CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Meenakshi Textiles is evaluating a machine that needs an initial outlay of ₹8,00,000. The present value of its expected cash inflows, discounted at the firm's cost of capital, is ₹9,20,000. What is the profitability index of the project?
The profitability index is 1.15. It is the present value of cash inflows divided by the present value of the outlay, which is 9,20,000 divided by 8,00,000. A value above 1 shows the project adds value and would be acceptable.
- A1.15Correct
- B0.15
- C0.87
- D1.35
Explanation
Profitability index = PV of cash inflows / PV of cash outflows = 9,20,000 / 8,00,000 = 1.15. The value 0.15 is NPV divided by outlay (net PI), which leaves out the 1. The value 0.87 results from inverting the ratio (8,00,000/9,20,000).
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