Project Management-0706

Question Paper
Project Management (MB271) : July 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. Which of the following does not indicate the presence of intense rivalry in an industry?
(a) Competitors are numerous or are roughly equal in size and power
(b) Industry is growing very fast
(c) The product or service lacks differentiation
(d) Fixed costs are high or the product is perishable
(e) Exit barriers in the industry are very high.
< Answer >
2. Which of the following is a qualitative model of demand forecasting?
(a) Chain ratio method (b) End use method
(c) Econometric method (d) Consumption level method
(e) Field sales force method.
< Answer >
3. Time estimates of different activities are as shown below:
Time Estimates
Activity
Optimistic Most likely Pessimistic
1–2 1 2 3
2–3 1 1.5 5
1–3 2 5 8
The standard deviation of the duration of this project is

(a) 0.33 week (b) 0.67 week (c) 1.00 week
(d) 1.15 weeks (e) 1.50 weeks.
4. Ratan Fabrics Ltd. invested Rs.50 crore in its new polyester project. The company expects a uniform < Answer >
cash inflow of Rs.15 crore for five years from this project. Cost of capital for the company is 10%. The
modified NPV of this project is Rs.8 crore. The re-investment rate applicable to the cash inflows of this
project would be
(a) 10% (b) 11% (c) 12% (d) 13% (e) 14%.
5. One of the ongoing projects under the guidance from Ministry of Defence is exposed to high cost over < Answer >
run but no time over run. It is going as per the schedule. Which of following equations would be true
about this project?
ACWP BCWS (BCWP) 2

<1 >1 >1
(a) BCWP (b) BCWP (c) (ACWP) (BCWS)
ACWP BCWP BCWS
+ >2 >1
(d) BCWP BCWS (e) ACWP .
6. Which of the following statements is/are false regarding estimation of cash flows of a project from < Answer >
equity funds point of view?
I. Preference dividend is not considered as an outflow.
II. Interest on long-term loans is not considered as outflows.
III. Realization of the current assets, net of the current liabilities is considered as an inflow.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
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< Answer >
7. The relationship between equipments, buildings and civil works is shown in
(a) Organizational layout (b) Communication layout
(c) Utilities layout (d) Transport layout
(e) General functional layout.
< Answer >
8. Which of the following expenses is a preliminary expense?
(a) Promotional expenses
(b) Traveling expenses
(c) Insurance during construction period
(d) Interest during construction period
(e) Legal charges for drafting agreements.
< Answer >
9. Which of the following is/are true regarding Life Cycle Costing?
I. It is expensive to perform.
II. It is suitable for large projects.
III. It assumes the life of the products is finite and is known.
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
10. Organizational structures and processes are custom made to produce a specific product or service. The < Answer >
project approach is adopted when the existing systems in the parent organization are not equipped to
handle the new task. Which among the following is not a characteristic of projects?
(a) Every project has a set of activities that are unique
(b) Organizations take up projects to perform a particular task or attain a specific goal
(c) A project consists of various activities that are to be performed in a particular sequence to deliver
the end product
(d) Every project has a specified start date but no definite completion date
(e) Projects consist of various technically interrelated activities.
11. Project management is a coordinated effort towards managing interrelated processes such as initiation, < Answer >
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.
12. The project manager uses the Project Management Information System (PMIS) in order to gather, < Answer >
integrate and disseminate the information and outcomes of other project processes. Which among the
following is/are true for PMIS?
I. The PMIS enables the project manager to distribute the required information to the project team
members and other stakeholders in the form of reports.
II. It doesn’t allow the project manager to update all project schedules.
III. For complex projects, the PMIS helps in identifying, sequencing, scheduling and tracking all
project activities.
(e) Both (I) and (III) above.
13. “This is a structured technique administered by a coordinator. All the individual members prepare their < Answer >
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
each idea for future use.”
The above statement refers to which of the following creativity and idea generation technique?
(a) Black Box (b) Brainstorming
(c) Delphi Technique (d) Nominal Group Technique
(e) Attribute Listing.
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14. A project manager should carefully study the market potential for a given project idea. The activities of < Answer >
a project manager in conducting a market and demand analysis include situational analysis and
objectives specification, collection of secondary data, market survey, market description, demand
forecasting and market planning. Which among the following is not true for market and demand
analysis?
(a) Situational analysis is the process by which a project manager studies customer preferences and
their purchasing capacity
(b) Project managers prefer to use secondary data, as it is readily available and economical
(c) Market survey is a useful method of obtaining the secondary data
(d) Based on the information obtained from the secondary data sources, and market survey, the project
manager describes the marketability of the project idea
(e) The project manager forecasts the demand for a particular product or service using information
obtained from secondary sources, market survey and market description.
15. The Work Breakdown structure (WBS) is a useful tool for the project manager in identifying the project < Answer >
activities. It illustrates how each activity of the project contributes to the whole project in terms of
budget, schedule and performance. Which among the following is/are factor(s) considered in
developing WBS?
I. Every activity in the WBS should produce multiple tangible deliverables.
II. The activities should be decomposed logically from higher levels to lower levels.
III. Each activity should be unique and distinct from other activities of the project.
(e) Both (II) and (III) above.
16. Which of the following points is normally not considered by a project manager while estimating the < Answer >
working capital requirements of a project?
(a) Raw materials (b) Work-in-process
(c) Assembly line (d) Stocks of finished goods
(e) Operating expenses.
< Answer >
17. Different time estimates of the activities related to a project are as follows:
Time Estimates (in weeks)
Activity
to t m t p
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%.
18. Firms initiate various projects as part of their organizational strategy. In order to execute these projects, < Answer >
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.
19. The project manager of a rolling mill is worried about the specifications of its outputs. The customer < Answer >
has set a specification of ± 0.05 cm of variation in the diagonal differences. The supplier of the
equipment states that the standard deviation of output from same type of machine is 0.009 cm. The
process capability of the machine is
(a) 0.93 (b) 1.44 (c) 1.85 (d) 2.78 (e) 3.70.
< Answer >
20. Which one of the following is the most significant task in a software project?
(a) Implementation (b) Controlling (c) Closing
(d) Planning (e) Monitoring.
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< Answer >
21. In a network diagram, the critical path
(a) Has the longest duration

