6.1 CAPITAL RATIONING
6.1.1 Conditions of Capital Rationing
Capital rationing indicates a situation in which funds for investment in a project are limited. The situation of capital rationing normally arises when a firm is not able to raise funds for the investment even if it wants to do so. But there are cases when a firm intentionally creates a capital rationing situation. If this is the case, the firm raises the discount rate, as a result of which many marginally NPV-positive proposals move to the reject zone and the available capital is utilised for only a limited number of proposals. Such a practice is however, not very common. The common practice, on the other hand, is to limit the availability of funds for the chosen proposals so that only ...
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