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Selecting the project(s) with the highest NPV(s) is not the correct decision rule when: Multiple Choice...

Selecting the project(s) with the highest NPV(s) is not the correct decision rule when: Multiple Choice

a. there is capital rationing.

b. there are mutually exclusive projects.

c. projects are long-lived.

d. projects are independent.

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Answer #1

Answer: Option "a" is correct.

In case of capital rationing there are restrictions on the capital that can be invested on new projects undertaken by a firm. This is due to limited availability of capital that can be invested. If a firm selects a project with highest NPV and higher required investment, then it might have to quit the project in between due to lesser availability of funds leading to huge loss.

Mutually exclusive projects are the set of projects out of which only one project can be accepted. Project with highest NPV should be accepted.
In case of long lived projects, the projects with highest NPV are accepted.
In case of independent projects, all the projects that meet the criteria of capital budgeting can be accepted. Projects with highest NPV are accepted.

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