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

Gupta Foods is evaluating a project with an initial outlay of Rs 3,00,000 and an inflow of Rs 3,63,000 at the end of year 2 only. The cost of capital is 10% per annum. What is the NPV and the profitability index?

NPV is zero and the profitability index is 1.00. The Rs 3,63,000 received in year 2, discounted at 10% by dividing by 1.21, has a present value of exactly Rs 3,00,000, equal to the outlay, so the project just earns its cost of capital.

  1. ANPV Rs 0; PI 1.00Correct
  2. BNPV Rs 63,000; PI 1.21
  3. CNPV Rs 3,000; PI 1.01
  4. DNPV Rs 30,000; PI 1.10

Explanation

PV of inflow = 3,63,000 / 1.21 = 3,00,000. NPV = 3,00,000 - 3,00,000 = 0, and PI = 3,00,000/3,00,000 = 1.00. Rs 63,000 ignores discounting.

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