Question

Project A	Project B	Project C	Project D
Initial investment	$200,000	$250,000	$300,000	$90,000
PV of cash inflows	$285,000	$295,000	$420,000	$94,000
Payback period (years)	7.2	6.0	9.5	2.0
NPV of project	$85,000	$45,000	$120,000	$4,000
Profitability index	1.43	1.18	1.40	1.04

Under conditions of capital rationing, which project would be least favored?

Answer 1

Answer:-If there is a capital rationing profitability index used to rank the project because profitability index also known as benefit cost ratio or desirability factor calculate as present value of cash flow divided by present value of initial investment. Profitability index shows the benefit per rupee of funds invested it is best creitria in a situation of capital rationing i.e limited funds available.

Project have Higher profitability index should be chosen first on priority therefore projectD having least profitability index have least favored.