Project Management-0406

Question Paper
Project Management (MB271) : April 2006

Section A : Basic Concepts (30 Marks)
• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.
< Answer >

1. Firms initiate various projects as part of their organizational strategy. In order to execute these projects,
firms prepare the aggregate project plan to keep control over all the projects taken up by the firm.
Which among the following is false with regard to Aggregate Project Plan?
(a) Firms prepare an aggregate project plan to assess the contribution of each project towards
achieving organizational goals
(b) Firms prepare an aggregate project plan to develop the corporate strategy
(c) Firms prepare an aggregate project plan to develop project schedule
(d) Firms prepare an aggregate project plan to assess the resource requirements of each project
(e) Firms prepare an aggregate project plan to prioritize the different projects.
< Answer >
2. Which of the following is false with regard to market research?
(a) Analysis with ready made primary data becomes comparatively easy
(b) Analysis with primary data is expected to be more accurate
(c) Primary data is available easily and saves time
(d) Secondary data can be collected from the publications of government research organizations
(e) Primary data is hard to available and consumes lot of time.
< Answer >
3. Project management is a coordinated effort towards managing interrelated processes such as initiation,
planning, controlling, implementing and closing of a project. Which among the following is not a part
of the project planning process?
(a) Vendor selection (b) Scope planning
(c) Activity sequencing (d) Resource planning
(e) Cost budgeting.
< Answer >
4. Effective exchange of information in a project requires good communication skills. The exchange of
information between project manager and the functional managers may be called
(a) Internal communication
(b) Informal communication
(c) Formal communication
(d) Horizontal communication
(e) Vertical communication.
< Answer >
5. Project managers today face complex problems in the wake of the increase in the number of
international projects being handled across the globe. Which among the following is not correct for
management of international projects?
(a) Political stability of a nation has a major impact on its economy and the business environment
(b) If the differences in culture, tradition and language between the partners of the project are not
managed effectively, the project is bound to fail
(c) The differences in the level of patent laws do not have much significance in managing projects
in different countries
(d) In case of international projects, any dispute between the parties involved should be referred to a
proper and transparent legal framework as agreed upon in the contract
(e) The level of diplomatic relation between two countries often plays an important role in
implementation of international projects.
< Answer >
6. Which of the following is not a characteristic of project?
(a) Unique activities (b) Attainment of a specific goal
(c) Sequence of activities (d) No time frame
(e) Interrelated activities.
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< Answer >
7. Which of the following does not constitute to the data required for developing a project plan?
(a) Outputs of other planning processes
(b) Historical information
(c) Organizational policy
(d) Stakeholder skills and knowledge
(e) Change requests.
< Answer >
8. Goenka group of industries is planning to invest Rs.50 crore in a project for the production of
pneumatic valves. They are also planning to sell-off this production unit after running it for five years.
They expect a price of Rs.20 crore for this production unit during sell-off. If the cost of capital to the
company is 15%, then the minimum annual cash inflow, beginning from the end of the second year, the
company should expect from this project would be
(a) Rs.6.00 crore (b) Rs.8.32 crore
(c) Rs.11.95 crore (d) Rs.13.11 crore
(e) Rs.16.12 crore.
< Answer >
9. Network diagram of a project schedule is as follows:
The time estimates related to each of these activities are represented in terms of number of weeks. The
slack (in weeks) related to the event C would be
(a) 1 (b) 2 (c) 3 (d) 4 (e) 5.
< Answer >
10. Choice of technology for an upcoming project is influenced by which of the following?
I. Plant capacity.
II. Principal inputs.
III. Product mix.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
< Answer >
11. Different time estimates of the activities related to a project are as follows:
Time Estimates (in weeks)
Activity
to tm tp
1-2 1.0 2.0 3.0
2-3 1.0 1.5 2.5
1-3 1.5 4.0 6.5
The chance of this project getting completed in 3 weeks is
(a) 11.51% (b) 34.13% (c) 68.26% (d) 84.13% (e) 94.27%.
< Answer >
12. Selection of contract type is influenced by the project manager’s level of uncertainty. A contract where
the vendee bears all costs of the product or service and vendor is paid a fixed fee for supplying these
goods is known as
(a) Fixed-Price contract
(b) Cost-Plus-Fixed-Fee contract
(c) Fixed-Price-Incentive-Fee contract
(d) Savings contracts
(e) Cost-Plus-Incentive-Fee contracts.
< Answer >
13. “This is a structured technique administered by a coordinator. All the individual members prepare their
ideas independently. Then they are requested to present the ideas before the other members, who rate
the ideas. The coordinator notes down all the ideas generated, the positive and negative arguments of
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each idea for future use.”
The above statement refers to which of the following creativity and idea generation techniques?
(a) Black box (b) Brainstorming
(c) Delphi technique (d) Nominal group technique
(e) Attribute listing.
< Answer >
14. Once the project is in the implementation phase, the project manager would like to make sure that the
project is moving ahead according to the plan. Which among the following is not true about a balanced
control system?
(a) Putting in more controls can reduce the risk of the project
(b) Excessive control induces rigidity and tends to block creativity
(c) A linear increment in the degree of control results in an exponential hike in the cost
(d) A balanced control system focuses on correcting errors, rather than punishments
(e) A balanced control system lays greater emphasis on short-term results rather than long-range
objectives.
< Answer >
15. A loan of Rs.20 million along with interest is to be repaid in sixty equal monthly installments. If the
loan carries an effective rate of interest of 12% p.a., then the amount of each installment would be
approximately
(a) Rs.2.00 lakhs (b) Rs.3.23 lakhs (c) Rs.4.45 lakhs
(d) Rs.5.87 lakhs (e) Rs.6.15 lakhs.
< Answer >
16. Which of the following is not a merit of NPV as a project appraisal criterion?
(a) It takes into account the time value of money
(b) It considers the cash flow stream in its entirety
