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ACCA Applied Skills · Financial Management · Specific investment decisions (lease or buy, asset replacement, capital rationing)

Which statement about capital rationing across more than one period is correct?

Linear programming can be used when capital is limited in several periods, because it handles a constraint for each period. Profitability index ranking works only for a single-period limit, so it is not always sufficient when more than one period is rationed.

  1. ARanking projects by profitability index is always sufficient to find the optimal plan
  2. BLinear programming can be used to select projects when capital is limited in several periodsCorrect
  3. CProjects must be indivisible for linear programming to give a valid solution
  4. DCapital rationing in multiple periods means the NPV rule should be abandoned in favour of payback

Explanation

With limits in more than one period, ranking by profitability index (which suits a single-period limit) may not give the optimum, so linear programming is used with a constraint for each period. Divisible projects are the usual assumption for the basic LP approach, which makes option C wrong, and the aim remains maximising NPV.

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