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My question is in capital raitioning part,specifically for divisible projects. How is the calculation done for limited capital for the last project to be invested on ??Simply, how is the limited capital apportioned for last project ??
We invest in projects in full as much as we can (choosing them in order of the NPV per $).
When we find that there is not enough capital to invest in a project in full, then we invest as much as we can in that project.
For example, suppose we have $10,000 available in total.
We decide to invest in Project A first which needs $4,000. No problem – we do A in full and have $6,000 left.
Suppose the next best is Project B which needs $5,000. No problem – we do B in full as well, and now have $1,000 left.
Suppose the next best is Project C which need $4,000. We only have $1,000 capital available and so we will invest in 1/4 (25%) of Project C ($1,000 out of a total of $4,000).If you have not watched it already, then my lecture on here about Capital Rationing might help you.
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