(c) It represents the contribution to the wealth of shareholders
(d) It enables to calculate the NPV of two or more mutually exclusive projects by simple addition of
NPV of individual projects
(e) It gives the best results in choosing between mutually exclusive projects that have substantially
different economic lives.
< Answer >
17. Jain group of industries started a project having a life of 10 years with an initial outlay of Rs.1000 crore.
Cost of capital and modified NPV related to this project are 12% and Rs.400 crore respectively. The
modified IRR of this capital investment would be
(a) 12.2% (b) 13.7% (c) 14.3% (d) 15.8% (e) 16.1%.
< Answer >
18. Which among the following is not true while screening the ideas for project?
(a) Assessment of the level of risk associated with selected ideas is a factor considered during initial
screening
(b) The project manager should ensure that the costs involved for implementation of the project are
reasonable and provides an acceptable level of profits
(c) The project idea should be compatible with the interests and abilities of the person who is
promoting the project
(d) The project manager should consider the input requirements, their availability and cost while
screening project ideas
(e) It is not necessary to estimate the present and future market demand for screening the project
ideas.
< Answer >
19. Technical analysis of a project idea includes an in depth study of all technical aspects related to basic
manufacturing operations, detailed design, assembling, modeling and prototype testing. Which among
the following is/are true about technical analysis of a project idea?
I. The manufacturing processes do not depend on the availability and quality of the raw materials.
II. Adoption of a particular technology requires an understanding of the need, readiness and the cost
of the technology.
III. Plant capacity is determined on the basis of installed capacity, machinery and availability of
infrastructure and labour.
(a) Only (I) above (b) Only (II) above
(e) Both (I) and (III) above.
< Answer >
20. Benefit cost ratio (BCR) of an upcoming project is 1. Which of the following is true regarding internal
rate of return (IRR) of the project?
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rate of return (IRR) of the project?
(a) IRR is equal to risk free rate of return
(b) IRR is equal to cost of capital of the project
(c) IRR is less than the risk free rate of return
(d) IRR is higher than the cost of capital of the project
(e) IRR can not be ascertained from the data furnished.
< Answer >
21. Which of the following analysis show how robust or vulnerable a project is, to changes in the
underlying variables?
(a) Decision-tree analysis (b) Scenario analysis
(c) Simulation approach (d) Sensitivity analysis
(e) Break-even analysis.
< Answer >
22. Income elasticity of demand for residents of a city was 1.3636. Quantity demanded in year 1 was 500
units while in year 2 it was 600 units. If the income in year 2 was Rs.16,196 what was the income in
year 1?
(a) Rs.11,500 (b) Rs.12,080 (c) Rs.12,500
(d) Rs.13,000 (e) Rs.14,170.
< Answer >
23. A project manager who adopts this approach of resolving conflicts is committed to his positions and
considers relationships as secondary. This approach may be called
(a) Avoiding (b) Accommodating (c) Competing
(d) Collaborating (e) Compromising.
< Answer >
24. Which of the following models is a numeric model of selecting a project?
(a) Sacred cow (b) Scoring models
(c) Comparative benefit (d) Q-sort technique
(e) Competitive necessity.
< Answer >
25. Which of the following is false with regard to data collection and analysis for conducting market and
demand analysis?
(a) Analysis with ready-made primary data becomes comparatively easy
(b) Primary data is readily available and hence saves time of the research analyst
(c) Analysis with primary data is expected to be more accurate
(d) Secondary data may be collected from the annual reports of the existing companies
(e) Secondary data can be collected from the publications of government research organizations.
< Answer >
26. Which of the following statements is/are true regarding the project staff?
I. The size of the project office staff is generally decided based on the size of the project,
technical complexity and its strategic importance.
II. A technical expert is preferred in comparison to a specialist in interpersonal skills, to be a project
manager.
III. Entire project team is not part of project office.
(a) Only (I) above (b) Only (III) above
(e) Both (I) and (III) above.
< Answer >
27. Which of the following is a group creativity technique for the generation of ideas?
(a) Black box (b) Attribute listing (c) Directed dreaming
(d) Delphi (e) Checklist.
< Answer >
28. Which of the following statements is not true with regard to PERT/CPM?
(a) PERT cannot handle situations in which two or more projects have to be planned together to share
the available resources
(b) CPM assumes that the cost associated with a project can be divided into two components: direct
costs and indirect costs
(c) PERT is based on time and variance estimates that consist of six-value weighted averages
(d) CPM and PERT techniques assume that the project has unlimited resources, and they can be
assigned for project activities
(e) PERT can be used when there is a change in the precedence and sequential relationships of project
activities.
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< Answer >
29. Project communication planning involves determining the information and communication
requirements of the various stakeholders of a project. Which among the following is/are true about
project communication planning?
I. The activity manager requires a detailed report because he is directly responsible for getting the
work done.
II. The project manager requires status reports on all the tasks that are in progress during the
reporting period.
III. Senior management usually prefers to get information in great detail about scheduling of various
project activities.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) above (e) Both (II) and (III) above.
< Answer >
30. The scope of a project is documented in the “Project Overview Statement” (POS). A good scope
statement would identify the goal of the project and describe how that goal can be achieved. Which
among the following is not true for POS?
(a) The first part of a POS states the problem or opportunities that the project is going to address
(b) The project goal, which forms the second part of POS, provides guidance to the entire project team
(c) The third part of the POS defines the objectives of the project
(d) The fourth part of the POS is the success criteria, which identifies the exact benefits that the
project can bring to the firm
(e) The fifth section of the POS contains risk analysis and financial analysis of the project.
END OF SECTION A
Section B : Problems/Caselets (50 Marks)

