CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project costs Rs 3,00,000 and has a present value of future cash inflows of Rs 3,60,000. What is its profitability index?
The profitability index is 1.20. It is the present value of cash inflows, Rs 3,60,000, divided by the initial outlay, Rs 3,00,000. A value above 1 indicates a positive NPV, so the project is acceptable.
- A0.83
- B1.20Correct
- C0.20
- D1.67
Explanation
PI = PV of inflows / PV of outflows = 3,60,000 / 3,00,000 = 1.20. Check: NPV = 60,000, and 60,000/3,00,000 = 0.20, so PI = 1 + 0.20. 0.83 inverts the ratio; 0.20 is NPV per rupee, not PI.
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