Which of the following best illustrates the problem imposed by capital rationing?
A)accepting projects with the highest NPVs first.
B)accepting projects with the highest IRRs first.
C)bypassing projects that have positive NPVs.
D)bypassing projects that have positive IRRs.

Question

Quizplus · Accepted Answer

Capital rationing occurs when a company has limited funds to invest in projects. Therefore, they must prioritize and choose which projects to invest in. Choosing projects based solely on their NPVs or IRRs may not be feasible due to the limited capital available. The best way to handle capital rationing is to prioritize projects based on their profitability index, which compares the potential return of a project to the cost of the investment. By bypassing projects that have positive NPVs, the company is potentially missing out on profitable investments, which could hurt the overall financial growth of the company.

Which of the Following Best Illustrates the Problem Imposed by Capital