“For most investment decisions that a firm faces, NPV is either

Question

“For most investment decisions that a firm faces, NPV is either a superior decision criterion, or is at least as good as the competing techniques.” In what investment situation is the profitability index better than the NPV?

25 Nov 2020

Answer :

Word Count : 958

Net Present Value (NPV) is generally regarded as the most reliable decision criterion for evaluating investment opportunities. It measures the difference between the present value of cash inflows and outflows associated with an investment. NPV is highly favored because it directly correlates with the value added to the firm. However, there are certain investment situations where the profitability index (PI) can be a better or more practical tool than NPV. The profitability index is a ratio of the present value of future cash inflows to the initial investment required. It is useful for comparing projects, especially when resources are limited.

The NPV approach is highly effective when there is no constraint on the available capital. If a firm can invest in all positive-NPV projects, the decision criterion is straightforward: choose the project with the highest NPV. However, in certain situations where resources are constrained, the profitability index offers distinct advantages over NPV. These situations include:

1. Capital Rationing:
Capital rationing occurs when a company has limited capital to invest in new projects. This may happen in scenarios where the company faces budget constraints, such as in a period of _________ _________ ________ _______ _________ __________ ______ ________ ____ _______ ___ ______.
__________ ___ ________ __________ _____.
_______ ____ __________ _________ ______ ____ ____ _______ _______ _____ ________ _____.
_____ ________ ______ _________ _______ __________ ___ _________.
______ ________ ________ __________ _____ ___ ____.
_________ _________ _____ ____ ________.
________ _______ ___ ______ ______ ___ __________ ___ ___ ______ _________.
___ ____ __________ _____ ____ ______ ________ _______ ____ ______.
____ ______ _____ _______ _______ ___ ____ ___ __________ ________.
_____ __________ ________ __________ ______ ______ _________.
________ _____ ____ __________ __________ _____ _______ _____.
___ _____ _____ ______ _______ _______ ______ _________ ____ __________ _______.
______ ____ _____ ________ ___.
_________ _________ _____ ________ ______ _______ _________ _____.
__________ _________ _______ ______ ____ ___ ________ _________ _____ ____.
_________ ________ ______ _______ _______ __________ _____ ________ ___ ______.
________ __________ ____ ____ ____ ________ ______ ________ _________.
____ ____ _______ ___ ___.
_________ ____ ______ __________ ________ __________ __________ ________.
____ _______ ____ _________ ___ ____ _______ ____ _________ __________ _______.
___ ____ _____ ____ ______ __________ ______.
_____ ________ _________ _______ ______ _______ _________ _____ _______ ____.
_______ __________ _____ ________ _____ ________ ______ _________ _________ ________ ________.
_______ ___ _________ ___ ____ __________ __________.
___ _____ ____ ______ _______ __________ ____ ________ _____ _________ __________.
_______ ______ __________ ____ _________ ___ __________.
_____ ________ ___ _________ _______ ___ _____ ______ _____ __________.
__________ ___ ___ __________ ______ _________.
______ __________ ___ _______ ____ ____.
_________ ________ ______ _________ _____ __________ _________ ______ ____ ____ _______.
____ __________ __________ ___ _____ ___ _________ ___ __________ _______ ____.
________ ______ _________ _________ ___ ___ _________ ______ ________ ________ __________.
____ __________ _________ _____ ___ ________ __________ _______ _________ ________ __________ ___.
_________ ____ ___ ________ __________ ________ _____ ________ ______ ______.
_______ __________ ___ ____ _________ ______ ______ _______ ____ _______ ________.
__________ _______ _______ _________ ____ ______ __________ ___ ________.
