Project Analysis and Evaluation Questions

Project Analysis and Evaluation (ECO311)

DIPET 1 in Economics - ECNT

Semester: Resit

Level: 400

Year: 2014

Answers (200 )

THE UNIVERSITY O F B AM E ND A

HIGHER TECHNICAL TEACHER TRAINING COLLEGE (HTTTC)

Economics series – level III 2013/2014 RESIT EXAMS

PROJECT ANALYSIS AND EVALUATIONEXAMINATION ( 2 HRS)

Note:

Attempt all three questions. The best score in any of the 20 mark questions will be

considered as CA. Show all calculations where necessary.

QUESTION I (20 marks)

A) Write TRUE for the right statement or FALSE for the wrong one for each of the

following statements below

i) Project study is an important aspect of the investment decision process.

ii) The most important role of project evaluation is to eliminate opportunity cost.

iii) All capital costs are lump sums incurred at the beginning of a project's life.

iv) Project cycle is a conglomeration of the different activities at the different stages of

project analysis

v) A r e j e c t a t t h e d e c i s i o n p h a s e m e a n s c o m p l e t e p r o j e c t i d e a

vi) Some project cost and benefits cannot be quantified and should be completely

ignored in evaluating projects.

vii) Project benefits are certain to occur if projects are properly evaluated.

viii) Not all project cost increase with the scale of production.

ix) The saying "a bird in hand is worth two in the bush" relates to the uncertainty

surrounding the value of money in the future.

x) The basic aim of discounting is to reduce the value of a present sum to its future

value.

(20 marks)

i) What is the most important business decisions related to project studies? (4 words)

ii) Why does the concept of project differ from investor to investor? (Phrase or

sentence).

iii) What is the most important feature of a project? ( a sentence)

iv) What is cost over-run in project analysis?

(phrase

or sentence)

What

are

some of the causes of cost over-run? (State reasons only)

v) Why is interest paid on borrowed capital? (just the points)

QUESTION

II (20 marks)

Assume a 6% time value of money, what would be the value of 1000 million frs

i) Received one year from now?

ii) Received immediately?

iii) Received at the end of five years?

iv) Received at the beginning of the sixth year?

v) Which would you prefer, assuming a 10% interest rate;

a) 10,000frs in cash or 1,000frs per year perpetually?

b) 10,000 frs in cash or 1,100 frs per year perpetually (1

installment at the end of

the first year)

c) 10,000 frs in cash or 900 frs per year perpetually (1

installment at the

beginning of the first year).

(N.B: Show all calculations to justify your answer)

www.schoolfaqs.net

QUESTION III (40 marks)

Members of Edom community have agreed to open a small plantain plantation as a

means of fighting graduate unemployment in Edom. According to indications, the

plantation produce on the average 120 bunches of plantains each month for the first

three years. Thereafter, production would increase by 1000 bunches each ye'ar for the next

five years and stabilizes till the end of the 10

year,

Wihich marks the end of the

community's involvement in the project. The project is then transferred to the Youth

movement for the sum of 7,500,000 FCFA. The community's initial investment is made

of three items and their costs are as follows:

• Land purchase and land preparation 6 million frs

• Purchase of plantain suckers 3 million frs

• Cost of tools (e.g. Spades, cutlasses etc)- 3,904,500 frs

Because of a difficult beginning the operations and management cost of the farm are

estimated at 940,000 frs for the first two years but drop to 540,000 frs for the following two

years. However as a result of inflation these cost increase by l million frs in the 5

year

but stabilize at 2,440,000frs from the 6

year to the end of the life of the project. The

community borrows its entire investment sum from the local credit company at an

interest rate of 12%.

a) Would the community accept this project if a bunch of plantain is sold at 1,000

frs each?

b) What is the internal rate of return of this project?

c) From your answers in (a) and (b) above, in what type of economy is

Edom operating?

d) Find the payback period of this project and state the most important reason

why this criterion is inferior to those of (a) and (b) above.

e) Why does Edom pay interest on borrowed capital?

N.B.:

Use a cash flow table to answer question three.

GOOD LUCK!

MAN LEP I LEP

www.schoolfaqs.net