CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control
Rao Steels is considering a project with an initial outlay of Rs 6,00,000 and a profitability index of 1.25 at its cost of capital. What is the project's NPV?
The NPV is Rs 1,50,000. A profitability index of 1.25 means present value of inflows is Rs 7,50,000 on a Rs 6,00,000 outlay, so the surplus over the outlay is Rs 1,50,000.
- ARs 1,50,000Correct
- BRs 1,25,000
- CRs 75,000
- DRs 2,00,000
Explanation
PI = PV of inflows / outlay, so PV of inflows = 1.25 x 6,00,000 = 7,50,000. NPV = 7,50,000 - 6,00,000 = 1,50,000. The 75,000 option wrongly takes 0.125 x outlay.
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