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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Kaveri Industries has a budget of Rs 100 lakh and faces capital rationing. Indivisible projects: P1 outlay Rs 50 lakh, NPV Rs 15 lakh; P2 outlay Rs 40 lakh, NPV Rs 14 lakh; P3 outlay Rs 30 lakh, NPV Rs 9 lakh; P4 outlay Rs 30 lakh, NPV Rs 8 lakh. Projects are independent and cannot be split. Which combination maximises total NPV?

The best combination is P2, P3 and P4, costing exactly Rs 100 lakh and yielding a total NPV of Rs 31 lakh. Other feasible combinations such as P1 with P2 give only Rs 29 lakh, and P1, P2 and P3 together exceed the budget.

  1. AP1 and P2, total NPV Rs 29 lakh
  2. BP2, P3 and P4, total NPV Rs 31 lakhCorrect
  3. CP1, P3, total NPV Rs 24 lakh
  4. DP1, P2 and P3, total NPV Rs 38 lakh

Explanation

P2+P3+P4 costs 100 lakh and gives 14+9+8=31. P1+P2 costs 90 lakh for 29; adding nothing more fits. P1+P3 costs 80 for 24; P1+P4 gives 23. P1+P2+P3 costs 120, exceeding the budget, so it is infeasible. The best feasible is 31 lakh, found by comparing NPV across feasible combinations rather than by ranking on size.

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