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The Profitability Index And Capital Rationing

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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.

A) True
B) False

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Solution Summary

This solution discusses the relative utility of the Profitability Index versus other methods under the constraints of capital rationing.

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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 ...

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