Asked by Kaleb Hulsey on Jun 12, 2024
Verified
A firm that faces capital rationing must select a subset of capital projects based on some ranking criterion. The capital budgeting technique best suited for this is the __________.
A) NPV
B) IRR
C) PI
D) AAR
E) payback
Capital Rationing
A strategy or situation where a company limits its new investments or projects due to constraints in available capital.
NPV
Net Present Value; a calculation used to estimate the value of an investment, considering the present value of its future cash flows.
- Explain the effects of capital rationing on project selection and the notion of soft and hard rationing.
- Comprehend the core concepts of different capital budgeting strategies and their implementation in making financial decisions.
Verified Answer
BH
Briana HorneJun 18, 2024
Final Answer :
C
Explanation :
The Profitability Index (PI) is best suited for situations of capital rationing because it allows for the ranking of projects based on their value created per unit of investment, thus helping in selecting the subset of projects that maximize value within the limited capital available.
Learning Objectives
- Explain the effects of capital rationing on project selection and the notion of soft and hard rationing.
- Comprehend the core concepts of different capital budgeting strategies and their implementation in making financial decisions.
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