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

Ganga Textiles is considering a project with an initial investment of Rs 8,00,000 and net cash inflows of Rs 2,00,000 per year for 6 years. The firm's required rate of return is 12%. The present value annuity factor for 6 years at 12% is 4.111. What is the NPV and profitability index (PI) of the project?

Present value of inflows is Rs 2,00,000 times 4.111, equal to Rs 8,22,200. Subtracting the Rs 8,00,000 outlay gives NPV of Rs 22,200. The profitability index is 8,22,200 divided by 8,00,000, about 1.03, which is above one and so acceptable.

  1. ANPV Rs 22,200; PI 1.03Correct
  2. BNPV Rs 4,00,000; PI 1.50
  3. CNPV Rs 22,200; PI 0.97
  4. DNPV Rs 1,22,200; PI 1.15

Explanation

PV of inflows = 2,00,000 x 4.111 = Rs 8,22,200. NPV = 8,22,200 - 8,00,000 = Rs 22,200. PI = 8,22,200 / 8,00,000 = 1.028, about 1.03. Option C wrongly shows PI below 1 despite positive NPV.

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