Which of the following best illustrates the problem imposed by capital rationing?
A) Accepting projects with the highest NPVs first
B) Accepting projects with the highest IRRs first
C) Bypassing projects that have positive NPVs
D)Bypassing projects that have positive IRRs

Question

Quizplus · Accepted Answer

Capital rationing is a situation where a firm has a limited amount of capital to invest in projects. Therefore, the firm has to prioritize and select the most profitable projects. Accepting projects with the highest NPVs or IRRs may seem like the best strategy, but it does not address the problem of capital rationing. Bypassing projects that have positive NPVs may be necessary if the expected return is not high enough to meet the firm's required rate of return, but bypassing them solely because of capital rationing means potentially missing out on profitable opportunities. Therefore, the best choice is to bypass projects that have positive NPVs because of the limitation imposed by capital rationing.

Which of the Following Best Illustrates the Problem Imposed by Capital