alleryStart learning →Why is the PI method suited to situations of capital rationing?
AIt ignores the time value of money
BIt needs no discount rate at all
CIt always picks the largest project
DIt gives a ratio, not an absolute sum
Answer & Solution
Correct answer: D. It gives a ratio, not an absolute sum
Under a budget limit, projects must be compared per unit of money used, which a ratio does and an absolute NPV does not.
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Related questions
Which rule applies to a PI result of 1.092 for an independent project?Perpetual inflow of Rs 12,000 a year at 10 percent against an outlay of Rs 1,00,000 gives Which of these is a technique that ignores the time value of money?A project has NPV zero at 18 percent discount rate. What is its IRR?If IRR exceeds the cost of capital on a conventional project, what is NPV?Which discount rate is often used when discounting project cash flows in NPV?Why is NPV on after-interest cash flows wrong?What is a limitation of the NPV approach regarding non-financial matters?