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 Divisible Projects
A
project which can be taken partially is known a divisible project. It is
important to remember that some project by nature is divisible. For example
construction of 100 houses is an example of divisible project. Selection of
project criteria is very simple i.e. maximum NPV from the selected projects.
Selection
of Divisible Projects
a. NPV per $ Spent
NPV
per unit of currency spent is calculated for each project i.e. NPV is divided
by the amount of investment required.
b. Project Ranked
Projects
are ranked in order of their NPV contribution i.e. highest NPV contributing
project would be undertaken in first place, then second highest contributing
project , and so on unless , all funds are exhausted.
c. Last Project
Last
Project is may be partially completed or undertaken; therefore NPV shall be
reduced accordingly, because projects are divisible in nature, therefore all
funds shall be exhausted.
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
|
Profitability
|
Ranking
|
|
A
|
4/10
= .4
|
2nd
|
|
B
|
3/8 =
.375
|
3rd
|
|
C
|
5/12 = .4167
|
Ist
|
|
D
|
7/20 = .35
|
Fourth
|
|
|
|
|
2.
Project
Selection
|
Project
|
Funds Allocated
|
NPV
|
Balance fund
|
|
C
|
12
|
5
|
20
|
|
A
|
10
|
4
|
10
|
|
B
|
8
|
3
|
2
|
|
D
10%
|
2
|
.7
|
0
|
|
Total
|
32
|
12.7
|
|