• This section consists of questions with serial number 1 – 7.
• Marks are indicated against each question.
• Detailed workings/explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.
1. Kadbury is an established brand of Coco Chocolate Milk. The company had done a market survey in Cyberabad
city for its brand Krunk. The income levels of Cyberabad are Rs.18,000 and Rs.22,000 for the years 2004 and
2005. The consumption of Chocolate Milk is 80 ml per head per day and 100 ml for the years 2004 and 2005.
You are required to find
a. The income elasticity.
b. The total demand when the projected income is Rs.23,500 and population is 50,000.
(3 + 3 = 6 marks) < Answer >
2. Excellent Industries made an NCD issue for Rs.400 lakh, debenture at a face value of Rs.100 with interest at
13.5% payable annually. The tenor of debenture is 7 years. The redemption value of NCD is Rs.108. The realized
value of NCD is Rs.97. Tax rate is 38.5%.
The company has option of writing off the difference between redemption value and realized value. D = 13.5%; T
= 38.5%; F = 108; P = 97; n = 7 years.
You are required to find cost of debenture.
(3 marks) < Answer >
3. The net cash flows associated with two projects are as follows:
Net Cash Flows
Year
Project A Project B
0 –1,000 – 32,000
1 1,400 2,00,000
2 –100 – 2,00,000
You are required to calculate the unrecovered investment balances over the life of the project.
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4. The activities, duration and direct activity costs of a project are as follows:
Time in Weeks Cost (Rs.)
Activity
Normal Crash Normal Crash
1-2 12 6 4,500 9,000
2-4 13.5 9 6,000 8,250
4-6 4.5 3.75 15,000 16,800
6-7 15 10.5 9,000 13,050
1-3 7.5 4.5 6,000 12,000
3-5 10.5 7.5 3,000 4,800
5-6 9 3 6,000 10,200
5-7 13.5 7.5 6,300 13,500
2-5 7.5 1.5 12,000 18,000
You are required to determine
a. The critical path of the network after crashing the activity with the minimum cost-time slope in the table.
b. The total direct cost associated with this network
(5 + 3 = 8 marks) < Answer >
Caselet 1
Read the caselet carefully and answer the following questions:
5. Project ‘Saras’ got underway ten years after the feasibility study. According to you what could have been the
reasons of the delay in the development of a prototype?
6. Project ‘Saras’ involved several organizations in the design and development of the prototype. According to you
what kind of organizational structure will suit this kind of project? Discuss the advantages.
SARAS
For more than a decade, K.Yegna Narayana, director of the light transport aircraft (LTA) project at the National
Aerospace Laboratories (NAL) in Bangalore had little else than thinking, talking about and working on his project. At
NAL hangar near his office, the aircraft is getting finishing touches. The 14-seater LTA, now named Saras and looking
impressively big near tiny two-seaters designed and made by NAL, is set to roll out on 4th February. It will fly by the
end of June.
Saras is the first civilian aircraft to be designed and manufactured completely in India. India is entering the civil aircraft
industry this year. India contributes 0.1% to the world aircraft manufacturing market of $350 billion. Saras is the first
serious attempt to address this anomaly.
The project was conceived by Roddam Narsimha, who was the director of NAL in 80s and early 90s. Narsimha had
decided that NAL needed to design aircraft and not just do research. The first attempt was an assembly: the
experimental light canard aircraft. NAL then designed the two-seater Hansa, the only all-composite two-seater in the
world. Hansa got certified in 2000. Even while the Hansa work was in progress, NAL decided to make Saras. The first
feasibility study was done in 1989. Russia’s Myasischev Design Bureau was a partner. But Saras got stuck due to lack
of funding. The Russians pulled out due to economic difficulties. By the end of 90s, it seemed that Saras would never
be developed.
In 1999, the Department of Science and Technology’s technology development board (TDB) agreed to help. TDB
sanctioned a grant of Rs.65 crore for the development of Saras. The estimated development cost was Rs.132 crore. The
Council of Scientific and Industrial Research, of which NAL is a part, put in Rs.52 crore. Hindustan Aeronautics (HAL)
and the ministry of Civil Aviation put in Rs.9 crore and Rs.5 crore respectively. The project got underway by end-
1999, 10 years after the feasibility study.
A number of companies worked on the project. HAL designed and developed the landing gear, electrical systems and
few other parts. Taneja aerospace made most of the sheet metal parts. NAL did the design and development, structural
and qualification testing and the project management. The Central Mechanical Engineering and Research Institute,
Durgapur, developed the throttle control box. About 20 firms in Bangalore did the machine tooling.
To reduce development costs, developers used off-the-shelf components as much as possible. T.S. Prahlad, who was
NAL’s director till recently, says, “Saras is specially designed for Indian conditions.” It can take off from short
runways, in hot conditions and on high altitudes. It can fly in any kind of weather.
India’s feeder airline services are poorly developed; even existing services like Vayudoot have stopped operations.
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Other than poor management, two major problems have been lack of cheap Indian aircraft and poor economies of scale
for maintenance. Saras could solve both. NAL now estimates an Indian market of 200 planes in the next 10 years.
The aircraft industry has a considerable influence on the economy of a country. The economic impact of aviation on the
world’s GDP is about 10%. After Saras, the next civil aircraft project is the 100-seater from HAL. Can these two
projects kickstart an aircraft industry in the country?
Caselet 2
