The following investment proposals are competing for selection. The Profitability Index (PI) of each of these proposals is also given: Project Initial Cash outlay (₹) PI A 25,000 1.13 B 35,000 1.11 C 40,000 1.15 D 30,000

Project Selection with Capital Rationing using Profitability Index (PI) Given: Budgeted Fund = ₹60,000 Project Details: Project Initial Cash Outlay (₹) PI Rank (by PI) Net Present Value (NPV) = Outlay × (PI - 1) C 40,000 1.15 1 40,000 × (1.15 - 1) = 6,000 A 25,000 1.13 2 25,000 × (1.13 - 1) = 3,250 B 35,000 1.11 3 35,000 × (1.11 - 1) = 3,850 D 30,000 1.08 4 30,000 × (1.08 - 1) = 2,400 Objective: Select the most profitable projects that completely utilize the available funds of ₹60,000. We will evaluate different combinations of projects, prioritizing those with higher PIs, to find the combination that maximizes total NPV within the budget. Possible Combinations: Project C only: Outlay = ₹40,000 Remaining Budget = ₹60,000 - ₹40,000 = ₹20,000 NPV = ₹6,000 Cannot fully utilize the budget with only C. Project C + Project A: Outlay = ₹40,000 (C) + ₹25,000 (A) = ₹65,000 This exceeds the budget of ₹60,000. So, this combination is not feasible. Project C + Project D: Outlay = ₹40,000 (C) + ₹30,000 (D) = ₹70,000 This exceeds the budget of ₹60,000. So, this combination is not feasible. Project A + Project B: Outlay = ₹25,000 (A) + ₹35,000 (B) = ₹60,000 This completely utilizes the budget. Total NPV = NPV(A) + NPV(B) = ₹3,250 + ₹3,850 = ₹7,100 Project A + Project D: Outlay = ₹25,000 (A) + ₹30,000 (D) = ₹55,000 Remaining Budget = ₹5,000 Total NPV = NPV(A) + NPV(D) = ₹3,250 + ₹2,400 = ₹5,650 Project B + Project D: Outlay = ₹35,000 (B) + ₹30,000 (D) = ₹65,000 This exceeds the budget of ₹60,000. So, this combination is not feasible. Comparison of Feasible Combinations: Combination (A + B): Outlay = ₹60,000, Total NPV = ₹7,100 Combination (A + D): Outlay = ₹55,000, Total NPV = ₹5,650 Combination (C only): Outlay = ₹40,000, Total NPV = ₹6,000 The combination of Project A and Project B yields the highest total NPV (₹7,100) and completely utilizes the available funds of ₹60,000. Conclusion: The management should select Project A and Project B as this combination is the most profitable and fully utilizes the budgeted funds.