CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Meera Foods has a project costing Rs 1,20,000 with PV of future cash inflows (at the cost of capital) of Rs 1,50,000. What is the profitability index?
The profitability index is 1.25. It is calculated as present value of cash inflows, Rs 1,50,000, divided by the initial investment, Rs 1,20,000. Since the index exceeds 1, the project has a positive NPV of Rs 30,000 and should be accepted.
- A0.80
- B1.25Correct
- C1.50
- D0.25
Explanation
Profitability index = PV of cash inflows / initial outlay = 1,50,000 / 1,20,000 = 1.25. A value above 1 means NPV is positive (Rs 30,000). 0.25 is the NPV per rupee invested, not the PI; 0.80 inverts the ratio.
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