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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Kaveri Engineering Ltd has a project with a present value of cash inflows of ₹9,00,000 and an initial outlay of ₹7,50,000. Which statement about its profitability index (PI) and the decision is correct?

The profitability index is 1.20, obtained by dividing the present value of inflows ₹9,00,000 by the outlay ₹7,50,000. Because PI exceeds 1, NPV is positive at ₹1,50,000 and the project should be accepted.

  1. API is 1.20 and the project should be acceptedCorrect
  2. BPI is 0.83 and the project should be rejected
  3. CPI is 1.20 and the project should be rejected
  4. DPI is 0.20 and the project should be accepted

Explanation

PI = PV of inflows / initial outlay = 9,00,000 / 7,50,000 = 1.20. Since PI exceeds 1 (NPV is ₹1,50,000 positive), accept. The 0.83 option inverts the ratio.

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