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When a Firm Is in a Capital Rationing Situation, It

question 13

Essay

When a firm is in a capital rationing situation, it may be helpful for the firm to use the profitability index to prioritize which projects to take. Briefly describe how the profitability index may fail the firm in that situation.


Definitions:

No Money Down

A financing or purchase arrangement in which the buyer is not required to make any upfront payment at the time of purchase.

Weekly Payments

Regular payments made on a weekly basis, often used in terms of loan repayment schedules or employment salaries.

Stated Rate

The annual interest rate declared on a financial instrument, such as a bond, without accounting for compounding within the year.

Rate Of Return

The accrual or diminishment of value in an investment over a specific epoch, visualized as a percentage of the investment’s inaugural cost.

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