CAF-7 · Chapter 13 · Question 5 of 15
When capital is strictly limited at Time 0, a company cannot undertake all projects with a positive NPV. To maximize shareholder wealth across divisible projects, the company should rank the projects based on their:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Profitability Index (PI)
Explanation
Under single-period capital rationing, if projects are divisible, the optimal way to allocate limited funds is to rank projects by their Profitability Index (NPV divided by Initial Investment). This identifies the projects that generate the most value per rupee invested.
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