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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Sagar Industries has a capital budget of ₹10 crore. All four independent projects are divisible. Outlay and NPV (₹ crore): A 4 and 2.0; B 3 and 1.2; C 5 and 1.5; D 2 and 0.9. What is the maximum total NPV obtainable?

The maximum NPV is ₹4.4 crore. Rank by NPV per rupee: A, D, B, then C. Accept A, D and B fully using ₹9 crore, and one-fifth of C with the last ₹1 crore, adding ₹0.3 crore of NPV.

  1. A₹4.4 croreCorrect
  2. B₹4.1 crore
  3. C₹3.9 crore
  4. D₹4.7 crore

Explanation

NPV per rupee: A 0.50, D 0.45, B 0.40, C 0.30. Take A (4), D (2) and B (3), using 9 crore, then 1 crore of C. NPV = 2.0 + 0.9 + 1.2 + 0.2... precisely 1/5 of C = 0.3, giving 4.4. The 4.1 figure ignores the divisible part of C. The 3.9 figure comes from ranking by absolute NPV.

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