(b) Can be completed without committing any resources
(c) Does not contain any dummy activity
(d) Contains the largest number of dummy activities
(e) Has the shortest duration.
22. Firms depend on numeric models heavily while selecting a project. Most firms consider the numeric < Answer >
models more useful than the non-numeric models, which are very subjective and unscientific. Which
among the following is false for numeric models?
(a) Payback period indicates how long the project takes to earn back the money spent on the project
(b) If the NPV of the project is positive, then the project can be accepted
(c) Internal rate of return is defined as the rate that discounts all the cash flows to get an NPV of zero
(d) Profitability index is the ratio of PV of all cash flows to the initial investment outlay
(e) The Average Rate of Return is ratio of Annual cash inflow plus depreciation to initial investment.
23. Project managers today face complex problems in the wake of the increase in the number of < Answer >
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.
24. After the project activities are sequenced, the project manager estimates the duration of each activity to < Answer >
calculate the duration of the entire project. Which among the following is false for activity duration?
(a) The duration of an activity is the time period required to complete the activity
(b) Activity duration is not influenced by the amount of resources allocated
(c) The actual duration of activities may vary from the estimates
(d) The actual durations of successful projects in the past can be used to estimate the duration of the
activity
(e) In case of highly technical activities, the project manager can consult a technical expert to estimate
the activity duration.
< Answer >
25. Which of the following is one of the deliverables in the control phase of the project?
(a) Project overview (b) Critical path (c) Work package description
(d) Final report (e) Status report.
< Answer >
26. Which of the following is not a part of Project Overview Statement (POS)?
(a) Project Problem (b) Project Goal
(c) Work Breakdown Structure (d) Success Criteria
(e) Assumptions, Risks and Obstacles.
< Answer >
27. Which of the following is not an advantage of using matrix structure for the project management?
(a) Enables the project manager to exercise control over all the resources
(b) Facilitates quick response to conflicts, changes and other needs
(c) Facilitates cost minimization by sharing key personnel
(d) Enables authority and responsibility sharing
(e) Establishes vertical communication channels.
< Answer >
28. The project manager can take preventive measures to reduce the loss caused by the risk. When the
purpose is to reduce the intensity of the risk to a point where it can be accepted, the method of risk
response is termed as
(a) Risk avoidance (b) Risk transfer
(c) Risk mitigation (d) Risk acceptance (e) Risk control.
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< Answer >
29. 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 >
30. The net present value of a project is Rs.9 lakh. If its initial investment is Rs.2 lakh and the cost of
capital is 10%, the benefit cost ratio is
(a) 5.50 (b) 4.50 (c) 0.55
(d) 0.45 (e) 6.50.
END OF SECTION A
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Section B : Problems/Caselet (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. The following information is available regarding the normal time and cost and also the crash time and < Answer >
cost relating to the various activities of a project.
Time (Weeks) Cost (Rs.)

