When evaluating multiple investment options, which measure helps in capital rationing?

When evaluating multiple investment options, which measure helps in capital rationing?

• A. Payback Period
• B. Net Present Value
• C. Benefit/Cost Ratio
• D. Internal Rate of Return

Answer: (C)

The Benefit/Cost Ratio is a particularly useful measure in capital rationing because it helps decision-makers assess the relative profitability of different investment options based on the benefits they yield compared to their costs. In situations where capital is limited and only a portion of projects can be funded, this ratio becomes crucial for prioritizing investments. The Benefit/Cost Ratio provides a straightforward way to compare projects: a ratio greater than 1 indicates that the benefits outweigh the costs, making the project a viable option. By ranking projects according to their Benefit/Cost Ratios, organizations can allocate limited resources efficiently to those investments that promise the highest return in relation to their costs. This rationalization is essential for capital rationing since it helps in maximizing the overall value derived from the investment portfolio under the constraint of available capital.

The Benefit/Cost Ratio is a particularly useful measure in capital rationing because it helps decision-makers assess the relative profitability of different investment options based on the benefits they yield compared to their costs. In situations where capital is limited and only a portion of projects can be funded, this ratio becomes crucial for prioritizing investments.

The Benefit/Cost Ratio provides a straightforward way to compare projects: a ratio greater than 1 indicates that the benefits outweigh the costs, making the project a viable option. By ranking projects according to their Benefit/Cost Ratios, organizations can allocate limited resources efficiently to those investments that promise the highest return in relation to their costs. This rationalization is essential for capital rationing since it helps in maximizing the overall value derived from the investment portfolio under the constraint of available capital.