Read the caselet carefully and answer the following questions:
7. If you were the project manager, which method would you use, and why?
Cincinnati Equipment Company, which specializes in the manufacture of modern construction equipment, will be
building a facility to house a new foundry. The company has selected a project manager and team to follow the project
through to completion. The project team is very interested' in selecting an appropriate scheduling technique for the
project. The project manager has thus set the following guidelines for the selection process simple: able to show
durations of events, the flow of work, and the relative sequence of events; able to indicate planning and actual flow;
which items may proceed at the same time and how far they are from completion. The assistant project manager favors
the Gantt chart, the finance representative likes PERT, and the construction supervisor prefers CPM.
END OF SECTION B
Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 8 - 9.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on section C.
8. “Project Status review meetings are used to review the status of projects. They are not general discussions or
meetings trying to solve a generic problem but focus on a single project with specifically timed agendas”. Explain
about the various kinds of reviews conducted during the project life cycle.
9. “Techniques like variance analysis, trend analysis and earned value analysis help the project manager to
understand the cost performance”. Explain in detail about the performance measurement in project cost
management.
END OF SECTION C
END OF QUESTION PAPER
Suggested Answers
Project Management (MB271) : April 2006
Section A : Basic Concepts
1. Answer : (b) < TOP
>
Reason : Corporate strategy is decided by the top management based
upon information related to organization’s requirements and
competitor’s analysis. Aggregate Project Plan follows the
corporate strategy. It ensures that all the projects under the
organization’s umbrella are in line with the overall corporate
strategy. Then it is followed by formulation of project
strategy and project activities.
All other alternatives are true for Aggregate Project Plan.
Hence the correct answer is (b).
2. Answer : (c) < TOP
>
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Reason : If the data required is collected from the field/market in raw
form solely for a particular purpose by the user then that is
called primary data, and if the data required is collected
from somebody which was originally collected with a view
to use in some other purpose then that data is called
secondary data.
As the primary data is collected solely for the purpose of
direct study the accuracy of study with the primary data is
very high. Hence, (b) is correct. Once the primary data is
collected, the analysis becomes very easy because in data the
information required specifically for the purpose of study is
collected recently. Hence (a) is correct. So the alternative (c)
is false. Secondary data as explained can be collected from
external sources such as Market Research Organizations,
Trade Associations and Government Research
Organizations. Hence, (d) is also correct.
3. Answer : (a) < TOP
>
Reason : Vendor selection is a part of the implementation process. It
is a process of accepting bids, quotations or proposals and
evaluating vendors. The technical and commercial sections
of the proposals are evaluated separately after the receipt of
the proposal. A vendor is selected when it meets the
requirement on both parameters.
All other alternatives form the part of project planning
process. Therefore the correct answer is (a).
4. Answer : (d) < TOP
>
Reason : Horizontal communication is the exchange of information
between the project manager and his/her peers: functional
managers, other project managers, the client’s representative
on the project and other individuals in similar management
positions. So, the alternative (d) is the answer.
Internal communication is the exchange of information
within the project environment. So, the alternative (a) is not
the answer.
Informal communication is the exchange of information in
informal groups. So the alternative (b) is not the answer.
Formal communication conveys information using the
formal communication channels established in the
organization. So the alternative (c) is also not the answer.
Vertical communication falls into two categories: (i) upward
communication, which involves project manager
communicating with the top management and (ii) downward
communication, which involves communicating with one’s
subordinates. However alternative (e) is not the answer.
>
Reason : Some countries overlook the importance of guarding
intellectual property because they lack the required patent
laws to regulate unfair trade practices. A foreign company
entering such countries has to bear a high risk because
transferring technical know-how will result in diluting its
technological superiority.
The other statements are true about risks involved in
managing international projects. The correct answer is (c).
>
Reason : Every project has a specific start date and completion date.
The time limit is either self-imposed or it is specified by the
client. All other alternatives are a characteristic of project.
Therefore the correct answer is (d).
8
7. Answer : (e) < TOP
>
Reason : In the process of project plan development, the project
manager collects the following data:
Outputs of other planning process, Historical information,
organizational policy, Stakeholder skills and knowledge,
Limitations and assumptions. The change requests are not
required while designing project plans. Therefore the correct
answer is (e).
>
Reason : Let the minimum annual cash inflow be Rs x Crore.
∴ x PVIFA (15, 4) PVIF(15, 1) + 20 PVIF (15, 5) = 50
or, 2.855 × 0.870x + 20 × 0.497 = 50
50 − 9.94
or, x = 2.48385 = 16.12.
>
Reason :
Slack period for event C would be

