Chapter 6

Capital Rationing

Previously, it was implicitly assumed that if a project received a positive evaluation, funds would be available for the investment to proceed. However, capital rationing refers to the situation in which capital (finance) is limited to the extent that it is not feasible to invest in all projects deemed acceptable. In such circumstances, the decision maker is faced with allocating a limited amount of capital, thereby necessitating a choice between competing projects. The assumption is generally made that the capital constraint is a short-term phenomenon (one period), perhaps arising as a consequence of the time required to raise external finance.

The capital constraint may be imposed internally by managerial decisions ...

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