Activity Standard
Normal Crash Normal Crash
Deviation
1–2 45 5 41 33,000 44,500
1–3 21 3 14 1,50,000 1,74,000
2–6 50 7 42 86,000 99,000
3–4 36 8 29 1,55,000 1,80,000
4–5 45 6 36 1,35,000 1,65,000
5–6 7 2 3 45,000 60,000
6–7 3 1 1 3,000 5,000
The required time of completion for the above project is 90 weeks. Delay in completion will result in
penalties at the rate of Rs.5,00,000 for each week of delay or part thereof.
You are required to:
a. Draw the network diagram and determine the critical path.
b. Determine the minimum cost project schedule if the indirect costs are Rs.7,500 per week.
(4 + 8 = 12 marks)
2. A project is being reviewed at a stage when the Budgeted Cost of Work Performed (BCWP) is < Answer >
exactly half of the Budgeted Cost of Total Work (BCTW). The Actual Cost of Work Performed
(ACWP) till date is Rs.12 lakh. This is Rs.2 lakh more than the Budgeted Cost of Work Scheduled
(BCWS) till date. The Additional Cost of Completion (ACC) is Rs.8 lakh and the Cost Variance is
Rs.1 lakh.
You are required to compute:
a. Schedule variance in cost terms.
b. Cost performance index.
c. Schedule performance index.
d. Estimated cost performance index.
(1 × 4 = 4 marks)
3. In the Proactive Company, the research and development divisions are considered to be at par with < Answer >
investment divisions. The company is faced with the problem of deciding on a project that would
place it in a better position than its competitors. Looking at its technical ability, the company is not
sure whether the project would ultimately be successful. It is estimated that a total of Rs.1 lakh will be
spent at the beginning of the year on this research project.
The R & D manager feels that there is a 60% chance that the project shall be successfully completed
by the next year. At the end of the one-year period if the project is not completed, the company may
either choose to abandon for Rs.25,000 or incur extra costs of Rs.40,000 to complete the project by
next year. The chances of successful competition in the second year are 30%. In case the project is not
completed by the end of second year, the project shall be abandoned for Rs.35,000.
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On successful completion, the annual cash inflows until the end of the life of project are expected to
be as follows:
– a 0.2 chance of Rs.40,000
– a 0.4 chance of Rs.60,000
– a 0.4 chance of Rs.80,000.
The life of the project, including the construction period is 5 years. The opportunity cost of capital is
12%.
You are required to:
a. Construct a decision tree depicting the above.
b. Determine the optimal decision, considering time value of money.
(6 + 7 = 13 marks)
4. Aditya Industries has a preferential capital of Rs.5 crore, each preferential share is issued at a face < Answer >
value of Rs.100 at 13.5%. Preference share is redeemable after 12 years. Net amount realized per
share is Rs.94.75.
The market price of the equity share is Rs.114. Dividend per share expected is Rs.8. Dividend per
share is expected to grow at 12% p.a.
You are required to find the cost of
a. Preferential Shares.
b. Equity Shares.
(3 + 3 = 6 marks)
Caselet
Read the caselet carefully and answer the following questions:
5. Discuss the competitive advantages of minimizing product development time in the automobile < Answer >
industry.
(5 marks)
6. The project team was able to analyze various scenarios with the help of the change management < Answer >
feature of Mantra. Discuss the manner in which the team was able to control bottlenecks with the
help of the software.
(5 marks)
7. Explain the benefits that Mantra brought to the Cheetah project. How did these advantages < Answer >
contribute to a shorter product time for Cheetah?
(5 marks)
Breakfree corp. is a US-based, sports car manufacturing company. During the 1990’s there is a heavy shift in
consumer preferences for automobile features. They began demanding improved functionality, reliability,
performance and fuel efficiency along with enhanced safety. The industry scenario was such that manufacturers who
could satisfy consumer preferences, would survive. Breakfree knew that the only way to survive and succeed in such
a competitive market, was by providing superior products at a competitive price. To achieve this goal, the company
focused its attention on totally reanalyzing the established design and production methodologies and systems. The
company also had to reduce its product introduction cycles, to ensure price competitiveness. However Breakfree did
not want to compromise on quality.
In order to stay competitive, Breakfree conceived the Cheetah, its high-performance sports car for the 1990s. When
the concept was debuted at the auto show in Detroit, in 1990, the car was well-received. But, it was only a year later
that the project got the green signal from its top brass. The project team pictured Cheetah as the ultimate, beautiful
car, a perfect blend of beauty and performance whose 0 -100 - 0 mph, sub-fifteen-second performance would take
one’s breath away. The top brass of the company wanted the car project, to play a crucial role in restructuring the
path of the company’s future. The project team was given just three years to convert the concept into a production
vehicle. This included the total development of the vehicle – the body, an all new 8000cc V40 aluminum engine, and
a six-speed, high-performance transmission – a task that had consumed 5 years in the past. Working under tight
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schedules and with limited resources, Breakfree recognized that consistent, end-to-end project management was
mandatory for its success. The company began looking into every component that went into the project. With such a
high-stake project on hand, the company was not in a position to grant concessions for any kind of weakness.
Personnel were hand picked for the project. After examining the various project management systems in the market,
Breakfree selected Mantra – the most popular project management software system of that time. It had used this
software in its previous projects, to manage the design of vehicle interiors, with great success.
According to the Cheetah team’s Executive Engineer (EE), Peterson, front-end planning and subsequent process
engineering and reengineering are the essentials for project requirements. The company required a sophisticated tool
that could manage multiple projects, concurrently and interactively. Since every thing was totally new on the
Cheetah project, the company could only depend on Mantra to satisfy its project requirements. The company
