A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed, which project should be selected?
A)select the project with the higher profitability index.
B)select the project with the lower profitability index.
C)without capital rationing, both projects can be selected.
D)without capital rationing, select by NPV method.

Question

Quizplus · Accepted Answer

Without capital rationing, the focus should be on selecting the project that adds the most value to the firm, which is determined by the Net Present Value (NPV) method. The profitability index is more useful when capital is limited.

A Firm Uses the Profitability Index to Select Between Two