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In capital rationing, the best project selection criterion is:
AHighest Profitability Index combined with budget constraints
BHighest NPV ignoring constraints
CLowest IRR
DShortest Payback
Answer & Solution
Correct answer: A. Highest Profitability Index combined with budget constraints
1. Capital rationing = limited capital budget.
2. Rank projects by PI (NPV per rupee invested) and pick the combination that maximises total NPV within the budget.
3. PI is the most useful ranking tool when capital is constrained.
_Source: ICAI BoS CA Inter Paper 6A, Ch 7 "Investment Decisions", §9 — PI_