Capital rationing
Under capital rationing, the objective is to select the feasible investment programme that creates the greatest total NPV within the funding limit. Hard rationing arises from external financing constraints; soft rationing is imposed internally. In a single-period problem, independently divisible projects may be ranked by NPV per unit of the scarce initial funds, provided proportional returns and other assumptions hold. Indivisible projects require comparison of feasible combinations. Dependencies, mutual exclusivity, multiple resource constraints or restrictions in later periods can invalidate simple rankings and require a more suitable optimisation approach.
Worked example
The budget is $100,000. Project A costs $70,000 and creates NPV $20,000; B costs $50,000 with NPV $16,000; C costs $50,000 with NPV $15,000. If all are indivisible and independent, B + C uses the budget and creates $31,000, exceeding A alone.
Common mistake
Selecting the individually highest-NPV project without checking whether another feasible combination creates more total value.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |