CA Inter P6 · Chapter 7 · Question 3 of 10
A project has a present value of cash inflows of ₹ 11,09,500 and an initial outlay of ₹ 10,00,000. Its profitability index is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 1.11
Explanation
Profitability index = PV of cash inflows / PV of cash outflows = 11,09,500 / 10,00,000 = 1.1095, about 1.11. A PI above 1 means the project earns more than its cost of capital. The figure 0.11 is the NPV per rupee invested (PI - 1), and 0.90 inverts the ratio.
More Investment Decisions MCQs
- Q5Equipment costs ₹ 6,00,000, has a 5-year life and a salvage value of ₹ 1,00,000. The average annual profit after depreciation and tax is ₹…
- Q6A project's annual profit before depreciation and tax is ₹ 4,00,000. Depreciation is ₹ 1,00,000 and the tax rate is 30%. The annual cash…
- Q7A company spent ₹ 2,00,000 last year on a feasibility study for a new plant. In deciding today whether to build the plant, how should this…
- Q8A firm has ₹ 10,00,000 available for investment. Three divisible, independent projects are available: P (outlay ₹ 4,00,000, NPV ₹…
- Q9When NPV and IRR rank two mutually exclusive projects differently, NPV is usually preferred because: