CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Mehta Textiles is evaluating a project that needs an initial outlay of ₹5,00,000. The present value of all its expected future cash inflows, discounted at the firm's cost of capital, is ₹6,00,000. What is the profitability index of the project?
The profitability index is 1.20. It is the present value of future inflows (₹6,00,000) divided by the initial outlay (₹5,00,000). Because the ratio exceeds 1, the NPV is positive and the project is acceptable on this criterion.
- A1.20Correct
- B0.83
- C1.00
- D0.20
Explanation
Profitability index = PV of cash inflows / initial outlay = 6,00,000 / 5,00,000 = 1.20. A value above 1 means NPV is positive (₹1,00,000). The option 0.20 is wrong because it is NPV divided by outlay, which is PI minus 1, not PI itself.
Did you get it right without looking?
One question tells you little. A timed set on Investment Decisions shows your real accuracy, how long you take and where you lose marks.
More Investment Decisions questions
- Vikram Auto invests ₹1,00,000 in a project with cash inflows of ₹60,000 at the end of year 1 and ₹78,000 at the end of year 2. Inflows are r…
- Which statement about the discounted payback period is correct?
- Aarav Ltd. is evaluating a project with an initial outlay of ₹2,00,000 and a single cash inflow of ₹2,64,000 at the end of year 2. The cost …
- Zenith Packaging must choose between two mutually exclusive machines, to be replaced with identical machines in future. Cost of capital is 1…
- Rohan Engineering must choose one of two mutually exclusive machines that it will replace on completion of their lives. Machine X has a 3-ye…
- Rohini Textiles is evaluating a project that needs an initial outlay of ₹5,00,000. The present value of its expected cash inflows, discounte…