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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Surya Textiles is evaluating a machine costing Rs 4,00,000 with no salvage value. It will generate net cash inflows of Rs 1,50,000 per year for 4 years. The cost of capital is 10%. Cumulative PV annuity factor at 10% for 4 years is 3.170. What is the NPV and Profitability Index (PI) of the project?

NPV is Rs 75,500 and PI is about 1.19. Present value of inflows is 1,50,000 times 3.170, which is Rs 4,75,500. Subtracting the outlay of Rs 4,00,000 gives NPV, and dividing inflows by outlay gives the profitability index.

  1. ANPV Rs 75,500; PI 1.19Correct
  2. BNPV Rs 1,00,000; PI 1.25
  3. CNPV Rs 75,500; PI 0.81
  4. DNPV Rs 1,55,500; PI 1.39

Explanation

PV of inflows = 1,50,000 x 3.170 = Rs 4,75,500. NPV = 4,75,500 - 4,00,000 = Rs 75,500. PI = 4,75,500/4,00,000 = 1.189, about 1.19. Rs 1,00,000 comes from undiscounted flows (6,00,000-4,00,000 is 2,00,000 actually, and 1.25 is wrong), and 0.81 inverts the ratio.

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