What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

Question

Quizplus · Accepted Answer

The profitability index is the best choice in this scenario because it takes into account the amount of investment required for each project as well as the potential profitability. It is calculated by dividing the present value of the cash inflows by the initial investment. Projects with higher profitability indexes should be given priority for limited capital investment. Internal rate of return and discounted payback do not take into account the size of the investment required, while the modified internal rate of return is more complex and may not provide clear rankings for projects with different investment requirements.

What Decision Criteria Should Managers Use in Selecting Projects When