Question

One can use the profitability index most usefully for which situation?

a. When capital rationing exists
b. Evaluation of exceptionally long-term projects
c. When a project has unusually high cash flow uncertainty
d. Evaluation of nonnormal projects

Answer 1

The profitability index is particularly useful when capital rationing exists, as it helps in selecting investment projects that offer the highest value per unit of investment.

Step-by-step explanation:

The profitability index can be most usefully applied in scenarios where capital rationing exists. The profitability index is particularly useful when capital rationing exists, as it helps in selecting investment projects that offer the highest value per unit of investment.

Capital rationing occurs when a company faces constraints on the funds available for investment projects, requiring them to select the most value-creating initiatives. Since profitability index measures the value created per unit of investment, it offers a means of comparing projects under these constraints to choose those that will maximize shareholder wealth.