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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Arjun Ltd is evaluating a project with an initial outlay of Rs 6,00,000, annual cash inflows of Rs 2,00,000 for 5 years, and a cost of capital of 12%. The PV annuity factor at 12% for 5 years is 3.605. What is the NPV and the profitability index?

The NPV is Rs 1,21,000 and the profitability index about 1.20. Present value of inflows is Rs 2,00,000 times 3.605, or Rs 7,21,000. Subtracting the Rs 6,00,000 outlay gives NPV, and dividing the PV of inflows by the outlay gives the index.

  1. ANPV Rs 1,21,000; PI 1.20Correct
  2. BNPV Rs 1,21,000; PI 0.20
  3. CNPV Rs 7,21,000; PI 1.20
  4. DNPV Rs 1,00,000; PI 1.17

Explanation

PV of inflows = 2,00,000 x 3.605 = 7,21,000. NPV = 7,21,000 - 6,00,000 = 1,21,000. PI = 7,21,000/6,00,000 = 1.2017, about 1.20. Option 3 quotes the PV of inflows as NPV, and option 2 confuses PI with NPV/outlay.

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