Capital rationing is technique which is used with capital budgeting techniques. Capital rationing technique is used when company has limited fund for investing in profitable investment proposals. In other words Capital rationing is a strategy employed by companies to make investments based on the current relevant circumstances of the company.
Explanation of Capital Rationing With Simple Example
For example, Company fixes his priority to invest his money in more profitable projects. Suppose a company has $ 1 million dollar and after using the Profitability index technique of capital budgeting company found that three projects of $ 600000, $ 300000 and $ 400000 are profitable out of seven projects but if company has limited cash of $ 1 million only. With this money, company can use capital rationing technique. Under this technique, if company sees that First and third proposal’s profitability index is high than second, then they will select only two projects combination out of three projects. Read also second example of capital rationing.
Explanation of Capital Rationing With Simple Example
For example, Company fixes his priority to invest his money in more profitable projects. Suppose a company has $ 1 million dollar and after using the Profitability index technique of capital budgeting company found that three projects of $ 600000, $ 300000 and $ 400000 are profitable out of seven projects but if company has limited cash of $ 1 million only. With this money, company can use capital rationing technique. Under this technique, if company sees that First and third proposal’s profitability index is high than second, then they will select only two projects combination out of three projects. Read also second example of capital rationing.