LOT (c) – EOT (c)
= 4–2
=> 2.
>
Reason : Choice of technology is influenced by a variety of
consideration like, plant capacity, principal inputs,
investment outlay, production cost, product mix, latest
developments, case of absorption etc. So, certainly option (e)
is correct.
11. Answer : (a) < TOP
>
Reason :
Activity to tm tp te σ
1
1–2 1.0 2.0 3.0 2.0
3
1
2–3 1.0 1.5 2.5 1.58
4
5
1–3 1.5 4.0 6.5 4
6
 3− 4
PZ ≤ 
Probability (t ≤ 3) =  5/ 6 
 −6 
PZ ≤ 
=  5 
9
= P(Z ≤ – 1.2) = 11.51%.
>
Reason : In Cost-Plus-Fixed-Fee contract, the vendee bears all the
costs of the product or service and the vendor is paid a fixed
fee for supplying these goods. This fixed fee is usually a
percentage of the actual cost of the goods supplied or the
work done. This type of contract is taken up only when there
is no possibility of arriving at an exact price for the contract.
Therefore the correct answer is (b).
>
Reason : Black box and attribute listing are individual creativity
techniques. Brainstorming, Delphi Technique and Nominal
Group Technique are techniques used for encouraging group
creativity to elicit more and better ideas.
Brainstorming is a conference technique by which a group
attempts to find a solution for a specific problem by
amassing all the ideas spontaneously contributed by its
members. Here any kind of criticism, judgment or comments
is not allowed.
In Delphi Technique of decision making members don’t
have face-to-face discussion. The decision is arrived at
through written communication in the form of filling up
questionnaires often through mails.
In Nominal Group Technique verbal communication is
restricted during the decision making process. Ranking is
done after individuals present their best idea to the group.
Hence the correct answer is (d).
>
Reason : Greater emphasis has to be given to long-range objectives
compared to short-term results for a balanced control
system. A balanced control system exercises only the
minimum control that is required to achieve the project
goals. All other alternatives are true for balanced control
systems. Therefore the correct answer is (e).
>
Reason : Principal loan amount = Rs.200 lakhs or Rs.20 million.
Repayment : in sixty equated monthly installments.
Implicit interest rate = 12% p.a. or 1% per month.
∴ Equated monthly installments are of the size
200 200
PVIFA (1%, 60) = 44.955 = Rs.4.44899 lakhs ≅
Rs.4.45 lakhs.
So, alternative (c) is the answer.
>
Reason : NPV is not the best measure for appraisal of projects
between mutually exclusive projects that have substantially
different economic lives. Uniform Annual Equivalent (UAE)
gives you the best measure then.
>
Reason : Let say terminal value of the cash inflows are x then
modified NPV.
x
− 1000
= (1.12)10
10
x
− 1000
or 400 = (1.12)10
or x = 1400 × 1.1210
= 4348.19.
Let the modified IRR be r
Terminal value
∴ (1 + r) 10
= Initial outlay
1 /10
 4348.19 
 1000.00  −1
or r =  
= 1.158 – 1
= 0.158.
∴ Modified IRR = 15.8%.
>
Reason : The project manager should estimate the potential for growth
and the return on investment for the proposed project ideas.
When screening the project ideas, the project manager should
consider factors like present domestic market demand,
expected future demand, number of competitors and their
market shares, and entry barriers for the new entrants.
All other alternatives are true for the screening of project
ideas. Hence the correct alternative is (e).
>
Reason : The manufacturing process is also determined by the
availability and quality of raw materials. For example, the
quality of limestone decides whether wet or dry process is to
be used in a cement plant.
Other statements are true for the technical analysis of the
project idea. Therefore the correct answer is (d).
>
PV of inflows
Reason : BCR = PV of outflows
BCR = 1 implies PV of cash inflows at cost of capital is
equal to initial outlay and NPV is equal to zero.
IRR is that rate of interest at which the PV of inflows is
equal to initial outlay or NPV is equal to zero. Hence, BCR
= 1 or NPV = 0 implies that the projects IRR is equal to cost
of capital. Hence, (b) is correct.
As a risk-free rate of return has no relevance for the project
is IRR, alternatives (a) & (c) are incorrect. And as IRR is
equal to cost of capital, alternatives (d) & (e) are incorrect.
>
Reason : Sensitivity analysis is used to find out how sensitive the
results of a particular financial model (i.e. NPV of a project)
are to changes in input variables.
< TOP
22. Answer : (e) >
Reason : Suppose, income in year 1 is I1
11
1
(600 − 500) / (500 + 600)
2
1
(16196 − I1 ) / (I1 + 16196)
1.3636= 2
or, I1= Rs.14,170.
< TOP
23. Answer : (c) >
Reason : A competing conflict resolving approach does generate ill
will that is costly and unpleasant; it does have its advantages
in the situations like – in emergencies, during announcing
unpopular decisions etc. A person who adopts this approach
is committed to his position or perspective and considers
relationships as secondary issues. So, the alternative (c) is
the answer.
Avoiding approach focuses away from the conflict
altogether. So, the alternative (a) is not the answer.
While avoiders shut themselves out, accommodators neglect
their own concerns in order to satisfy the concerns of others.
So, the alternative (b) is also not the answer.
The collaborating approach focuses on satisfying both
parties to the greatest degree. It is cooperative in nature. So,
the alternative (d) is not the answer.
Though compromising approach is also cooperative in
nature but here the cooperation is dictated by self interest.
So, the alternative (e) is not the answer.
>
Reason : The non-numeric models are sacred cow, Extension product
line, Operating necessity, Competitive necessity,
Competitive benefit, Comparative benefit, Q-sort technique.
The numeric models of selecting a project are
Profit/Profitability models, Scoring models and Iterative
rating methods. Therefore the answer is (b).
>
Reason : If the data required is collected from the field/market in raw
form solely for a particular purpose by the user, then it is
called primary data, and if the data required is collected from
somebody and is used by some other individual or
organization then it is called secondary data. Collection of
primary data needs a lot of time and effort of the observer
and hence it is costly. So, the alternative (b) is false.
Once the primary data is collected, the analysis becomes
very easy because the data has been collected specifically for
the purpose of study and that too it has been collected
recently. Hence (a) is correct. As the primary data is
collected solely for the purpose of direct study, the accuracy
of study with the primary data is very high. Hence, (c) is
correct. Secondary data as explained can be collected from
external sources such as Market Research Organizations,
Trade Associations, Annual Reports of the existing
companies and Government Research Organizations. Hence,
the options (d) and (e) are also correct.
>
Reason : The size of the project office staff is generally decided based
on the size of the project, technical complexity and its
strategic importance. Hence, the statement (I) is correct. All
those who work for the project are not the part of project
office. Only those who are entrusted with the job of assisting
the project manager in discharging his duties belong to the
project office. Hence, the statement (III) is true. But a
12
project manager’s job is to get things done by others
working on his project and hence, he needs to be specialist in
interpersonal skills. Hence, the statement (II) is not correct.
So, option (e) is the answer.
>
Reason : The techniques that help in individual creativity are:
Attribute listing, Checklist, Black box and Directed
dreaming.
The techniques that help in group creativity are:
Brainstorming, Delphi and Nominal group techniques.
Hence, option (d) is the correct answer.
>
Reason : PERT cannot be used when there is a change in the
precedence and sequential relationships of project activities.
PERT works in a standstill framework of precedences and
sequential relationships.
CPM and PERT techniques assume that the project has
unlimited resources, and they can be assigned for project
activities. However, in reality, project resources are usually
limited. Sometimes activities may be delayed because of the
non-availability of resources. That is why the project
manager recalculates the activity schedules keeping in mind
the availability of resources.
>
Reason : Senior management usually prefers to get information in the
form of graphs and pictorial representation. As senior
managers have very limited time for reviewing a project
report, a report submitted to them is best limited to a single
page with the milestones of the project highlighted.
Other statements are true for project communication
planning. Therefore the correct answer is (d).
>
Reason : The fifth section of the POS consists of Assumptions, Risks
and Obstacles. It mentions all organizational or
environmental factors that may affect the outcome of the
project. The project manager uses this section of the POS to
alert senior management about the risks or obstacles that
may influence the project activities. This part of the POS
also mentions the contingency plans to be prepared to
reduce the impact of the above risks on the project.
However Risk Analysis and Financial Analysis report is also
sometimes given with the POS, but it is presented as an
attachment to the main document. All other alternatives are
true for POS, so the correct answer is (e).
13
Section B : Problems/Caselet
1. a. Income elasticity
Q 2 − Q1 g 2 + g1
×
= g 2 − g1 Q 2 + Q1
100 − 80 22, 000 + 18, 000

