of Roads Rs 30,000 Rs 25,000
Life of bridge 60 years 30 years
Life of Roads 60 years 60 years

With the cost of capital at 9 %, which proposal should be adopted? (Assessment of the proposals
to be carried out by a comparison of their present worth)

11. Your firm owns a large earthmoving machine that may be renovated to increase its production
output by an extra 8 m3/hr, with no increase in operating costs. The renovation will cost Rs
5,00,000/-. The earthmoving machine is expected to last another eight years, with zero salvage
value at the end of that time. Earthmoving for this machine is currently being contracted at Rs
14/m3. The company is making a 18 percent return on their invested capital. You are asked to
recommend whether or not this is a good investment for the firm. Assume the equipment works
1800 hours per year. (Hint i = 18%).
12. For the following data of a project, calculate the payment received by the contractor at different
time periods. Also prepare the month-wise running account bill (b) the cash inflow diagram for
the contractor and (c) the cash outflow diagram for the owner.
  Value of contract: Rs 1,00,00,000 (Rs. One Crore)
 Time period: 4 months
 Payment schedule: First month 15% of the contract value, 2nd month 40%
(cumulative), 3rd month 80%(cumulative) and fourth month 100% (cumulative).
 The owner makes an advance payment of Rs 5.00 lakhs of Rupees, which is to
be recovered in 4 equal installments.
 The owner also supplies materials to the value of about Rs 3.2 lakhs which value
is also to be recovered equally from each Running Account bill.
 In addition, the owner will recover from the payments made to the contractor 2%
of the value of the work done as income tax deducted at source and deposit this
amount with the Reserve Bank of India.

13. Two equipments ‘A’ and ‘B’ have the capability of satisfactorily performing a required function.
Equipment ‘B’ has an initial cost of Rs 160,000 and expected salvage value of Rs 20,000 at the
end of its 4 year service life. Equipment ‘A’ costs Rs. 45,000 less initially, with an economic life
1 year shorter than that of ‘B’; but ‘A’ has no salvage value, and its annual operating costs exceed
those of ‘B’ by Rs 12,500. When the required rate of return is 15%; state which alternative is
preferred when comparison is by
a. The repeated projects method
b. A 2year study period (assuming the assets are needed for only 2 years.
14. A building costing Rs.16,00,000 is expected to have a 35 years life with a 25% salvage value.
Calculate the depreciation charge for years 4, 9, 18, 26 using the
i. Straight -line method
ii. Sum of years method
iii. Double-declining balance method
15. An asset having a first cost of Rs.11,50,000 is expected to have a life of 12 years with a
salvage value of Rs1,00,000. In what year does the depreciation charge by the straight
line method first exceed the depreciation charge allowed by the
i. Sum of years method
ii. Double-declining balance method
16. Table 7.1 gives the details of the equipment used at a construction site. Complete the table and
determine the total expenses for depreciation of equipment at the site.

Table 7.1 Details of the equipment used at a construction site

S. Description Nos Month Opening Opening Depreciation Depreciation Total

No. book value as value for rate per month Depreciation
on total
31.12.2005

1 Batching plant - 1 10 1197450 5.15% 7940

20 Cum/Hr
2 Front end loader 1 10 1116742 11.31% 20094
3 Transit mixers 3 10 1282895 4.75% 7754
4 Tough rider 2 6 167069 11.31% 2997
5 Dewatering 1 4 174635 4.75% 1057
Pump
6 Curing Pump - 1 10 64595 4.75% 392
 Multi Stage type
7 Tower Crane 1 6 7279250 5.15% 48281
8 Theodolite 1 10 598265 4.75% 3614

17. Check regulations published by the accounting authorities for specific rules regarding
depreciation and methods of calculating depreciation for various types of assets.
18. Two pumps can be used for pumping a corrosive liquid. A pump with a brass impeller costs Rs
40,000 and is expected to last for three years. A pump with a stainless steel impeller will cost Rs
95,000 and lasts for five years. An overhaul costing Rs 15,000 will be required after 2000
operating hours of brass one while overhaul of Rs35,000 for stainless steel after 9000 hours. If the
operating cost of each pump is Rs 25/hour, how many hours /year must the pump be required to
justify the purchase of expensive pump? (use interest rate of 10% /yr.)
19. A construction company engaged in constructing sewage treatment plant is considering the
economics of furnishing an in-house water testing lab instead of sending samples to independent
labs for analysis. If the lab is furnished so that all the test could be conducted in-house the initial
cost would be Rs12,50,000. A technician will be required at a cost of Rs 6,50,000 /year. The cost
of power, chemicals, etc will be Rs 250 per sample. If it is partially furnished, then initial cost
will be Rs 5,00,000 and a part-time technician at Rs 2,50,000 per year. The cost of in-house
analysis is Rs150/sample, but since all tests cannot be conducted by the company, outside testing
will be required at the cost of Rs.1000/- per sample. If the company elects to continue the present
condition of outside testing, the cost will be Rs.1750/- per sample. If the lab equipment will have
a useful life of 12 years and company's MARR is 10%/year, how many samples must be tested
each year in order to justify
i. the complete lab system
ii. the partial lab system
iii. if the company expects to test 175 samples per year, which alternative among the
three should be selected?
20. An engineer is trying to decide between two ways to pump concrete up to top floors of a seven
storeyed building under construction. Plan-1 requires the purchase of equipment costing Rs
300,000 and costing between Rs 20 per ton and Rs 35 per ton to operate with the expected cost of
Rs 25 per ton. The asset is able to pump 100 tons per day. If purchased, the asset will last for 5
years, have no salvage value, and be used for 50 to 100 days per year. Plan-2 is an equipment-
leasing option and is expected to cost Rs 1,25,000/- per year for equipment with an optimistic
cost of Rs 90,000/- and a pessimistic value of Rs 1,60,000/-per year. In addition, a Rs 250/- per
hour labour cost will be incurred for operation of the leased equipment.
Plot the equivalent uniform annual cost of each plan versus total annual operating cost or lease
cost at i=12%. Determine which plan should be selected for a use of
i. 50 days per year.
ii. 100 days per year.
21. The purchase price of a small diesel generator set is Rs. 10 Lakhs. The operating costs based on
the annual average estimated hours of operation are Rs. 40,000 in the first year, and Rs. 60,000 in
the second year, rising by Rs. 15,000 each year thereafter. The resale value of the diesel generator
set can be assumed to be as predicted in Table below. The cost of capital is 15%. Calculate the
optimum replacement age.

