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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Tulsi Enterprises has a capital budget of ₹10,00,000 for one year. Projects are indivisible and cannot be repeated. Project P: outlay ₹4,00,000, NPV ₹1,20,000. Project Q: outlay ₹5,00,000, NPV ₹1,00,000. Project R: outlay ₹6,00,000, NPV ₹1,74,000. Which choice maximises total NPV, and what is it?

Projects P and R should be selected, giving a total NPV of ₹2,94,000 for exactly ₹10,00,000 of outlay. The combination Q and R has a higher NPV figure than P and Q but costs ₹11,00,000, so it breaches the capital rationing limit.

  1. AP and R, total NPV ₹2,94,000Correct
  2. BQ and R, total NPV ₹2,74,000
  3. CP and Q, total NPV ₹2,20,000
  4. DP, Q and R, total NPV ₹3,94,000

Explanation

Feasible combinations within ₹10,00,000: P+R costs 10,00,000 with NPV 2,94,000; P+Q costs 9,00,000 with NPV 2,20,000. Q+R costs 11,00,000 and all three cost 15,00,000, so both exceed the budget and are infeasible. The best feasible choice is P and R.

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