Under capital rationing the profitability index is used to select investments because of limited capital by their:
A) excess profit to achieve the highest payoff.
B) reward per dollar cost to achieve the highest incremental NPV.
C) incremental IRR to maximize the total rate of return.
D) capital usage rate to stay within budget.

Question

Quizplus · Accepted Answer

The profitability index is used under capital rationing to select investments by their reward per dollar cost, aiming to achieve the highest incremental Net Present Value (NPV). This method helps in maximizing the returns from the limited available capital.

Under Capital Rationing the Profitability Index Is Used to Select