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      Question

      Two mutually exclusive projects A and B have the

      following NPVs: • Project A: ₹40 lakh, initial investment ₹100 lakh • Project B: ₹35 lakh, initial investment ₹80 lakh Which project should be selected and why?
      A Project A because of higher NPV Correct Answer Incorrect Answer
      B Project B because it requires less capital Correct Answer Incorrect Answer
      C Project B due to higher Profitability Index Correct Answer Incorrect Answer
      D Project A due to higher IRR Correct Answer Incorrect Answer
      E Either can be selected as NPV is positive Correct Answer Incorrect Answer

      Solution

      PI = NPV / Initial Investment PI A = 40/100 = 0.4 PI B = 35/80 = 0.4375 When capital is limited, higher PI indicates better return per rupee invested. So, Project B is preferred.

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