CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A firm has ₹5,00,000 available for capital rationing and the following indivisible projects: P (outlay ₹3,00,000, NPV ₹60,000), Q (outlay ₹2,00,000, NPV ₹50,000), R (outlay ₹2,50,000, NPV ₹40,000). Which combination maximises total NPV?
The best combination is P and Q with a total NPV of ₹1,10,000. Together they cost exactly ₹5,00,000, within the budget. P and R would cost ₹5,50,000 and is not feasible, while Q and R yields only ₹90,000.
- AP and Q, total NPV ₹1,10,000Correct
- BP and R, total NPV ₹1,00,000
- CQ and R, total NPV ₹90,000
- DOnly P, total NPV ₹60,000
Explanation
Feasible combinations within ₹5,00,000: P+Q costs 5,00,000 (NPV 1,10,000); Q+R costs 4,50,000 (NPV 90,000); P+R costs 5,50,000 and exceeds the budget, so it is infeasible. P+Q gives the highest NPV. The P+R option is wrong because it breaches the budget.
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