Answer (C) is correct . The profitability index is another term for the excess present value index. It measures the ratio of the present value of future net cash inflows to the original investment. In organizations with unlimited capital funds, this index will produce no conflicts in the decision process. If capital rationing is necessary, the index will be an insufficient determinant. The capital available as well as the dollar amount of the net present value must both be considered.
Answer (A) is incorrect because Capital rationing is not a technique but rather a condition that characterizes capital budgeting when insufficient capital is available to finance all profitable investment opportunities.
Answer (B) is incorrect because The average rate of return method does not divide the future cash flows by the cost of the investment.
Answer (D) is incorrect because The accounting rate of return does not recognize the time value of money.
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