recognized that for the project to satisfy its goals, it needed to have a significant process reengineering. With tight
schedules and limited resources, the project team could not afford to target all processes for reengineering.
Therefore, they had to determine bottlenecks that can occur in between the team and the three-year-deadline.
Mantra’s effective change management system allowed the team to measure the impact of any change before
committing to it. It helped the teams identify processes that required immediate attention, in addition to determining
where redistribution of resources could have the greatest impact on the project.
In spite of careful front-end planning, no project can be totally free of unforeseeable problems, particularly when the
project involves a number of external vendors. Breakfree utilized Mantra’s change management capabilities to
control the front-end errors. As in every project, Cheetah too had its teething problems. However, with the help of
Mantra, Breakfree could proactively avoid those problems. The team was able to inspect delay in the project
management network, immediately sense the impact of the problem and gauge precisely what action to take. If the
delay had a significant impact on the other processes and on the project’s ultimate goal, the team reallocated its
resources, to remove the bottleneck. Since the project team was able to visualize the impact of any problem on the
total project, it could predict potential bottlenecks. This helped keep the project on track. Mantra became a road map
to success, for Breakfree’s journey from Cheetah’s concept to its delivery.
Breakfree ensured that the project team accomplished the individual goals established, for each component of the
project while incorporating innovative technologies. This practice put extra pressure on the project management
function and made sure all the elements progressed in a coordinated fashion. The Cheetah team pioneered several
innovations in the industry. Within a year of the formation of the engine feasibility team, Breakfree had its first
8000cc, V10 test engine. The project team produced a six-speed manual transmission box (0-60 mph acceleration in
4.5 seconds), in just 18 months (which traditionally takes 5-6 years). The team did not accept the conventional
stamped, steel construction for its frame, but chose a tabular steel that saved significant amount of time without a
compromise on the strength. In pursuit of a better and less labor-intensive, panel construction process, the project
team developed Resin Transfer Molding (RTM) for the car, making it the first car in the US to use such a
technology. RTM enhanced the quality of the panels significantly, apart from its durability and quality of finish.
RTM also reduced the retooling lead time associated with changes in body styling. This helped Breakfree to respond
more quickly to the emerging consumer preferences. The project team also developed a four-piston caliper front
brake disc system and a ventilated disc rear, single piston slider-brakes that would bring the vehicle to stop from 100
mph to 0 mph in less than 5 seconds.
The project management software, Mantra, provided a communication network that ensured project success, both on
the micro (within each component) and the macro level. It made sure critical elements were linked. The first of the
Cheetahs scheduled to arrive in August 1993 were all premiered before they were displayed at the showrooms. More
than the glitz of rolling out a new sports car, the Cheetah project set new standards for excellence at Breakfree. End-
to-End, Enterprise – wide project management has evolved as a road map of success for the organization.
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.
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8. One of the most important responsibilities of project manager is to estimate the cost of the project. < Answer >
Due care should be exercised in estimating costs. He should apply appropriate techniques for the
purpose. Explain in detail about the techniques used by project manager to estimate costs.
(10 marks)
9. Project auditing is the process of detailed inspection of the management of a project, its < Answer >
methodology, techniques, procedures, documents, properties, budgets, expenses and level of
completion. In this context, explain the construction and use of the audit report during the various
stages of project life cycle.
(10 marks)
END OF SECTION C
END OF QUESTION PAPER
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Suggested Answers
Project Management (MB271) : July 2006
Section A : Basic Concepts
1. Answer : (b) < TOP >
Reason : The factors which contributes in enhancing the competitive pressure or intentensifying the
competitive rivalry are:
• The relative sizes of the players. If all are of equal size then competition will be high.
• Stagnation, i.e., the industry is not growing very fast.
• No product innovation i.e., lack of differentiation in product or service offerings.
• High fixed costs, leading to a scramble to sell the break-even quantity.
• Due to high exit barriers, reluctant players cannot leave the competition and continue
to remain in the fray to make it more intense.
So, alternative (b) is the answer.
2. Answer : (e) < TOP >
Reason : Different types of qualitative models of demand forecasting are: Field sales force
method, User’s expectations method, Delphi method and Jury of executive
opinion method. So, the alternative (e) is the answer.
Other alternatives given in the question like – Chain ratio method, End use
method, Econometric method and Consumption level method are different types
of cause and effect models for demand forecasting.
3. Answer : (c) < TOP >
Reason :
Time Estimates
Expected time
Activity Optimistic Most likely Pessimistic estimates
(to) (tm) (tp)
1–2 1 2 3 2
2–3 1 1.5 5 2
1–3 2 5 8 5
The network of the project is as follows:
We see critical path is 1– 3. So the standard deviation of the duration of this project is the
tp − t0 8−2
standard deviation of activity (1 – 3) i.e., 6 = 6 = 1.
Terminal Value
−I
Reason : Modified NPV = (1 + k) n
15xFVIFA(r,5)
8= − 50
or (1.1)5
58x(1.1)5
FVIFA(r,5) = = 6.227
or 15
from the table r = 11%
10
5. Answer : (d) < TOP >
BCWP
Reason : The project is undergoing a severe cost overrun i.e., ACWP <1 (1)
BCWP
And as the project is going as per schedule so BCWS = 1 (2)
BCWP ACWP
(a) From equation (1) ACWP < 1 or BCWP > 1
So, alternative (a) is false.
BCWP BCWS
(b) From equation (2) BCWS = 1 or BCWP = 1
∴ Alternative (b) is false.
(BCWP) 2 BCWP BCWP

