Under conditions of capital rationing (i.e., limited capital funds are available), the optimal allocation of funds to capital investment projects occurs when management uses which one of the following decision models?
A) Discounted payback.
B) Profitability index (PI).
C) Modified internal rate of return (MIRR).
D) Internal rate of return (IRR).
E) Discounted accounting rate of return.

Question

Quizplus · Accepted Answer

The profitability index (PI) is the best choice when capital is limited because it measures the project's net present value per dollar of investment. This means that it helps identify the project that will generate the highest return for the amount of capital invested. The other models listed do not take into account the size of the investment or the availability of funds, making them less useful in a capital rationing situation.

Under Conditions of Capital Rationing (I