joyline yegon
Apr 4
Discuss concept of capital rationing as use in capital budgeting?
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Apr 4
Capital rationing is a concept used in capital budgeting to allocate limited funds among various investment opportunities. It refers to the situation where a company has a limited amount of capital available for investment, and must prioritize and select the most profitable projects to invest in.
Capital rationing is typically used when a company does not have enough funds to invest in all of the potential projects that are available. In this case, the company must carefully evaluate and select the projects that will provide the highest return on investment and create the most value for the company.
There are several reasons why a company may face capital rationing, including limited access to external financing, internal budget constraints, or a desire to maintain a certain level of financial stability. In these situations, capital rationing helps companies make strategic decisions about where to allocate their limited resources in order to maximize profitability and achieve their financial goals.
When faced with capital rationing, companies must use various capital budgeting techniques, such as net present value (NPV), internal rate of return (IRR), and payback period, to evaluate and prioritize investment opportunities. By carefully analyzing the potential risks and returns of each project, companies can make informed decisions about where to allocate their limited capital in order to achieve the highest possible return on investment.
Overall, capital rationing is an important concept in capital budgeting that helps companies make strategic decisions about how to allocate their limited funds in order to maximize profitability and achieve their financial objectives.
Capital rationing is typically used when a company does not have enough funds to invest in all of the potential projects that are available. In this case, the company must carefully evaluate and select the projects that will provide the highest return on investment and create the most value for the company.
There are several reasons why a company may face capital rationing, including limited access to external financing, internal budget constraints, or a desire to maintain a certain level of financial stability. In these situations, capital rationing helps companies make strategic decisions about where to allocate their limited resources in order to maximize profitability and achieve their financial goals.
When faced with capital rationing, companies must use various capital budgeting techniques, such as net present value (NPV), internal rate of return (IRR), and payback period, to evaluate and prioritize investment opportunities. By carefully analyzing the potential risks and returns of each project, companies can make informed decisions about where to allocate their limited capital in order to achieve the highest possible return on investment.
Overall, capital rationing is an important concept in capital budgeting that helps companies make strategic decisions about how to allocate their limited funds in order to maximize profitability and achieve their financial objectives.
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