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

Meera Chemicals has a capital budget of Rs 10,00,000 and can undertake any of these indivisible projects: P (outlay Rs 4,00,000, NPV Rs 1,00,000), Q (outlay Rs 6,00,000, NPV Rs 1,50,000), R (outlay Rs 5,00,000, NPV Rs 1,20,000), S (outlay Rs 3,00,000, NPV Rs 60,000). Which combination maximises total NPV under capital rationing?

Choose projects P and Q. They use exactly the Rs 10,00,000 budget and give a combined NPV of Rs 2,50,000, higher than any other feasible combination such as P and R at Rs 2,20,000.

  1. AP and R
  2. BP and QCorrect
  3. CQ and S
  4. DR and S

Explanation

Feasible pairs within Rs 10,00,000: P+Q = 10,00,000 with NPV 2,50,000; P+R = 9,00,000 with NPV 2,20,000; P+S = 7,00,000 with 1,60,000; Q+S = 9,00,000 with 2,10,000; R+S = 8,00,000 with 1,80,000. Three-project sets such as P+S+R exceed the budget. P and Q gives the highest NPV.

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