Which of the following statements is true regarding the application of the NPV principle to multiple...

Which of the following statements is true regarding the application of the NPV principle to multiple projects under capital rationing?

		The project with the highest NPV will be selected.
		The project with the lowest NPV will be selected.
		All positive NPV projects should be accepted as long as the sum of the upfront costs exceed the capital budget.
		All positive NPV projects may not be accepted.

Expert Solution

As per the concept of capital rationing, in case of multiple projects having positive NPVs, the project that shall be selected will be those which have maximum positive NPV within the budget of the company.

So, the correct answer will be option of All positive NPV projects may not be accepted.

Option of The project with the highest NPV will be selected is incorrect since other projects having positive NPV's may also be selected

Option of The project with the lowest NPV will be selected is incorrect since projects all those projects which have positive NPV's may be selected as long as there cost falls within the capital budget of the company

Option of All positive NPV projects should be accepted as long as the sum of the upfront costs exceed the capital budget is incorrect since in capital rationing, the sum of the upfront cost shall not exceed the capital budget

Do ask in case of any doubts.

jeff jeffy answered 2 years ago

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