×
(c) (ACWP) (BCWS) = ACWP BCWS
BCWP BCWP
From equation (1) ACWP < 1 and BCWS = 1
BCWP BCWP
×
∴ ACWP BCWS < 1
So, alternative (c) is false.
BCWP ACWP
(d) From equation ACWP < 1 or BCWP > 1
BCWP
and from equation (2) BCWS = 1
ACWP BCWP
+
∴ BCWP BCWS = (> 1) + 1
> 2
So, alternative (d) is true.
(e) (< 1) × (1) < 1
BCWP BCWS
×
or ACWP BCWP < 1
BCWS
Or ACWP < 1
So, alternative (e) is false.
Reason : Operating cash inflows as per equity fund’s point of view

= Profit after tax – Preference dividend + Depreciation + Other non-cash charges.
So, (I) is false.
Terminal cash flows as per equity fund’s point of view:
= Net salvage value of fixed assets + Net salvage value of current assets – Repayment of
term loans – Redemption of preference capital – Repayment of working capital
advances – Retirement of trade credit and other funds.
So, (II) is false but (III) is true.
As the question is asked to indicate the false statements, So, alternative (d) is the answer,
which says both (I) and (II) are false.
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Reason : The relationship of the buildings, civil works and the equipments is shown in General
Functional Layout. This layout is designed in such a way that the entire process of receiving
raw materials, processing and the outward movement of the finished goods takes place
smoothly and efficiently.
Organizational layout shows number of people required, their requirement at each part of
the project site, and their hierarchical relationship.
Communication Layout shows the communication lines between the various divisions –
the model and their numbers.
Utilities Layout shows the points of availability and consumption of each utility at each
point. Transport Layout shows the distances between various facilities outside the
production line and the modes of transport between them.
Reason : Preliminary expenses include capital issue expenses, cost of feasibility report, cost of
project reports, cost of market survey, legal charges of drafting agreements – memorandum
and articles of association, capital issue, under writing commission and brokerage, charges
for drafting, printing and issue of prospectus, share certificates etc. Hence (e) is the answer.
The expenses incurred till the date of commencement of commercial production are
included under the head pre-operative expenses. Broadly speaking pre-operating expenses
are – (i) promotional expenses (ii) organisation and training costs (iii) Rent, rates and taxes
(iv) Traveling expenses (v) Postage, telegrams and telephone expenses (vi) Printing and
stationery expenses (vii) Advertisement expenses (viii) Guarantee commission (ix)
Insurance during construction (x) Interest during construction period etc. Hence, (a), (b), (c)
and (d) fall under pre-operative expenses.
Reason : Life cycle costing system is a method of evaluating alternative courses of action early in the
life of a project, so that the resources can be committed to the best. But it is not free from
defects, like –
i. Life cycle costing is expensive to perform and is hence suitable only for large projects
ii. The entire exercise will have to be repeated whenever the requirements change.
iii. It assumes that the life of the products is finite and is known.
So, we see that alternative (e) is correct.
Reason : Every project has a specified start date and completion date. This time limit is either self-
imposed or it is specified by the client. A project comes to a close when it delivers the
product or services as per the clients requirements or when it is confirmed that it is no
longer possible for the project to deliver the final product or services as required by the
client. Any extension of due date is done after a lot of discussions with project manager and
client.
All other alternatives are characteristics of projects. Therefore the correct answer is (d).
11. Answer : (a) < TOP >
Reason : Vendor selection is a part of the implementation processes. 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).
Reason : PMIS allows the project manager to regularly update all project schedules. By showing up
variations, the PMIS helps the project manager to monitor the project processes. Based on
the performance of the current operations, PMIS shows at what point of time the difference
between the actual and planned performance exceeds control limits. This allows the project
manager to take initiatives to keep the differences within control.
Statement I and III are true for PMIS. Therefore correct answer is (e).
12
Reason : Nominal Group Technique 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 each idea for future use.
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.
So, option (d) is the correct answer.
Reason : Sometimes information collected from secondary sources may not be enough to understand
the market conditions completely. Hence, information obtained from secondary sources
should be supplemented by primary data, which is problem-specific. A market survey is a
useful method of obtaining the primary data. Market survey is a technique that is aimed at
gathering all possible information by conducting interviews.
All other statements are true for market and demand analysis. Therefore the correct answer
is (c).
Reason : While developing WBS, it is ensured that,

Every activity in the WBS should produce a single tangible deliverable.
Each activity should be unique and distinct from the activities of the project.
The activities should be decomposed logically from higher levels to lower levels.
Therefore the correct answer is (e).
Reason : The project manager considers following points when estimating the working capital
requirements of a project:
• Raw materials and components
• Work-in-process
• Stocks of finished goods
• Operating expenses
So, clearly we can say that alternative (c) is the answer. On the contrary the alternatives (a),
(b), (d) and (e) are not the answer.
13
Reason :
Activity t
o t m t
p t e σ
1–2 1.0 2.0 3.0 2.0 1

