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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Godavari Foods Ltd has a project with PV of future cash inflows of Rs 18,00,000 and an initial outflow of Rs 15,00,000. What is the profitability index and the decision under the PI rule for an independent project?

The profitability index is 1.20, obtained by dividing the present value of inflows of Rs 18,00,000 by the Rs 15,00,000 outlay. Because PI is greater than 1, NPV is positive at Rs 3,00,000, so the independent project should be accepted.

  1. API 0.83; reject
  2. BPI 1.20; acceptCorrect
  3. CPI 1.20; reject
  4. DPI 0.20; accept

Explanation

PI = PV of inflows / initial outlay = 18,00,000/15,00,000 = 1.20. Since PI exceeds 1, NPV is positive (Rs 3,00,000), so accept. PI 0.83 inverts the ratio.

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