In a 'Hard' capital rationing situation, a company should select the combination of projects that:

Answer options:

Maximizes the total Internal Rate of Return (IRR).

Has the shortest Payback Period.

Maximizes the total Net Present Value (NPV) within the budget constraint.

Selects only projects with a Profitability Index > 2.0.

How to approach this question

Goal of firm = Maximize Wealth (NPV). Constraint = Budget. Solution = Maximize NPV within Budget.

Full Answer

C.Maximizes the total Net Present Value (NPV) within the budget constraint.✓ Correct

Under capital rationing, the firm cannot accept all positive NPV projects. It must choose the specific combination that yields the highest summed NPV without exceeding the budget.

Common mistakes

Ranking by IRR (which can be misleading for project scale).

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