3
2–3 1.0 1.5 2.5 1.58 1

4
1–3 1.5 4.0 6.5 4 5

6
 3−4
PZ ≤ 
Probability (t ≤ 3) =  5/6 
 −6 
P Z ≤ 
=  5 
= P(Z ≤ – 1.2) = 11.51%.
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. Therefore the correct answer
is (b).
(USL − LSL)
Reason : The process capability C = p 6×σ
{0.05 − (−0.05)}
= 6 × 0.009
= 1.85
Reason : Planning in software project is extremely significant. Primarily it revolves around the
decomposition of project into smaller tasks. So the alternative (d) is the answer.
The importance of monitoring, controlling, implementation and closing are same as that of
any other project. These do not have much special in software project. So, the alternatives
(a), (b), (c) and (e) are not the answer.
Reason : In network diagram critical path is the path with longest duration.
< TOP >
22. Answer : (e)
Reason : The Average rate of Return is calculated using the following formula
= (annual cash inflows- Depreciation) / Initial Investment
All other statements are true for numeric models. Therefore the correct answer is (e).
< TOP >
23. Answer : (c)
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).
14
Reason : Activity duration could also be influenced by the amount of resources allocated. Generally
speaking, more the resources, the shorter the duration of the activity. However it cannot be
assumed that the relationship between activity duration and resources allocated is
completely proportional.
Other alternatives are true for activity duration. Therefore the correct answer is (b).
Reason : During the five phases of project, namely , Initiate, Plan, Organize, Control and Close,
various activities are undertaken and there are few deliverables that are identified with
every phase. During the control phase of the project, the deliverables are variance report,
Status reports, Staff allocation reports.
Reason : Work breakdown structure (WBS) is not a part of Project overview statement (POS). The
WBS is a deliverable-oriented grouping of project elements that organizes and defines the
total scope of the project. The POS consists of project problem, project goal, project
objectives, success criteria and assumption, risks and obstacles.
Reason : Vertical communication channels are a key characteristic of traditional organizational

structure. In a matrix structure the communication channels are not vertical. All the other
are advantages of using matrix structure.
Reason : Very few risks can be effectively addressed by avoidance or transfer responses. The project
manager can also take preventive measures to reduce the loss caused by the risk. This is
called risk mitigation. The correct answer is (c).
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).
PV NPV + I 9+2
Reason : BCR = I = I = 2 = 5.5
15
Section B : Problems
1. a. Critical path = 1 – 3 – 4 – 5 – 6 – 7 = 21 + 36 + 45 + 7 + 3 = 112 weeks.
b. The time-cost slope for the activities of the project can be calculated as follows:
Activity Additional cost Reduction in time Time-cost slope
1–2 11,500 4 2875
1–3 24,000 7 3429
2–6 13,000 8 1625
3–4 25,000 7 3571
4–5 30,000 9 3333
5–6 15,000 4 3750
6–7 2,000 2 1000
Total cost before crashing = 6,07,000 + 112 x 7,500 = 6,07,000 + 8,40,000 = Rs.14,47,000
i. Out of the activities on the critical path, 6-7 has the least time-cost slope. So crash 6-7 first by 2 weeks.
Then the cost of the project will be :
Total cost before crashing = 14,47,000 + 1,000 x 2 – 7,500 x 2 = 14,47,000 + 2,000 – 15,000 = Rs.14,34,000
The project schedule will then be 112 – 2 = 110 weeks.
ii. Out of the remaining activities on the critical path, 4-5 has the lowest time-cost slope. 4-5 can be crashed by
9 weeks. After that:
Total project cost will be = 14,34,000 + 3333 x 9 – 7500 x 9
= Rs.13,96,497
Total project duration = 110 – 9 = 101 weeks.
iii. The next activity is 1-3, which can be crashed by 7 weeks. But after crashing for 5 weeks, 1-2-6-7 also
becomes critical. So 1-3 should be first crashed only by 5 weeks.
Project cost = 13,96,497 + 3429 x 5 – 7,500 x 5
= Rs.13,76,142
Duration = 101 – 5 = 96 weeks.
iv. Now crashing has to be done on both 1-2-6-7 and 1-3-4-5-6-7. On 1-2-6-7, 2-6 has a lower time-cost slope of
1625 and can be crashed by 8 weeks. But 1-3 can be crashed only by 2 more weeks. So both should be
crashed by 2 weeks.
Total cost = 13,76,142 + 1,625 x 2 + 3,429 x 2 – 7,500 x 2
= Rs.13,71,250
16
v. Now, 2-6 can be crashed by 6 weeks along with 3-4
Total cost = 13,71,250 + 1,625 x 6 + 3,571 x 6 – 7,500 x 6
= Rs.13,57,426
Time = 94 – 6 = 88 weeks.
vi. On 1-2-6-7, 1-2 can now be crashed by 1 week along with the remaining 1 week of 3-4.
Total cost = 13,57,426 + 2,875 x 1 + 3,571 x 1 – 7,500 x 1
= Rs.13,56,372
vii. On 1-2-6-7, 1-2 can be crashed by 3 weeks along with 3 weeks of 5-6
Total cost = 13,56,372 + 2,875 x 3 + 3,750 x 3 – 7,500 x 3
= Rs.13,53,747
As all activities on 1-2-6-7 have already been crashed, no further crashing is possible.
Least cost schedule = 84 weeks
Cost = Rs.13,53,747.
< TOP >
2. Actual cost of work performed = Rs.12 lakhs
Cost Variance = Rs.1 lakh
∴ Budgeted cost of work performed
= 12 + 1 = Rs.13 lakhs
∴ Budgeted cost for total work
= 13 x 2 = Rs.26 lakhs
Budgeted cost of work scheduled
= ACWP – 2 = 12 – 2 = Rs.10 lakhs
a. Scheduled variance in cost terms = BCWP – BCWS
= 13 – 10 = Rs.3 lakhs
b. Cost performance index = BCWP/ACWP
13
= 12 = 1.08
c. Schedule performance index = BCWP/BCWS
13
= 10 = 1.30
d. Estimated cost performance index = BCTW/(ACWP + ACC)
26
= 20 = 1.3
< TOP >

