Answer (D) is correct . Given unlimited funds, all projects with a net present value greater than zero should be invested in. Thus, it would be profitable to invest in any company where the rate of return is greater than the cost of capital.
Answer (A) is incorrect because Neither the accounting rate of return nor the earnings as a percent of sales is useful in capital budgeting. The accounting rate of return is accounting net income over the required investment; it ignores the time value of money. Earnings as a percent of sales ignores the amount of required investment.
Answer (B) is incorrect because The payback criterion for capital budgeting is not efficient or effective.
Answer (C) is incorrect because The problem states that there are unlimited capital funds but does not indicate what the cost of capital is. Accordingly, projects can only be invested in when the internal rate of return is greater than cost of capital, i.e., the net present value is greater than zero.
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