Question

With capital rationing, alternative proposals are initially screened by establishing minimum standards and applying which of the following methods? A. Cash payback and net present value methods B. Net present value and internal rate of return methods C. Cash payback and average rate of return methods D. Net present value and average rate of return methods

Answer 1

Answer: OPTION C

Explanation The answer to this question is cash payback and average rate of return method.

Capital rationing is the method used by companies to effectively allocate the limited funds a company has on alternative funds.

Under payback period method the company evaluates how much time will it take a project to recover its initial cost and as per average rate of return method the company evaluates the return generated from the net income, it does not take into consideration the time value of money.