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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

A project costs ₹1,50,000 and yields annual cash inflows of ₹50,000 for 5 years. The present value annuity factor for 5 years is 3.00 at 20% and 3.60 at 13%. What is the project's Profitability Index at a cost of capital of 13%, and the interpretation?

The Profitability Index is 1.20 and the project should be accepted. Present value of inflows is ₹50,000 × 3.60 = ₹1,80,000, divided by the ₹1,50,000 outlay gives 1.20. A PI above 1 means a positive NPV, so the project adds value.

  1. A1.20; accept because PI is greater than 1Correct
  2. B0.83; reject because PI is less than 1
  3. C1.20; reject because PI is greater than 1
  4. D1.00; indifferent

Explanation

PV of inflows at 13% = 50,000 × 3.60 = 1,80,000. PI = 1,80,000 / 1,50,000 = 1.20. Since PI > 1, NPV is positive and the project is accepted. The 0.83 figure inverts the ratio. Option 3 gives the right ratio but a wrong decision.

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