Question

What is the optimal allocation of the budget? How do you determine what’s optimal? Why is the profitability index particularly helpful?

Answer 1

Optimum allocation of the budget will refer to the budgeting of overall capital and income of the business in the proper Assets and income generating securities which will help the organisation in order to maximize the overall rate of revenues so optimal allocation of budget will always be about optimal allocation of resources into all such securities which will help in generating a higher rate of return for the businesses.

Determination of optimal can be done through capital rationing and these capital rationing method will include various types of net present value along with internal rate of return and payback period method along with discounted payback period method and equivalent annual annuity method which will a certain about the profitability of the project given under Limited capital scenario.

Profitability index is particularly helpful because profitability index will determine all such products which are having a higher net present value then total outflows and it will also reflect all such projects which are having a profitability index above 1, will be easily accepted so that determination criteria is quite easy in respect to other projects and it will help in selection of best project available.