General Studies · Capital Budgeting and Capital Rationing
In the context of asset replacement decisions and capital rationing, which of the following statements is true?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1If an investment project has 'non-conventional' cash flows, the Internal Rate of Return (IRR) method will always produce exactly two distinct positive interest rates where the NPV is zero.
- 2When capital is rationed in a single period and projects are indivisible, they should be ranked strictly using the Profitability Index (PI) to ensure the maximum NPV.
- 3Hard capital rationing is primarily driven by internal management decisions to limit growth or avoid the dilution of earnings per share.
- 4The Equivalent Annual Cost (EAC) method assumes that the asset being replaced will be succeeded by an identical asset with the same cost and performance characteristics in perpetuity.✓
Correct answer
The Equivalent Annual Cost (EAC) method assumes that the asset being replaced will be succeeded by an identical asset with the same cost and performance characteristics in perpetuity.
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