Single
Period Capital Rationing
Single
period Capital Rationing meaning the shortage of capital for one year only,
normally this year is the initial year e.i. Year 0. Single Period capital
rationing can be analyzed in term of divisible and non divisible project.
Single
Period Rationing for Non Divisible Projects
A
project which cannot be undertaken partially is known non divisible projects. For
example construction of a bridge is a non divisible project, one cannot
construct half bridge. Divisibility of project is normally decided by nature of
project or agreement of project.
Selection
of Non Divisible Projects
Selection
of non divisible project may be analyzed in the following stages or steps i.e.
NPV maximization objective, different combination analyses, selection of
maximum contributing combination.
a. NPV Maximization
NPV
maximization is the objective, and projects are to be selected on the bases of
these basic selection criteria. it is important to remember that NPV
maximization is basic principal for both divisible and non divisible projects .
b. Different Combination
Different
combination of projects are formed and analyzed in terms of total NPV
contribution by these projects and funds exhaustion by these projects.
c. Maximum Contributing Combination
Maximum
contributing combination is selected. It is important to remember that maximum
contributing combination must be within range or feasible i.e. funds are
available for undertaken theses projects.
Single Period Capital Rationing
Example
ABC
companies has option to undertake four project, which are divisible in nature,
and total Fund Available are 32 million . Suggest which of following projects
should be undertaken
Project
|
Finance Required
|
NPV
|
A
|
10
|
4
|
B
|
8
|
3
|
C
|
12
|
5
|
D
|
20
|
7
|
Solution
1.
Ranking
of Project
Project
|
Funds
|
NPV
|
A+B+C
|
10+8+12
= 32
|
4+3+5=
12
|
A+C+D
|
10+8+20=
40
|
Not
possible
|
A+D
|
10+20 = 30
|
4+7=
11
|
B+D
|
8+20 =28
|
3+7=
10
|
C+D
|
12+20 =32
|
5+7 =12
|