CAPITAL RATIONING

                                                                      CAPITAL RATIONING

CAPITAL: - Resource that use by an enterprise to start its initial operation.

RATIONING: - system of allocation when resources are limited.

                                  

                      Capital rationing is a system of allocation of limited capital to most profitable project. This type situation will be raised when more than one profitable project is available in hand with limited resources. So it is necessary to ranking the project according to their NPV.

                     

                      Every business organization carries out their activities for maximizing the shareholders wealth. So to maximize the shareholder wealth management with limited resources select the project which provides maximum return. In such a situation capital rationing helps the organization for ranking available projects in according to their profitability     

                

                  Capital rationing technique uses two or more capital budgeting technique. Among all NPV and IRR is most popular technique for ranking the project. Preference should be given to independent projects. Projects are to be ranked in order to higher NPV. Where there is multi-period capital rationing linear programming technique should be used to maximize NPV.