When hard capital rationing exists,projects may be accurately evaluated by use of:
A) 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 there is a strict limit on the amount of capital available for investment, projects should be evaluated based on their ability to generate the highest return on investment with limited capital. In this scenario, the profitability index is the best choice as it measures the present value of the expected cash inflows divided by the initial investment. This ratio helps identify the projects that generate the highest return per dollar invested and is most suitable for projects with limited capital resources. Payback period and mutually exclusive IRRs are not effective in evaluating projects under hard capital rationing, as they do not consider the time value of money or the available capital. Borrowing projects may increase the capital available for investment, but they also come with additional costs and risks, making them not the best choice in this situation.

When Hard Capital Rationing Exists,projects May Be Accurately Evaluated by Use