Capital Rationing
The availability of funds effects the capital budgeting decisions. The amount of funds available for capital expenditures will be either limited or unlimited. Funds would be considered unlimited when a firm is willing to acquire, through borrowing or equity, any amount of capital as long as the return on the investment is higher than the cost of the funds. When the funds that a firm will make available for capital investment are limited, and the firm has more opportunities for profitable investments than the limited funds can cover, the condition is described as capital rationing.
Your assignment is to focus on the following:
- Describe how capital-budgeting decision criteria would be different in a capital-rationing situation than in a situation in which capital rationing was not necessary, and explain the reasons for the difference in criteria.
- Describe the discounted-cash flow technique or techniques you would recommend in a capital-rationing situation and explain your reasons for your recommendation.
Write your response as a one-page memo.