CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project has a present value of cash inflows of Rs 6,00,000 and an initial investment of Rs 5,00,000. Its profitability index is:
The profitability index is 1.20. It is the present value of inflows, Rs 6,00,000, divided by the initial investment of Rs 5,00,000. Since the index exceeds one, NPV is positive at Rs 1,00,000 and the project is acceptable.
- A0.83
- B1.20Correct
- C1.00
- D0.20
Explanation
Profitability index = PV of inflows / initial outlay = 6,00,000 / 5,00,000 = 1.20. Check: NPV = 1,00,000 and 1 + 1,00,000/5,00,000 = 1.20. The 0.83 option inverts the ratio, and 0.20 is NPV divided by outlay only.
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