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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Under capital rationing, Meera Industries has Rs 10,00,000 available and can undertake indivisible projects: P (outlay Rs 6,00,000, NPV Rs 90,000), Q (outlay Rs 4,00,000, NPV Rs 70,000), R (outlay Rs 5,00,000, NPV Rs 60,000). Which combination maximises total NPV?

The best choice is projects P and Q together, costing exactly Rs 10,00,000 and giving a combined NPV of Rs 1,60,000. P and R would need Rs 11,00,000, exceeding the limit, and Q with R yields only Rs 1,30,000.

  1. AP and R, NPV Rs 1,50,000
  2. BQ and R, NPV Rs 1,30,000
  3. CP and Q, NPV Rs 1,60,000Correct
  4. DP alone, NPV Rs 90,000

Explanation

Feasible combinations within Rs 10,00,000: P+Q costs 10,00,000 giving 1,60,000; P+R costs 11,00,000 and is not feasible; Q+R costs 9,00,000 giving 1,30,000. P+Q gives the highest NPV. P and R is wrong because it exceeds the budget.

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