×
= 22, 000 − 18, 000 100 + 80
20 40, 000
× = 1.11
= 4, 000 180
b. Change in per capita income
23, 500 − 22, 000 1, 500
= = 0.0329
= 23,500 + 22, 000 45, 500
Projected per capita demand
= 100 ml ((1 + 0.0329) × 1.11)
= 100 ml (1.146519) = 114.6519 ml.
Total demand in the city
= Estimated population × Projected per capita demand
= 50,000 × 114.6519 = 57,32,595 ml.
< TOP >
F−P
D (1 − T ) +
n
F+P
2. Cost of debenture kd = 2
108 − 97
13.5 (1 − 0.385 ) +
7
108 + 97
= 2
8.3025 + 1.5714
= 9.63%
= 102.5 .
< TOP >
3. Project A
IRR at 32%,
1, 400 100
− =0
1 + r (1 + r )2
= –1,000 +
1, 400 100
− = 3.21
(1.32) (1.32 ) 2
= – 1,000 +
1, 400 100
− = − 3.90
(1.33) (1.33)2
At 33%, –1,000 +
3.21
= 32.45%
32% + (33% – 32%) 3.21 + 3.90
Project A has got only one real root
r = 0.3245⇒ 1 + r = 1.3245
Unrecovered Investment Balance
F0 (1.3245) = –1,000
F1 (1.3245) = –1,000 (1.3245) + 1,400 = 75.5
F2 (1.3245) = 75.5 (1.3245) – 100 = 0
14
Project B
IRR
2, 00, 000 2, 00, 000
− =0
= –32,000 + (1 + r) (1 + r)2
Multiplying this equation by (1 + r ) we get

