CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project needs an initial outlay of ₹10,50,000 and the present value of its future cash inflows, discounted at the firm's cost of capital, is ₹12,60,000. What is the profitability index of the project?
The profitability index is 1.20. It is the present value of inflows, ₹12,60,000, divided by the initial outlay, ₹10,50,000. A value above 1 means the project has a positive NPV and is acceptable. The figure 0.20 would be the net profitability index.
- A1.20Correct
- B0.83
- C0.20
- D0.80
Explanation
Profitability index = PV of cash inflows / PV of cash outflows = 12,60,000 / 10,50,000 = 1.20. The value 0.20 is NPV divided by outlay (2,10,000/10,50,000), which omits the 1 and is the net PI. The value 0.83 inverts the ratio.
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