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CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

Meera Plastics is assessing a project with an initial outlay of ₹10,00,000 and a uniform annual inflow of ₹3,50,000. The present value annuity factor over the project life at the cost of capital is 4.0. In a sensitivity analysis on the annual inflow alone, by what percentage can the inflow fall before the NPV becomes zero?

The inflow can fall by about 28.57%. At an annuity factor of 4.0, NPV turns zero when the annual inflow is ₹10,00,000/4 = ₹2,50,000. Against the base inflow of ₹3,50,000, this is a reduction of ₹1,00,000, which is 28.57%.

  1. A25.00%
  2. B71.43%
  3. C40.00%
  4. D28.57%Correct

Explanation

Base PV of inflows = 3,50,000 × 4 = ₹14,00,000, so NPV = ₹4,00,000. The break-even inflow = 10,00,000/4 = ₹2,50,000. The fall allowed = 1,00,000/3,50,000 = 28.57%. The 25% option divides the NPV by the PV of inflows' base incorrectly, and 71.43% is the break-even inflow as a percentage of the base inflow, not the fall.

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