Analyze the impact of capital rationing on project selection when using NPV and IRR methods.
Understand the Problem
The question is discussing capital rationing and its effect on project selection using the NPV (Net Present Value) and IRR (Internal Rate of Return) methods. It is looking for an analysis of how capital rationing influences the decision-making process in this context.
Answer
B. Capital rationing may lead to the rejection of high IRR projects if NPV is low.
The final answer is B. Capital rationing may lead to the rejection of high IRR projects if NPV is low.
Answer for screen readers
The final answer is B. Capital rationing may lead to the rejection of high IRR projects if NPV is low.
More Information
Capital rationing limits available funds which can result in the rejection of projects that have high IRR but don't meet the desired NPV. NPV directly measures value addition and is usually preferred when resources are limited, even if IRR is high.
Tips
A common mistake is assuming high IRR always indicates project acceptance. Ensure to consider NPV, particularly under capital constraints.
