Corporate Finance - use of PI in capital rationing

CFA Level II
#1

I am still in a dilemma, choosing between NPV and PI in a capital rationing situation.

Need help with example. Anyone?

#2

If I remember correctly, looking at a project’s PI is superior to just NPV when you’re dealing with a limited budget. I.e., An unlimited budget means you take anything with a positive NPV. If the budget is limited, you want to pick the those projects with the highest PI.

#3

Hi,

I am not sure you are supposed to choose between the 2. The goal under capital rationing is to choose all the projects that will maximise the total NPV with a constraint of limited capital. To get the best decision regarding this objective you have to process a trial and error method and the PI helps to maximise the total NPV with capital constraint.