1.5 Incorporating capital rationing in capital investment appraisal; Single period capital rationing with divisible projects; Multi-period capital rationing with divisible capital investments

Incorporating capital rationing in capital investment appraisal involves the consideration of limited availability of funds when evaluating and selecting investment projects. Capital rationing occurs when a company has a limited budget or capital constraint, and it must prioritize and allocate funds among competing investment opportunities.

There are several methods and techniques that can be used to incorporate capital rationing into capital investment appraisal:

1. Ranking and selection: Rank the investment projects based on their profitability or other relevant criteria. Then, select the projects that offer the highest return on investment within the available budget. This approach focuses on maximizing the overall value or profitability of the investment portfolio given the capital constraint.
2. Capital budgeting constraints: Set specific limits or thresholds on the amount of capital that can be allocated to different types of projects or investment categories. This ensures that the investment portfolio remains within the predefined budgetary limits.
3. Postponement or phasing: Instead of rejecting investment projects that cannot be fully funded due to capital rationing, consider postponing or phasing the projects. This allows for the allocation of funds over time as additional capital becomes available or as the financial position of the company improves.
4. Sensitivity analysis: Conduct sensitivity analysis on the investment projects to assess their flexibility and resilience to changes in capital allocation. Determine the projects that are more sensitive to capital constraints and prioritize those that are less affected.
5. Capital constraints as a criterion: Include the capital constraint itself as a criterion in the investment decision-making process. Assign weights to each project based on their alignment with the available budget, and consider this factor along with other evaluation criteria.