CS Professional · Strategic Management and Corporate Finance · Project Evaluation
A project has an initial outlay of Rs 8,00,000 and the present value of its future cash inflows at the firm's cost of capital is Rs 9,20,000. What is the profitability index (PI) and the decision under the PI rule?
The profitability index is 1.15, found by dividing the present value of inflows, Rs 9,20,000, by the outlay of Rs 8,00,000. Since the PI exceeds 1, the NPV is positive at Rs 1,20,000 and the project should be accepted.
- API 1.15; acceptCorrect
- BPI 0.87; reject
- CPI 1.15; reject
- DPI 0.15; accept
Explanation
PI = PV of inflows / initial outlay = 9,20,000 / 8,00,000 = 1.15. A PI above 1 means NPV is positive (Rs 1,20,000), so the project is accepted. 0.87 inverts the ratio, and 0.15 is the NPV per rupee, not the PI.
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