Given a $10,000,000 capital budget, a discount rate of 10%, and seven projects totaling $14,000,000, which capital rationing rule should be used?
A) Invest in the lowest cost projects until all investment funds are exhausted
B) Invest in all projects with an IRR 0
C) Invest in all projects with an IRR 10%
D) Invest in the projects with the highest IRR until all investment funds are exhausted
E) Invest in the projects with the highest IRR that are greater than or equal to 10% until all investment funds are exhausted

Question

Given a $10,000,000 capital budget, a discount rate of 10%, and seven projects totaling $14,000,000, which capital rationing rule should be used?
A) Invest in the lowest cost projects until all investment funds are exhausted
B) Invest in all projects with an IRR > 0
C) Invest in all projects with an IRR > 10%
D) Invest in the projects with the highest IRR until all investment funds are exhausted
E) Invest in the projects with the highest IRR that are greater than or equal to 10% until all investment funds are exhausted

Quizplus · Accepted Answer

The capital rationing rule should prioritize projects with an IRR greater than or equal to the discount rate (10%) and then select those with the highest IRR until the budget is exhausted.

Given a $10,000,000 Capital Budget, a Discount Rate of 10