2
–32,000 (1 + r)2 – 2,00,000 (1 + r) – 2,00,000 = 0

Solving this as a quadratic equation, we get
(1 + r) = 12.5 and (1 + r) = 5.00 i.e., r = 25% & 400%
Unrecovered Investment Balance
r = 25%
F0(0.25) = –32,000
F1(0.25) = –32,000 (1.25) + 2,00,000 = 1,60,000
F2 (0.25) = 1,60,000 (1.25) – 2,00,000 = 0
r = 400%
F0 (4.00) = –32,000
F1(4.00) = –32,000 (5.00) + 2,00,000 = 40,000
F2 (4.00) = 40,000 (5.00) – 2,00,000 = 0.
< TOP >
4. a. Before crashing
12 13.50 4.50
1 2 4 6
9
7.50 7.50 15
3 5 7
10.50 13.50
The critical path of the network is 1-2-4-6-7 and the duration is 45 weeks.
Activity Cost Slope

1–2 4500/6 = 750
2–4 2250/4.50 = 500
4–6 1800/0.75 = 2400
6–7 4050/4.50 = 900
1–3 6000/3 = 2000
3–5 1800/3 = 600
5–6 4200/6 = 700
5–7 7200/6 = 1200
2–5 6000/6 = 1000
The activity with the least cost-time slope is 2–4. Hence crash 2–4. After crashing 2–4 the network looks as
below:
12 12 4.50
1 2 4
6
7.50 7.50 9 15
3 5 7
10.50 13.50
15
Path (after crashing) Total duration in weeks
1–2–4–6–7 43.50
1–3–5–7 31.50
1–2–5–7 33.00
1–3–5–6–7 42.00
1–2–5–6–7 43.50
Hence critical path after crashing is 1–2–5–6–7
b. Total direct cost
= 4500 + 6000 + 15000 + 9000 + 6000 + 3000 + 6000 + 6300 + 12000 = Rs.67800.
< TOP >
Caselet 1
5. Project ‘Saras’ started ten years after the feasibility study was done. This is a common problem with such kind of
projects. In a project which is highly R&D oriented and does not have industry backing usually don’t find any
takers and the progress is slow. The main hindrance faced by such projects is their lack of funds. As aircraft
industry has always been dominated by American and European companies, they have gained some reputation for
quality and reliability. The other reason is the lack of trust by Indian aviation sector on the local manufacturers.
They have good reasons to have such opinion also. Although there has been lot of thrust by the government on
development of Missile technology and launch vehicles, there has been hardly any progress in development of
transport aircraft.
Since this project was undertaken by ‘NAL’ which comes under CSIR, it also suffered the effect of sanctions by
USA after the pokharan nuclear tests. There was a blanket ban imposed by USA on all government run
laboratories and R&D centre which were in some way associated with the nuclear program. As the case states it
suffered a major setback when their Russian collaborators pulled out of this project due to lack of funding.
Moreover this being the first project of this kind has its unique problem. There was no previous data available,
against which the project schedule could be benchmarked. Even arriving at cost estimates would also suffer from
the same problem. Only after the two-seater ‘Hansa’ was ready, they had something to benchmark with.
The project ‘Saras’ also suffered from the problem of coordination. Since the development involved a number of
companies and laboratories, it was difficult to maintain a tight control in such projects. In a typical engineering
project there are some activities which are parallel in nature and some are in series. The processes which are in
series can not be performed unless the previous one is accomplished. So any delay in the modeling of initial
components can have a cascading effect on the development of the components which follows after them.
There are also reasons specific to products such as aircraft. Once a prototype is ready it has to meet certain
technical standards and it is tested for airworthiness by DGCA and a clearance has to be taken from them. It can
go up in the air only when all the clearances required are attained. Bureaucratic hurdles also play its role in the
delay in the execution of such projects.
Projects like ‘Saras’ require strong industry funding and support to sustain and develop world class product which
can compete with the likes of Boeing, Airbus and Concorde which has strong financial muscle and have access to
big funds from Government and industrial houses.
< TOP >
6. Although the project ‘Saras’ was conceived and was undertaken by NAL, a number of other companies were
involved in the development of the prototype. It also received funds from several organizations to complete it.
Some of them were HAL, CSIR, TDB, CMERI, Taneja aerospace and several small companies in Bangalore. To
successfully execute the project with such wide participation and involving diverse technology a close and
dedicated team pooled from different functional and technical experts is required.
The organization should have a matrix structure. This provides the advantage of both traditional and product
organization structure. In this form , there are two lines of reporting one to the functional heads and other to the
project managers. The project manager is given the overall responsibility for the implementation of the project.
Having such structure provides a close interaction and informality among the project group. Any problem which
entails several technologies could be undertaken by a group of engineers with different background. This will help
in the quick remedy and faster progress of the project. The functional heads can take up the problems related to
their area and provide the required help to the project team.
The advantages from such structure could be as follows:
16
The project manager has full control over the project and can be made accountable for it.
The project manager is free to commit the resources of the firm and can react quickly to the needs of the firm.
Conflicts are few and can be resolved fast.
Projects can be completed with low costs and time, as people can be shared.
Control and coordination are better.
Motivation levels of the employees are better.
< TOP >
Caselet 2
7. The basic approach of all scheduling techniques is to form an actual or implied network of activity and event
relationships that graphically portray the sequential relations between the tasks in a project. The most common
approach to project scheduling is the use of the Gantt charts, and the network techniques such as PERT and CPM.
The Gantt chart shows planned and actual progress for a number of tasks displayed against a horizontal time scale.
It is particularly effective and easy-to-read method of indicating the actual current status for each of a set of tasks
compared to the planned progress for each item of the set. It is useful in expediting, sequencing, reallocating
resources among tasks, and keeping track of how things are going.
In application, PERT has primarily been used for R&D projects for which it was originally developed though its
use is more common on the development side of R&D than it is on the research side.
CPM was designed basically for construction projects and has been generally embraced by the construction
industry. However, there are many exceptions to these generalities.
Originally, PERT was strictly oriented to the time element of projects and used probabilistic activity time
estimates to aid in determining the probability that a project could be completed by some given date. CPM, on the
