When hard capital rationing exists, projects may be accurately evaluated by use of:
A) the payback period.
B) mutually exclusive IRRs.
C) a profitability index.
D)borrowing, rather than lending, projects.

Question

Quizplus · Accepted Answer

When hard capital rationing exists, meaning the company has a limited budget for new projects or investments, companies need to select projects that maximize their return on investment (ROI). One way to evaluate projects in this situation is to use the profitability index (PI), which measures the present value of future cash flows generated by the project relative to its initial investment. The higher the PI, the better the project's ROI. The payback period and mutually exclusive IRRs do not take into account the time value of money or the size of the investment, making them less accurate in a situation where capital is limited. Borrowing, rather than lending, projects is not a method of evaluation but rather a source of financing.

When Hard Capital Rationing Exists, Projects May Be Accurately Evaluated