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(ix) Capital Rationing:
Capital rationing occurs any time when there is a budget ceiling or constraint on the amount of funds that can be invested during a specific period of time. Under this situation, a decision maker is compelled to reject some of the viable projects having positive NPV because of shortage of funds. Situations of capital rationing are as below:
(a) Projects are divisible and constraint is a single period one:
(i) Calculate the PI of each project.
(ii) Rank the projects on the basis of PI.
(iii) Choose the optimal combination of the project & calculate NPV of the optimal combination.
(b) Projects are indivisible and constraint is a single period one:
(i) Construct a table showing the feasible combinations (ranking based on NPVs) of the project that's aggregate of initial outlay does not exceed the funds available for investment.
(ii) Choose the combination whose aggregate NPV is maximum and consider it as the optimal project mix.iii)
(c) When constraint is multi-period one & projects are divisible:
Under such situation, optimum project mix can be worked out with the help of LP approach.
(d) When constraint is multi-period one & projects are indivisible:
(i) Construct a table showing the feasible combinations of the project that's aggregate of initial outlay & subsequent outlay do not exceed the funds available for investment in relevant periods.
(ii) Choose the combination whose aggregate NPV is maximum and consider it as the optimal project mix.
(iii) If any fund remains unutilized, alternative use of it may be worked out and P.V. of cash inflow generated by such fund may be taken into consideration to find out aggregate NPV of the decision. In the absence of specific information, NPV of alternative use shall be taken as NIL.