Year 1 2 3 4 5 6 7
Predicted resale values (Rs. Lakhs) 9 8 7.5 6 4 2.5 1
22. In a project a contractor needs an earth excavating equipment, which he has the option of buying
either from manufacturer M/s XYZ Equipments or from M/s EFG Equipments. M/s XYZ makes
it under brand name A and M/s EFG makes it under brand name B. For your convenience assume
that technically, there is no difference between them, and the decision has to be based purely on
financial considerations. Some of the information that may be required in order to be able to
make the decision is summarized in Table Q13.1.
Table Q13.1
Item A B
Cost of new equipment Rs.500,000 Rs.400,000
Service life (years) 6 6
Salvage value at the end of 6 year Rs.200,000 Rs.150,000
Annual operating disbursement consisting of Rs.250,000 Rs.275,000
operating and maintenance cost for the
first three years
Annual operating disbursement consisting of Rs.300,000 Rs. 325,000
operating and maintenance cost for the last
three years

Analyze and recommend which equipment you are going to buy. You can assume a minimum
rate of return @15% per annum. Repeat the calculation for other rate of returns also and see if a
change in rate of return can change your decision. The minimum required rate of return is 15%.

23.

i. Net working capital means

a. Current assets – Current liabilities
b. Fixed assets – Fixed liabilities
c. Current assets – Non tangible assets

ii. An aggressive approach to current asset financing leads to

a. Greater profitability
b. Lower profitability
c. No impact on profitability

iii. The longer the operating cycle

a. The larger the size of current assets
b. The smaller the size of current assets
c. The size of current assets remain unchanged

iv. Mortgage involves

a. Moveables as collateral
b. Immovables as collateral
c. No collateral

v. Commercial paper is issued by

a. Any company
b. Only blue-chip companies
c. Only Government companies
vi. Retained earning is liability. True or False

vii. Goodwill is tangible asset. True or False

viii. Factoring and Forfaiting are sources of long term finance. True or False

ix. T-account is also called Ledger. True or False

x. Outstanding is part of current liability. True or False

24. For the set of data given in the Table Q11.1 calculate the revenue using the following methods of
revenue recognition: (1) Cash method of revenue recognition (2) Straight Accrual Method of
Revenue recognition (3) Completed contract method of revenue recognition and (4) Percentage of
completion method of revenue recognition

Table Q11.1
Sl. Description Amount in Rs.
No.
1 Contract amount 1000,000
2 Original estimated cost 900,000
3 Billed to date 700,000
4 Payments received to date 630,000
5 Costs incurred to date 450,000
6 Forecasted costs to complete 400,000
7 Costs paid to date 400,000

25. The following table (see Table Q12.1)shows inter firm comparison of construction companies.
Calculate the current ratio and the net working capital for each of the companies and comment on
them.

Table: Inter firm comparison

Particulars ABC CDE EFG HIJ
Working capital as % of sales 28.94% 6.30% 27.33% 28.26%
Unadjusted advance 560 174 169 29
Unadjusted advance as % of 6.28% 6.09% 5.05% 2.54%
backlog
Gross Current Assets 2704 442 539 256
Gross Current Assets as a % of 70.18% 56.81% 79.62% 56.51%
sales
Total Liabilities and Provisions 1589 392 354 128
Total Liabilities and Provisions as 41.24% 50.39% 52.29% 28.26%
a % of sales
Current Ratio 1.7017 1.1276 1.5226 2.000
Net Working capital 28.94% 6.42% 24.63% 28.25%
26. From the following transactions details of a construction company M/s New Construction
Limited, prepare the profit and loss account and Balance Sheet. Assume all transactions to be the
cash transactions. Also assume depreciation of machinery to be zero in this financial year.

Table Q13.1Transaction details of M/s New Construction Company

Transaction Reference
1 T1
2 T2
3 T3
4 T4
5 T5
6 T6
7 T7
8 T8
Description
Purchased materials for Rs 6566/-
Paid salaries Rs 668/-
Paid for telephone charges Rs 1691/-
Interest on loan paid Rs 177/-
Tax paid Rs 77/-
Sold goods for Rs 9614/-
Borrowed loan from Citibank Rs 3176/-
Purchased machinery for Rs 3176/-

27. Determine the working capital required for the business from the following data.

General reserves 50 Lakhs

Cum depreciation 20 Lakhs
Short term loans 30 Lakhs
Work in progress 40 Lakhs
Finished goods 10 Lakhs
Debtors 30 Lakhs
Sales 100 Lakhs
Commercial papers 15 Lakhs
Rental deposits 5 Lakhs
Other advances made 15 Lakhs
Equity capital 200 Lakhs
Fixed assets 150 Lakhs
Raw materials 25 Lakhs
Creditors 30 Lakhs
Advance received 10 Lakhs
Overdraft 50 Lakhs
Provision for Tax 5 Lakhs
Cash in bank 5 Lakhs
Advance tax 10 Lakhs