Introduction of Capital Rationing and Risk Factor in Capital Budgeting Assignment Help
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An overview of Introduction of Capital Rationing and Risk Factor in Capital Budgeting-
When a firm or a company makes a formal move to process the acquisitions and its investments of its capital is said to be as capital budgeting. It is a process where different projects are evaluated and amount for every project is decided. It is a decision that a firm or a company needs to take where they can stipulate the amount they can spend on current assets for its replacements, additions, modifications, disposition of all the fixed assets. It is basically a long term planning that a body needs to make to run the company smoothly.
Capital rationing and risk factors are both considered while formulating capital budget of a company.
Capital rationing: It is the act of making boundaries on taking up new investments and projects by compelling higher cost of capital for its investments. It has more two parts:
Risk factors: It is an important part in capital budgeting as the firm needs to decide what projects to take to have the minimum amount of risk’s as then the company will be able to survive as well as to run its business properly. Otherwise there is a chance the company may go bankrupt as the liabilities will become more than expected. It is a factor that a firm will never avoid during capital budgeting.
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