The correct answer is D. All of the above.
Internal Rate of Return (IRR) is a measure of a project’s profitability. It is the rate of return that a project is expected to earn on its invested capital. The IRR is calculated by finding the discount rate that makes the present value of the project’s cash inflows equal to the present value of its cash outflows.
Profitability Index (PI) is a measure of a project’s profitability relative to its investment. It is calculated by dividing the project’s present value of cash inflows by its initial investment. The PI is a useful tool for comparing projects with different sizes and investment requirements.
Feasibility Set Approach is a method for selecting projects that are feasible given the project’s constraints. The constraints can include financial, technical, and environmental factors. The Feasibility Set Approach is a useful tool for ensuring that projects are selected that are likely to be successful.
However, all of these methods may not give the optimum result in case of the indivisible projects. Indivisible projects are projects that cannot be divided into smaller parts. For example, a project to build a new factory cannot be divided into two smaller projects to build two smaller factories.
In case of indivisible projects, the IRR, PI, and Feasibility Set Approach may not give the optimum result because they do not take into account the opportunity cost of the project. The opportunity cost of a project is the value of the best alternative that is forgone by choosing the project.
For example, suppose a company has the opportunity to invest in two projects, Project A and Project B. Project A has an IRR of 10% and a PI of 1.2. Project B has an IRR of 12% and a PI of 1.3. The Feasibility Set Approach would select Project B because it has the higher IRR. However, Project A may be the better choice if the opportunity cost of Project B is high. For example, suppose the company has a limited amount of capital and Project B requires more capital than Project A. In this case, the company may choose Project A even though it has a lower IRR and PI than Project B.
Therefore, in case of the indivisible projects, the IRR, PI, and Feasibility Set Approach may not give the optimum result. The decision maker should consider the opportunity cost of the project when making a decision.