Question

Which of the following statements is correct? a) capital rationing occurs when a company chooses to...

Which of the following statements is correct?

a) capital rationing occurs when a company chooses to fund all positive NPV projects

b) A company typically sets no limit on the total amount of capital expenditures that it will make in the upcoming year.

c) a decreasing marginal cost of capital can occur when there is not enough internally generated cash for a firm to fund all of its positive NPV projects.

d) The equivalent annual annuity method is used to find the equivalent annual annuity for two projects with unequal lives.

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Answer #1

Equivalent annual annuity method is used to find the equal annual annuity for two project with unequal lives so this method is used to compare two projects which are mutually exclusive in nature and they are having different cash flows and different life span so they will be evaluated using equivalent annual annuity method and the best project is selected.

Other options are not true because capital reasoning is not about all projects and company will be setting limit on the capital expenditure and statement about decreasing marginal cost of capital is not true.

Correct answer will be option (D)the equivalent annual annuity method is used to find the equivalent annual annuity for two projects with unequal life.

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