Skip to content

CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Under capital rationing with divisible independent projects, which ranking criterion best selects projects to maximise total NPV from a limited budget?

Projects should be ranked by profitability index, meaning NPV per rupee of outlay, and accepted in that order until the budget is exhausted. This allocates scarce funds to the most productive uses and maximises total NPV when projects are divisible and independent.

  1. AHighest absolute NPV first
  2. BHighest IRR first regardless of size
  3. CHighest profitability index (NPV per rupee of outlay) firstCorrect
  4. DShortest payback period first

Explanation

With divisible projects and a single-period budget limit, ranking by profitability index allocates each rupee to its most productive use, maximising total NPV. Ranking by absolute NPV favours large projects that consume the budget inefficiently. IRR and payback ignore this per-rupee measure of value.

Did you get it right without looking?

One question tells you little. A timed set on Project Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Project EvaluationFree diagnostic mock

More Project Evaluation questions