Project Appraisal and Finance 2015-17

INDIAN INSTITUTE OF MANAGEMENT, TRICHY

PROJECT APPRAISAL AND FINANCE[A 3-credit course]

FACULTY: PADMALATHA SURESH

SESSION WISE GROUP ASSIGNMENTS

(Sessions 21-22)

Method of discussion

For all sessions in this course, the class will form itself into groups of 4 members in each group. The names of the group members will have to be finalized in advance, and the same group composition will be maintained until the end of the course.

Every case will be supplied with assignment questions to clarify the analysis. These questions will be addressed to specific groups, who are expected to present their analysis of the issue contained in the question.

Apart from questions for specific groups, most cases would also require all groups to submit their answers to certain questions related to the case

All assignments will be submitted as soft copies nefore the beginning of each session

Evaluation criteria for presentations1. All group members will have to be present and participate in the presentation.

Any member of the group who is not present in the class will not be evaluated for the presentation made by the group to which he / she belongs

2. Soft copies of the presentation / written assignment will have to be sent to the faculty [through the class representative] before the start of the session .

3. Presentations will be evaluated on the depth of analysis / conceptual strength 4. Presentations should not exceed 10 mins unless otherwise specified5. For presentations involving research, the sources of information will have to be

provided.

Note: Please refer to Course Schedule for session wise Topics and Readings

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Project Appraisal and Finance 2015-17

Sessions 21,22

Topic : Valuing Projects – the ERR (completed portions highlighted yellow )

Lecture: The concept of ERR

NOTE : A quiz on the concept of ERR (lecture) and the case will be given before beginning the case discussion. This quiz will be an individual quiz

CASE: NGHE AN TATE AND LYLE SUGAR COMPANY Case objective: Understand how large projects impact society and how to measure value through financial and social returns

Assignment questionsMake the following assumptions for your calculations1. Real risk adjusted discount rate = 10%2. Nominal discount rate = 13%

Individual assignment – all participants – PLEASE BRING YOUR INDIVIDUAL LAPTOPS TO THE CLASSROOMAn xls to calculate the ERR will be sent separately. Please fill in the xls wherever case facts are available, and bring it to the classroom on your laptopsThe ERR would be calculated in the classroom during the case discussion. Please note the calculated ERR will be submitted in the class as soft copies.

Assignment questions for specific groups

Group 3You are the sponsor for the project. Is the mill an attractive investment? What are the returns?What are the major risks? Are the returns commensurate with the risks?

Group 4 Will farmers convert to cane? Consider sensitivities. Please use the following table to weigh comparative returns [data to be taken from case exhibits]

Net return from Opportunity cost of labor=$1 Opportunity cost of labor=$0NPV of net return $

Value above alternative crop$

NPV of net return $

Value above alternative crop $

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CANECash crops [average]PineappleCoffeeRubberCombo A – peanuts+maizeCombo B – peanuts+peanutsCombo C- peanuts + rice

Net social returns of cane vs subsistence crop – say- peanuts + peanuts over a 3 year time frameCrops – peanuts+ peanuts

NPV @ 13% in USD]

Operating profits [in Dong] [undiscounted values]Year 0 Year 1 Year 2 Year 3

RevenuesCostsNet returnCane – net returnsSocial gain / lossPlease use inferences from the above tables to substantiate your analysis

Group 1 Will truckers buy and use their trucks for cane delivery? Consider sensitivities. Please fill in the following table from case facts to calculate the returns to truckers

Revenue: Mean travel distance [km round trip]Cost to deliver [VND per ton]Tons per load [payload]Average trips per dayNumber of days per seasonFuel costsLorry km / gallonPrice / gallonFuel cost / dayLabor costsAverage wage / day

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Maintenance per seasonLorry costsAverage cost of lorryAverage km for life of lorryAnnual interest rateDepreciation per kmProfit per season per trucker [in VND]Revenue ------------------

CostsFuel -------------------Labor --------------------Maintenance ---------------------

Total costs ---------------------

Net revenue ---------------------Interest ---------------------Depreciation ---------------------

Profit /loss ----------------------

Profit margin per season --------------------%

Please base your analysis on the returns as above and the risks involved

Groups 2 and 3 – ROLE PLAYGroup 2 – You play the role of the Government. As government, how would you respond to and convince the opposition in support of the project?Group 3 – You play the role of the Opposition parties. How would you question / critique the government in respect of the project?

Both groups – It is suggested that you use the calculations done in the ERR xls to clinch your arguments

Group 4As IFC, would you fund the project? What are the pros and cons? What will your decision be?

Reinforcement of concepts and Summing up by faculty.------------------------------------------------------------------------------------------------------------Topic: Valuing projects – Real options

Lecture on real options and their relevance for project finance

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FREEDOM……..FOR THE TIME BEING!!!!

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