______________ is the recommended method for determining the optimal capital budget under conditions of capital rationing.

Question

Quizplus · Accepted Answer

The profitability index (PI) method is considered the recommended method for determining the optimal capital budget under conditions of capital rationing. This method calculates the ratio of the present value of future cash flows to the initial investment. It provides a measure of the value created per dollar invested and helps management select projects with the best returns relative to the investment required. Projects are ranked by their profitability index, and those with the highest index are selected for funding until the budget is exhausted. This method ensures that the firm invests its limited capital resources in the projects that generate the highest return per dollar invested.

______________ Is the Recommended Method for Determining the Optimal Capital