Skip to content

CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Meera Textiles has a budget of ₹40 lakh. Project Z (outlay ₹25 lakh, NPV ₹5 lakh) is compulsory for statutory compliance. X (outlay ₹20 lakh, PV of inflows ₹26 lakh) and Y (outlay ₹15 lakh, PV of inflows ₹19.5 lakh) are independent and divisible. What is the maximum total NPV from the budget?

The maximum NPV is ₹9.5 lakh. The compulsory project Z uses ₹25 lakh and gives ₹5 lakh. The remaining ₹15 lakh earns ₹0.30 NPV per rupee in either X or Y, adding ₹4.5 lakh.

  1. A₹9.5 lakhCorrect
  2. B₹10.5 lakh
  3. C₹5.0 lakh
  4. D₹8.0 lakh

Explanation

Z takes ₹25 lakh, leaving ₹15 lakh. NPV of X is 6 (0.30 per rupee) and of Y is 4.5 (0.30 per rupee), so both give the same return per rupee. Investing ₹15 lakh in Y gives 4.5, or 3/4 of X gives 4.5. Total = 5 + 4.5 = 9.5. The 10.5 figure ignores the compulsory project and takes X and Y alone.

Did you get it right without looking?

One question tells you little. A timed set on Advanced Capital Budgeting Decisions shows your real accuracy, how long you take and where you lose marks.

Practise Advanced Capital Budgeting DecisionsFree diagnostic mock

More Advanced Capital Budgeting Decisions questions