Question 1

**Section A**

Oceanic Minerals is considering several deep-sea mining projects but faces strict capital rationing. The company has $10 million available. 
Project Alpha requires an initial investment of $4m and has an NPV of $1.2m.
Project Beta requires an initial investment of $6m and has an NPV of $1.5m.
Project Gamma requires an initial investment of $5m and has an NPV of $1.6m.

Assuming the projects are divisible, what is the Profitability Index (PI) of Project Gamma?

Accepted Answer

Calculate the Profitability Index using the formula: PI = Present Value of Future Cash Flows / Initial Investment. Alternatively, PI = 1 + (NPV / Initial Investment).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Calculating NPV / Initial Investment (0.32) and stopping there. While 0.32 is used for ranking, the formal PI is 1.32.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 1

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