ExpertMedium1 markMultiple Choice
CPA · Question 42 · Area 1: Business Analysis
In a 'Hard' capital rationing situation, a company should select the combination of projects that:
In a 'Hard' capital rationing situation, a company should select the combination of projects that:
Answer options:
A.
Maximizes the total Internal Rate of Return (IRR).
B.
Has the shortest Payback Period.
C.
Maximizes the total Net Present Value (NPV) within the budget constraint.
D.
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
C
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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