3. a
17
b. Value at C4 = PV of annual cash inflows for 3 years as at the end of second year
= 64,000 x PVIFA12%,3 = Rs.1,53,728
Value at C3 = 1,53,728 x 0.3 + 0.7 x 35,000 = Rs.70,618
Value at D2 = Maximum of [(PV of 70,618 – 40,000); 25,000]
70,618
= Maximum [( 1.12 ) – 40,000; 25,000]
= Maximum [23,052; 25,000]
Hence, value at D2 = Rs.25,000
Value at C2 = PV of annual cash inflows for 4 years at the end of first year
(0.2 x 40,000 + 0.4 x 60,000 + 0.4 x 80,000) PVIFA12%,4
= 64,000 x 3.037 = Rs.1,94,368
Value at C1 = [Value at C2 x 0.6 + Value at D2 x 0.4]/(1.12)
= (1,94,368 x 0.6 + 25,000 x 0.4)/1.12
1,26,620.8
= 1.12
= Rs.1,13,054
Value at D1 = Max [(1,13,054 – 1,00,000); 0]
= Rs.13,054
Optimal decision is to take up the project and abandon the project if it is not successfully completed by the end of
first year.
< TOP >
F-P
D+
n
F+P
4. i. Cost of preferential share kp = 2
where,
D = Preference dividend
F = Redemption price
P = Net amount realized per share
N = Maturity period
100-94.75
13.5+
12
100+94.75
= 2 = 14.31%
18
ii. Cost of equity capital
D1
+g
ke = Pe
where,
D1 = Dividend expected = 8
g = 12%
Pe = Market Price
8
= 114 + 0.12
= 0.07 + 0.12 = 0.19 i.e. 19%
< TOP >
5. The present day automobile industry is supply-heavy. Hence, there is no room for complacency. Consumer tastes
are fast changing. And with the offerings from a broad array of domestic and foreign vendors, consumers have
increased their demands for improved functionality, reliability, performance and fuel efficiency, along with
enhanced safety features. Such a scenario has put automobile companies on their toes, to introduce better models
at a faster rate, in order to remain in business. Industry dynamics have become so powerful that only those
companies who can match to the consumer’s expectations will survive.
If product development time is minimized, a company will be able to develop more and more products at a faster
rate so as to match the customer’s fast changing preferences. Minimizing product development time can also help
in lowering the inventory carrying cost, along with incorporating technical advancements in the products as a
faster rate. This practice can also ensure price competitiveness. In the automobile industry, it can ultimately spell
boon for the consumer – offering him more qualitative products at competitive prices.
< TOP >
6. The software used was sophisticate. It was able to manage multiple projects concurrently and interactively. The
change management feature helped the team to predict the impact of changes on resource allocations, process
restructuring and effect of any change before its implementation. The change management feature also seems to
have helped the company prevent unforeseeable problems arising because of a number of external vendors.
Therefore, this feature might have allowed the project team exercise great control on the project activities.
< TOP >
7. Mantra definitely enabled the project team and the organization to view a big picture, and measure the impact of
each operation against that view. The software’s powerful change management processes, along with its multi-
project-handling capacity made it possible for the project team to work limited resources in tight schedule. Mantra
also enabled them to view the impact of any process on the total project, helped them predict potential bottlenecks
and ensured that the project was on schedule (every time). The software acted as a road map of success for the
Breakfree’s journey from the Cheetah’s inception to its launch. The software also provided a communication
network across the project that ensured the project’s success, both on a micro and a macro level. It also ensured the
establishment of crucial links between the elements as per the plan.
< TOP >
Section C
8. The project manager develops an estimate of the costs of the resources required to execute the project. This
inculdes identifying and evaluating various cost alternatives. The project manager considers the WBS, resource
rates, activity duration estimates, historical information and the chart of accounts in estimating the costs.
The WBS is used to ensure that cost estimates are made for all the identified activities. The resource rates show the
cost of each unit of resource such as labor cost per hour, the cost of one litre of lubricant oil, etc. The project
manager considers the activity duration estimates for all the project activities to know by what time the resources
should be made ready.
The project manager also considers historical information in estimating the cost of the project. He studies project
files, and commercial cost estimating databases of past projects. A good overall understanding of similar projects
undertaken in the past proves helpful. The chart of accounts is a numbering system used to monitor project costs
by category (labor, supplies, materials, etc.) It is a coding structure that the firm uses to report financial
information in its ledger.
Some of the techniques used by the project manager to estimate costs are:
• Analogous estimating
• Bottom-up estimating
19
• Parametric modeling
• Computerized tools
Analogous Estimating
In analogous estimating, the project manager considers similar projects to estimate the costs of the project. Based
on the actual costs incurred in that project, the project manager prepares the cost estimates by considering the
parameters like time value of money, inflation rate, etc. Though this type of estimating is easy and economical, but
it is less accurate than the other methods.
Normally, this technique can be used only in consultation with an expert. The difficulty in using this approach lies
in finding a similar project and determining its actual costs. This technique is also called the top-down estimating.
Bottom-up Estimating
In bottom- up estimating, the cost of each element of the project is calculated separately and all these costs are
added up to estimate the total project cost. The smaller the work elements of the project, the greater the accuracy
of the estimate.
Parametric Modeling
In parametric modeling, cost estimates are made using mathematical models. For instance, if, according to the
estimates of the project manager, the cost of constructing a building is Rs.20,000 per square yard, a sum of Rs.2
crore is required for constructing a 1000 square yard building. Even if the estimates made with these models are
not exact, they give the project manager a rough idea about the costs that are likely to be incurred.
Parametric modeling provides reliable estimates when;
• The model is developed on the basis of accurate historical information
• All project parameters are quantifiable
• The model is scalable (can be applied to all projects irrespective of their size).
Computerized Tools
The project manager can use computerized project management software packages like Project 2000 to estimate
the project costs. These software packages compute various costs once the relevant data is provided. The project
manager prepares the cost estimates, supporting details and the cost management plan of the project on the basis of
techniques discussed above. The cost estimates for all the project resources are expressed in terms of rupees
dollars, etc.
< TOP >
9. CONSTRUCTION AND USE OF THE AUDIT REPORT

