est: Mulupic stion: 4 pts 13 of 23 (20 com are limited to b. What there with cap

Question

est: Mulupic stion: 4 pts 13 of 23 (20 com are limited to b. What there with capital r the O A. Projects C and D B. O c. Projects D and G Projects C and F TOF OD. Projects D, F and A is greater it is thus not an optimal strategy st of Ca is the above O E. Projects C, D and G and rationing may force the firm to reject projocts with positive net present values. (I O Data Table or false t of capital st of new False. COST $4,000,000 2,000,000 6,000,000 5,000,000 2,000,000 6,000,000 3,000,000 PROJECT True. 1.07 1.33 1.32 1.18 1.23 1.12 gly Com (Click on the icon located on the 7 Click to Print Done

Explanation / Answer

a. The answer is option "A" - Projects C and D.

This is because C and D have the maximum PIs of 1.33 and 1.32 among all the seven projects. Also the total outlay = 6,000,000+5,000,000 = $11,000,000. This does not exceed the budget of $11 million.

b. The answer is "TRUE".

This is because in this case capital rationing is acting as a constraint and so the firm cannot invest in all the projects due to its limited budget. This leads to rejection of projects A,B,E,F and G even though their profitability index >1 (meaning that they have a positive NPV)

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