Which one 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 zero IRRs

Question

Quizplus · Accepted Answer

Capital rationing is a situation where a firm has limited funds to invest in all available projects. Therefore, the firm must prioritize and choose projects that will maximize the value of the investment. Bypassing projects that have positive NPVs (option C) is the best example of the problem imposed by capital rationing because the firm may miss out on profitable investment opportunities that could have possibly contributed to the company's growth and success. The other options (A, B, and D) are all valid ways of evaluating projects but do not directly address the limitations imposed by capital rationing.

Which One of the Following Best Illustrates the Problem Imposed