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

Question

Quizplus · Accepted Answer

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.

A Firm That Faces Capital Rationing Must Select a Subset