Selecting the project(s)with the highest NPV(s)is not the correct decision rule when:
A) there is capital rationing.
B) there are mutually exclusive projects.
C) projects are long-lived.
D) projects are independent.

Question

Quizplus · Accepted Answer

When there is capital rationing, the available funds are insufficient to fund all the projects with positive NPV. In such a situation, it is essential to prioritize the projects based on other criteria such as the profitability index or internal rate of return. Selecting projects based solely on NPV might lead to the omission of projects with better financial viability but a lower NPV. Therefore, considering other decision rules is more appropriate in the presence of capital rationing.

Selecting the Project(s)with the Highest NPV(s)is Not the Correct Decision