CA Inter P6 · Chapter 7 · Question 8 of 10
A firm has ₹ 10,00,000 available for investment. Three divisible, independent projects are available: P (outlay ₹ 4,00,000, NPV ₹ 1,20,000), Q (outlay ₹ 6,00,000, NPV ₹ 1,50,000) and R (outlay ₹ 5,00,000, NPV ₹ 1,60,000). Ranking by profitability index, the maximum total NPV achievable is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) ₹ 3,05,000
Explanation
PI = (outlay + NPV) / outlay: P = 5,20,000/4,00,000 = 1.30, Q = 7,50,000/6,00,000 = 1.25, R = 6,60,000/5,00,000 = 1.32. Rank R, P, Q. Invest ₹ 5,00,000 in R (NPV ₹ 1,60,000) and ₹ 4,00,000 in P (NPV ₹ 1,20,000), leaving ₹ 1,00,000 for 1/6 of Q (NPV ₹ 1,50,000 / 6 = ₹ 25,000). Total NPV = 1,60,000 + 1,20,000 + 25,000 = ₹ 3,05,000. Ranking by absolute NPV (R, then 5/6 of Q) gives only ₹ 1,60,000 + ₹ 1,25,000 = ₹ 2,85,000, and taking P and Q in full gives ₹ 2,70,000.
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