other hand, used deterministic activity time estimates and was designed both, to control the time and cost aspects
of a project. Moreover, in CPM, activities can be crashed (expedited) at extra cost to speed up the completion
time.
Analyzing the above features of the Gantt charts, PERT and CPM techniques of networking, I would have used
the CPM method rather than the other two. The basic reason for such a selection, beside others, is that CPM
embraces the construction industry more than the other two methods and our project in concern is also a
construction project.
< TOP >
Section C: Applied Theory
8. PROJECT STATUS REVIEW MEETINGS
Project status review meetings are used to review the status of projects. They are not general discussions or
meetings trying to solve a generic problem, but focus on a single project with specifically timed agendas. Various
kinds of reviews are conducted throughout the project life cycle. For a project to be called a successful one, the
timing of reviews is important. A project undergoes the following reviews during its lifecycle:
Status review - reviews the status of cost, performance, schedule and scope.
Design review - reviews the design of the product or service to ensure that it meets
client requirements.
Process review - reviews the processes and checks for the possibility of any improvements.
Status Review
The most frequently conducted review is the status review. A status review can be comprehensive or cursory.
Generally, a cursory review is conducted on a weekly basis while a comprehensive review is conducted on a
monthly basis. Generally, for a project of one-year duration, a weekly cursory review and a monthly
comprehensive review will suffice. When the project runs into difficulties, the frequency of reviews increases until
the problem is solved. To avoid micromanagement, tile frequency of status reviews should be limited. A status
review should, ideally solve problems, not punish people. It is always advantageous to know the kinds of problems
existing in a system, the factors causing these problems and the corrective measures required to solve them.
Design Review
A design review ensures that the product or service being developed matches customer requirements. Generally,
such reviews are conducted when a milestone has been reached. If a product is poorly designed, it will not meet
customer expectations. Therefore, the design review focuses on the performance component 'rather tl1an on cost,
time and scope of the project. :
The project manager has to keep in mind some guidelines while conducing design reviews. It is necessary to
include the conditions for manufacturing and servicing in the design review. Ensuring optimization by integrating
design with manufacturing specifics like tooling and economics of process and specialty machines, is also 'the
17
responsibility of a design review. A design review also considers the specifications of the working conditions such
as storage of inventory, ease of accessing the materials and tools, safety in operating and maintaining and damage
protection. .
Process Review
The process review is focused on reviewing the “how” aspect of an activity.. This review tries to find out how an
activity can be carried out in a better manner. Process reviews typically take place at the milestones or once every
two or three months. This type of review tries to improve those activities that are not being carried out well.
It is important to discuss the outcome of the different types of reviews with all the parties involved in the project.
The activity manager reports the status of the project on a weekly basis to the project manager, who in turn reports
to senior management on a biweekly basis. Thus it becomes appropriate to conduct project status review meetings
once in every two weeks. Though the duration of the status review meeting depends on tile size of the project, it is
usually limited to one hour. The list of people attending the review meeting varies across the project life cycle,
depending on the need of the person and the situation. Though status review meetings have a flexible format as
influenced by the need of the project, the top-down approach is commonly used. The minutes of the meeting are
circulated, revised for errors and follow ups and filed in the project notebook.
< TOP >
9. Performance Measurement
Techniques like variance analysis, trend analysis, and earned value analysis help the project manager to
understand the cost performance. Variance analysis compares the actual project results to the planned results. The
cost variations are measured at every stage of the project and the causes of these variances are determined. Trend
analysis examines the project results over a period of time to find out if the cost performance is improving or not.
Earned value analysis is a technique that measures the project performance by integrating the scope, cost and
schedule measures of the project. According to this analysis, three values are important. These are: Budgeted Cost
Work Schedule, Actual Cost Work Performed (ACWP) and Earned Value (also called Budgeted Cost of Work
Performed, (BCWP)).
The Budgeted Cost Work Schedule is the approved cost estimate planned for a project activity for a given period.
The Actual Cost Work Performed is the total costs (both direct and indirect) incurred while implementing an
activity in a given period. The Earned Value is a percentage of the total budget equal to the percentage of work
completed.
These three values along with certain measures like Cost Variance (BCWP-ACWP), the Schedule Variance
(BCWP-BCWS) and the Cost Performance Index (BCWP/ ACWP) help. the project manager to determine
whether the work is progressing according to the schedule and whether it is within the budget. The cumulative
Cost Performance Index for the entire project (total of BCWPs of all project activities divided by total of all
ACWPs) forecasts the project cost at completion. .
The project manager prepares revised cost estimates, budget updates, and Estimates At Completion (EAC) and
decides what corrective actions should be taken. The project manager prepares revised cost estimates by making
modifications to the current cost information. These revised cost estimates should be communicated to all project
stakeholders.
In budget updates, changes are made to the approved cost baseline. The EAC is a forecast of the total project costs
on the basis of the project performance. Here, the completion times are estimated as actual work completed plus a
new estimate for remaining work. The project manager also documents all the lessons he has learnt in controlling
project costs.
< TOP >
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Question Paper

Project Management (MB271) : April 2006

< Answer >

Section B : Problems/Caselets (50 Marks)

Section C : Applied Theory (20 Marks)

END OF QUESTION PAPER

Slack period for event C would be

100 − 80 22, 000 + 18, 000

Multiplying this equation by (1 + r ) we get

–32,000 (1 + r)2 – 2,00,000 (1 + r) – 2,00,000 = 0

Activity Cost Slope

< TOP OF THE DOCUMENT >

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