When a firm is faced with capital rationing, how can the profitability index (PI) be used to select the best projects? Why does choosing the projects with the highest PI not always lead to the best decision?
Answer to relevant QuestionsUnder what circumstance is the use of the equivalent annual cost (EAC) method to compare substitutable projects with different lives clearly more efficient computationally than using multiple investments over a common period ...For what kinds of investments does terminal value account for a substantial fraction of the total project NPV, and for what kinds of investments is terminal value relatively unimportant? Why must manager intuition be part of the investment- decision process regardless of a project NPV or IRR? Why is it helpful to think about real options when making an investment decision? Give a real- world example of an expansion option and an abandonment option. What are American Depositary Receipts (ADRs), and how are these created? Why do you think ADRs have proven to be so popular with U. S. investors?
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