Capital Rationing

question 24

Multiple Choice

Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 per cent for the cash flows, then what is the profitability index for the project?

• A) 0.11
• B) 0.90
• C) 1.11
• D) 1.90

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Definitions:

Forbear

To refrain from enforcing a right or claim, or to abstain from doing something.

Unilateral Contract

A contract in which one party makes a promise in exchange for the other party's performance, rather than a promise in return.

Prior Unenforceable Obligations

Refers to commitments or agreements that were not legally binding or couldn't be enforced due to certain conditions or deficiencies in their formation.

Consideration

Something of value (such as goods, services, money, or a promise) exchanged between parties in a contract.