The profitability index is useful in a capital rationing situation because
A) it helps identify projects by the amount of value created per dollar invested.
B) if followed, then it is only necessary to take the projects with the highest PI first.
C) it will rank the best project to be taken in an absolute manner.
D) none of the above.

Question

Quizplus · Accepted Answer

The profitability index measures the amount of value created per dollar invested, making it useful in a capital rationing situation where there are limited funds available for investment. By calculating the PI for each project, the company can prioritize those with the highest PI, ensuring that they are maximizing value for their investment. However, the PI does not rank projects in an absolute manner, as its usefulness is dependent on the specific situation and investment criteria.

The Profitability Index Is Useful in a Capital Rationing Situation