__________ ________ ______ __________ ____ __________ ______ ________.
__________ ______ ________ ____ ______ ________ ___ ___ _____.
_____ ____ ____ ___ _________ ___ ________.
__________ _____ _______ _________ _______ __________ _______ __________ ____ ___.
______ _________ _________ ____ _____ __________ _____ ______ _______ _________.
_________ __________ ________ _________ _____.
__________ _________ ____ _______ _____ ___ __________ _____ ______.
_____ _______ _________ __________ _________ _______ _________ ____ _________ ___ ____ ________.
_________ __________ __________ _______ _______ ______ _________ ___ ______ _____.
________ ______ ___ ______ ____ _______ ________ __________ __________ __________ _________ __________.
_____ ________ _____ ___ ____ _______ _______ _______.
_________ ________ _______ _____ ______ ______ _____ _____ __________ ________.
___ _____ ___ _________ _____ ____ _________ ________ ________.
______ ________ _____ ____ __________.
__________ __________ ______ __________ ___ ____.
__________ _____ ______ _______ __________ ________ ___ _________ ____ ________.
_________ _________ __________ ___ ____ ______ ________.
______ ______ ___ ________ _________ ___.
__________ __________ _____ ____ ____ ______ _________ ___ ____ __________ ____ _______.
_________ ________ _____ _________ ___ ___ _________ ____ ___ ______ __________ ___.
___ _____ ____ __________ _________ _____ ___ ________ __________ _______.
___ ____ __________ __________ ___ ____ ____.
_______ ____ _______ _______ _____ _____ ______ _____ ____.
__________ ______ ___ __________ ____ ________ ______ ________ __________ ____.
__________ ____ __________ ________ _______ __________ ________.
_____ ___ _________ _____ ________ ____ _________ ______ _____ ______.
_________ ______ __________ _________ __________ _______.
______ ______ ____ ________ ____ ____ ________ _____ ________.
______ _____ ______ ______ ___ ___ ________.
______ __________ _________ ____ ____ _____ ______ _____ ________ _______ _______ ____.
_______ __________ __________ _________ ____ _____ _________ _________ _____.
______ _______ _______ ____ ______ ________ _________ ___.
____ __________ ________ __________ _________.
________ ________ ____ _________ __________ ___ _______.
________ __________ _____ ___ ________ _______ ________ _______ __________ __________ ______.
__________ _________ ______ _____ ___ _________ ___ ________ _____ _________ ___ ______.
___ _______ ___ __________ __________ ___.
_____ _________ ________ ___ ______.
________ _________ _________ ___ _____ _____ ___ ____ ___ _____ ________.
___ ______ _________ ____ ______.
____ ________ __________ ___ _____ _________ ______ ____ _______ ____ ________ _______.
____ ___ _____ ___ _______ __________ _____ _________ ______ ___.
___ __________ ______ ___ ______ ___ _________.
___ ________ ______ ________ __________ ___ _________ _______.
________ ________ _____ _____ ________ ________.
__________ ____ ___ ________ ________.
______ ___ ______ ___ __________ ______.
_______ _________ ________ _____ ______ _______ ________ _______ _______.
__________ ______ ________ ________ ______.
________ ____ ______ _____ _____.
__________ _________ ___ ____ _________ ________ _______.
________ _________ _______ ____ ________ ___ _________ ____ ____.
________ __________ ___ _________ ________ _________ ____ _____ _______.
____ ____ __________ ____.
Get Full Answer on WhatsApp

IGNOU Solved Assignments Assignments Ignou Projects Project Previous Year Solved Exam Papers Notes Notes Sample Question Papers Sample Question Papers

IGNOU NEWS

Assignment Submission Last Date Extended Till 30 June 2026 Click Here★★★IGNOU June 2026 TEE Date Sheet Released Click Here★★★

Liabilities	2018 (Rs.)	2019 (Rs.)	Assets	2018 (Rs.)	2019 (Rs.)
Share	65,000	85,000	Goodwil	3,000	2,500
Capital	12,000	14,500	Buildings	52000	50,000
Reserves	8,600	9000	Plant	40,000	41,000
P. & L A/c		...	Stock	20,500	18,800
Bank loan	20,000		Debtors	41,000	36,200
(Long-term)	40,000	35,000	Cash	100	650
Creditors	11,000	7,500	Bank	...	1850
Bills
Payable
	1,56,600	1,51,000		1,56,600	1,51,000