CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Rohini Textiles is evaluating a project that needs an initial outlay of ₹5,00,000. The present value of its expected cash inflows, discounted at the firm's cost of capital, is ₹6,25,000. What is the profitability index (PI) of the project?
The profitability index is 1.25. It is the present value of inflows, ₹6,25,000, divided by the initial outlay of ₹5,00,000. A PI above 1 means NPV is positive, so the project creates value and is acceptable.
- A1.25Correct
- B0.25
- C0.80
- D1.50
Explanation
PI = PV of cash inflows / initial outlay = 6,25,000 / 5,00,000 = 1.25. Since PI is above 1, NPV is positive (₹1,25,000) and the project is acceptable. The value 0.25 is wrong because it is NPV divided by outlay, which is PI minus 1. The value 0.80 inverts the ratio.
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