A Firm That Faces Capital Rationing Must Select a Subset

question 202

Multiple Choice

A firm that faces capital rationing must select a subset of capital projects based on some ranking criterion. The capital budgeting technique best suited for this is the __________.

• A) NPV
• B) IRR
• C) PI
• D) AAR
• E) payback

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Definitions:

Capital Investment Proposals

Proposals for spending on large, long-term purchases aimed at gaining or maintaining competitive advantage.

Present Value Concepts

Concepts that recognize that cash to be received (or paid) in the future is not the equivalent of the same amount of money received at an earlier date.

Net Cash Flows

The difference between cash inflows and cash outflows in a given period, reflecting the liquidity of a business.

Equal Cash Flows

Consistent payments or receipts over a period of time in an investment or finance context.