Final answer:
Comparing Project A and Project B under capital rationing, Project A has a shorter payback period, but Project B has slightly higher NPV, Profitability Index, and IRR. If long-term profitability is prioritized and a longer payback period is acceptable, Project B is the better option. However, if immediate returns are prioritized, Project A might be preferred.
Step-by-step explanation:
To make a decision on which project to choose in accordance with the capital rationing concept, we need to compare the given financial metrics of Project A and Project B. Capital rationing implies that there is a limit to the amount of capital investment that a company can undertake, so we need to select the project which would provide the best returns within the capital budget.
Looking at the data presented, Project A has a shorter payback period of 3 years compared to 5 years for Project B. This could be preferred if liquidity and shorter-term returns are prioritized. However, Project B has a slightly higher Net Present Value (NPV) of RM41632 compared to RM40639 for Project A, indicating that Project B may generate more value over its lifetime. Additionally, Project B's Profitability Index is marginally higher at 1.38 compared to 1.37 for Project A, and the Internal Rate of Return (IRR) for Project B is 23.921%, which is higher than the 21.614% of Project A. This suggests that Project B has the potential to generate higher returns for each unit of capital invested.
Given these considerations, if the company values long-term profitability and can afford a longer payback period, Project B may be the better choice. If the company has a shorter investment horizon and values quick return of capital, then Project A might be preferred. Ultimately, the decision also depends on the company's capital constraints, risk tolerance, and investment strategy.