Under capital rationing, selecting projects according to their Profitability Index (PI) ranking until the budget cap is met will generate a higher NPV than any other ranking method.
In a capital rationing situation, a purchaser has a limited supply of capital to invest in profit-making projects. Therefore, the purchaser is seeking to obtain the greatest return per dollar risked. Measures such as internal ...
This solution discusses the relative utility of the Profitability Index versus other methods under the constraints of capital rationing.