Capital Rationing

Capital Rationing is a situation in the business organization when a number of projects compete for a limited number of resources. In other words, “It is a situation when the organization is constrained by limited resources for a certain interval of time.”

At this time, the total capital investment cannot be increased at any point of time. To avoid such situations, Capital Budgeting Decisions should be taken care of.

Factors that influence Capital Budgeting Decisions:

Some of the factors those are crucial formaintaining proper balance. These factors are responsible for influencing the Capital Budgeting Decisions that include:

1. Future Earnings
2. Degree of Certainty

• Product Demand

1. Amount of Investment
2. Relative Importance of the Profit
3. Cost of Capital Projects

• Cost of Production
• Opportunity Cost

Risk Analysis of Capital Budgeting:

To keep the financial balance, some important techniques of Capital Budgeting Decisions include:

1. General Techniques:

1. Certainty Equivalent
2. Risk Adjusted Discount Rate

1. Quantitative Techniques:

1. Probability Assignment
2. Co-efficient of Variation

• Standard Deviation

1. Sensitivity Analysis
2. Decision Tree

Links of Previous Main Topic:-

• Introduction to financial management
• Introduction and types of dividend
• Concept of cost of capital
• Capitalization meaning
• Concepts of working capital
• Concept of capital expenditure

Links of Next Finance Topics:-

• Test question of capital budgeting
• Learning objectives and chapter outline
• Limitations of operations research
• Linear programming learning objectives and outline of chapter