The format of an audit report depends on the nature of the project under evaluation and the purpose of the
evaluation. It is always advantageous to use a standard format for presenting audit reports. Such a format makes it
easy for the project manager and the top management to understand and comprehend it. If the audit report is to be
distributed within the organization then the management should prepare a distribution list. If the distribution of
audit reports is restricted it can attract the attention of every individual thinking it to be a confidential report,
which will finally lead to interpersonal and inter-group conflicts.
Though some project managers prefer complex and custom made formats of audit reports for their projects, it is
always better to have a simple and straightforward structure. The information should be arranged in such a manner
that it is easy to compare the planned and the actual output. The report should focus on the deviations of the
delivered output from the planned output, along with explanations and comments. Such a simple and straight
forward structure will make it easy for management to identify problems with the project.
The audit report should not make negative comments about the people involved in the project. The content of the
report should be limited to the information and the issues that pertain to the project. The report should be written
in a professional style without any scope for emotional overtones. A typical audit report must provide the
following basic information:
Extent of Benefits Derived from Auditing at Different Stages in a Project
Stage in Project Life Cycle Extent of Benefit
An audit in the early stages of the project is very valuable
Initial especially if it is conducted before 25% of the project has been
completed.
During feasibility study A technical audit at this stage is highly beneficial.
Beneficial for developing measurement standards so as to validate
Preliminary planning
the performance standards set.
Less beneficial because the flexibility of the project team at this
Scheduling phase
stage is usually limited.
20
When project team is analyzing Beneficial to a certain extent only.
the data
Benefits depend on the significance of the project processes and
Implementation phase
techniques
Benefits are realized to the extent the results of the audit are
Post-project
utilized in future projects.
< TOP >
< TOP OF THE DOCUMENT >
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Question Paper

Project Management (MB271) : July 2006

< Answer >

The standard deviation of the duration of this project is

ACWP BCWS (BCWP) 2

1-2 1.0 2.0 3.0

(a) Has the longest duration

• This section consists of questions with serial number 1 – 7.

Time (Weeks) Cost (Rs.)

Section C : Applied Theory (20 Marks)

END OF QUESTION PAPER

3. Answer : (c) < TOP >

4. Answer : (b) < TOP >

(BCWP) 2 BCWP BCWP

Reason : Operating cash inflows as per equity fund’s point of view

Reason : While developing WBS, it is ensured that,

1–2 1.0 2.0 3.0 2.0 1

2–3 1.0 1.5 2.5 1.58 1

1–3 1.5 4.0 6.5 4 5

Reason : Vertical communication channels are a key characteristic of traditional organizational

< TOP >

< TOP >

9. CONSTRUCTION AND USE OF THE AUDIT REPORT

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