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

Rao Auto Ltd has a capital rationing budget of Rs 10,00,000 for one year with indivisible projects: P1 outlay Rs 4,00,000 NPV Rs 1,20,000; P2 outlay Rs 5,00,000 NPV Rs 1,50,000; P3 outlay Rs 3,00,000 NPV Rs 1,10,000; P4 outlay Rs 2,00,000 NPV Rs 50,000. Which combination maximises total NPV?

The best combination is P2, P3 and P4, which uses exactly the Rs 10,00,000 budget and yields a total NPV of Rs 3,10,000. Other feasible combinations, such as P1, P3 and P4, give lower totals of Rs 2,80,000 or less.

  1. AP1, P3 and P4, total NPV Rs 2,80,000
  2. BP2, P3 and P4, total NPV Rs 3,10,000Correct
  3. CP1, P2, total NPV Rs 2,70,000
  4. DP2 and P3, total NPV Rs 2,60,000

Explanation

P2+P3+P4 costs 10,00,000 with NPV 1,50,000+1,10,000+50,000 = 3,10,000. P1+P3+P4 costs 9,00,000 with NPV 2,80,000. P1+P2 costs 9,00,000 with NPV 2,70,000. P2+P3 gives 2,60,000. The best feasible is 3,10,000.

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