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

Sagar Chemicals invests Rs 12,00,000 in a project giving net cash inflows of Rs 5,00,000 a year for 3 years. At 10%, the annuity factor is 2.487. Which gives the project's profitability index and the correct decision?

Present value of inflows is 5,00,000 times 2.487, or 12,43,500. Dividing by the outlay of 12,00,000 gives a profitability index of about 1.04. Because it exceeds 1, the project adds value and should be accepted.

  1. API 1.04, acceptCorrect
  2. BPI 0.96, reject
  3. CPI 1.04, reject
  4. DPI 0.96, accept

Explanation

PV of inflows = 5,00,000x2.487 = 12,43,500. PI = 12,43,500/12,00,000 = 1.036, about 1.04. PI above 1 means accept. PI 0.96 comes from inverting the ratio.

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