(a) The Zenith Enterprises Ltd. has two investment proposals—project X and project Y. These are mutually exclusive. Project X…

(a) Choice between mutually exclusive projects X and Y

Cash inflows are taken at year end. All figures are in ₹ crore.

(i) Risk-adjusted discount rate (RADR) method. RADR = risk-free rate + risk premium: X = 8% + 2% = 10%; Y = 8% + 4% = 12%. Expected inflows are discounted at the project's own RADR.

• Project X at 10%: 1.8 × 0.909 = 1.6362; 2.0 × 0.826 = 1.6520; 2.0 × 0.751 = 1.5020. PV = 4.7902. NPV = 4.7902 − 3.4 = 1.3902.
• Project Y at 12%: 1.8 × 0.893 = 1.6074; 1.8 × 0.797 = 1.4346; 2.0 × 0.712 = 1.4240. PV = 4.4660. NPV = 4.4660 − 3.3 = 1.1660.

NPV of X is higher, so X is chosen by this method.

(ii) Certainty equivalent (CE) method. Each expected inflow is multiplied by its CE coefficient and the certain flows are discounted at the risk-free rate of 8%.

• Project X: 1.8 × 0.85 = 1.530 × 0.926 = 1.4168; 2.0 × 0.75 = 1.500 × 0.857 = 1.2855; 2.0 × 0.60 = 1.200 × 0.794 = 0.9528. PV = 3.6551. NPV = 3.6551 − 3.4 = 0.2551.
• Project Y: 1.8 × 0.90 = 1.620 × 0.926 = 1.5001; 1.8 × 0.85 = 1.530 × 0.857 = 1.3112; 2.0 × 0.75 = 1.500 × 0.794 = 1.1910. PV = 4.0023. NPV = 4.0023 − 3.3 = 0.7023.

NPV of Y is higher, so Y is chosen by this method.

The two methods conflict. RADR puts all risk into the rate and so penalises later cash flows more, whereas the CE method treats risk in the cash flows and time value separately. As CE coefficients are management's direct estimates of risk for each year, Y, which has the higher NPV by CE, is the better choice if those estimates are accepted.

(b) Credit policy and assessing a customer's credit-worthiness

A credit policy is the set of rules by which a firm decides whom to give credit, on what terms and how to collect. It has four parts: credit standards, credit terms (period and cash discount), credit analysis and collection policy. It balances higher sales and profit against the cost of funds locked in receivables and the risk of bad debts.

The credit-worthiness of a customer is assessed through the five Cs:

• Character: willingness to pay, judged from payment record, trade and bank references and reputation.
• Capacity: ability to pay from cash flows, judged from earnings, liquidity, order book and debt-service cover.
• Capital: financial strength, judged from net worth, capital structure and profitability.
• Collateral: security that can be realised if the customer defaults.
• Conditions: the state of the economy and industry, competition and regulation.

These are supported by credit ratings, the CIBIL score, ratio analysis, ageing of past dues and references. Credit is extended only when the profit on the additional sales exceeds the cost of funds, collection and expected default loss.

(c) Phases of operating procedures of India's monetary policy framework

• Monetary targeting (to 1997–98): broad money (M3) was the intermediate target and reserve money the operating target. The tools were CRR, SLR, administered interest rates and selective credit controls. Financial liberalisation weakened the money-income link.
• Multiple indicator approach (1998–99 to 2013–14): the RBI watched interest rates, credit, output, inflation, the exchange rate and capital flows. The Liquidity Adjustment Facility (repo and reverse repo, from 2000) became the main operating tool, with open market operations, the Marginal Standing Facility (from 2011) and CRR.
• Flexible inflation targeting (from 2015–16, statutory in 2016 by the RBI Act amendment): the Monetary Policy Committee fixes the policy repo rate to meet a CPI inflation target of 4% with a ±2% band (retained for April 2026 to March 2031). The operating target is the weighted average call money rate, kept within a corridor bounded by the Standing Deposit Facility rate (floor, since 2022) and the MSF rate (ceiling), using LAF, variable-rate repos and OMOs.