Project Analysis and Evaluation (ECO311)
DIPET 1 in Economics - ECNT
Semester: First Semester
Level: 400
Year: 2018
THE UNIVERSITY OF BAMENDA
HIGHER TECHNICAL TEACHER TRAINING COLLEGE
DEPARTMENT OF ECONOMICS LEVEL III
First Semester Examinations 2017/2018
Project
Analysis and Evaluation
Time: 2hrs
NOTE: Attempt all questions, showing all calculations where necessary
QUESTION I (10 marks)
Write TRUE for the correct statement and FALSE for the wrong one. Do not write T or F in
place of TRUE or FALSE respectively.
i)
At the end of a project cycle a decision is taken as to whether or not to
execute the project.
ii)
In a non-inflationary period a unit of money today does not represent a greater
real purchasing power than a unit of money a year hence.
iii)
In determining the payback period taxes and depreciation must be subtracted from
the net cash flows.
iv)
Economic motives of projects are mainly tied to the financial benefits and
expectations from investments.
v)
The internal rate of return (1RR) is that rate of discount that makes the net
present value of a project greater than zero.
vi)
A merit of the payback period method is that it ignores changes in the cash
flows.
vii)
The discount factor used for the calculation of cash inflows is equivalent to the
market interest rate
viii)
One merit of the net presenr value (NPV) method is that it is consistent with the
objective of maximizing the shareholder's wealth.
ix)
NPV and IRR methods may give conflicting results in case of mutually exclusive
projects.
x)
Conflicts in ranking projects under NPV and 1RR may be due to the fact that the
projects have different patterns of cash flows.
QUESTION II (5 marks)
Provide brief answers to these questions as indicated:
a)
Which concept do you use when the costs of executing a project are far greater than
the estimated costs? (2 or 3 words)
b)
What causes the problem of deciding wether or not to commit resources to a
given project? (1 word)
c)
What are the two main determinants of the present value of a sum of momey?
(4words)
d)
What name do you give to a constant sum of money receivable for an indefinite
period? (1 word)
e)
The yield on investment refers to which investment criterion? (4 words)
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QUESTION III (20 marks)
1)
Compound the sums of 150 million frs and 100,000 frs for 5years at 8 percent per
annum. (b) What if these sums were compounded semiannually? (6 marks)
2)
Using the 72 and 69 rules show how long it takes a give sum of money to double if the
interest rates were 12 percent and 8 percent respectively. (4 marks)
3)
Four projects A, B,C and D have identical initial investments of 40,000 USD each.
Their net income streams in USD are exhibited in the table below:
4)
YEAR A B C D
1 8000 28000 12000 12000
2 32000 4000 16000 20000
3 4000 4000 12000 16000
4
8000 8000
1 6 0 0 0
5
36000 36000 20000
(a)
Rank the projects on the basis of their payback.(5 marks)
(b)
Compute the rate of return on investment of each project and rank them.
(5marks)
Question IV (35 marks)
A village community is thinking of opening up a corn farm with an initial investment Of
97,901,000 FCFA. It is estimated the farm will yield annual sales of 36,000,000 FCFA each
year for the first three years and 30,000,000 FCFA each year for the last three years of the
project. Th e corn farm is transferred to the Youth Group for 20J300
:
000 FCFA.
The management and operation costs are estimated at FCFA 6 millions for the first year;
12 millions for the second year; 10 millions each for the next two years; and 15 millions
each for the last two years. The village borrowed its capital from a local financial
institution at an interest rate of 14 per cent.
a)
Should the village carry out this project?(15 marks, including calculations/tables)
b)
What is the internal rate of return of this project if executed? (5 Marks)
c)
How long does it take the village to get back its initial investment? (6 Marks)
d)
Why does the financial institution ask the community to pay 14 per cent interest on
the borrowed capital? (5 Marks)
e)
If the community had decided to invest this sum of money on government bonds with
an indefinite time period, how much would the community get for this investment?
(4 marks)
NB: Use financial tables with three decimal places for all calculations involving the
time value of money.
GOOD LUCK (Man lep I lep)
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