Question

2. Provide one reason for foregoing value-added projects under capital rationing.

Answer 1

What is capital rationing capital rationing is a common practice in most of the companies as they have more profitable projects available for investment as compared to Capital available in theory there is no place for capital rationing as company should invest in all profitable projects have ever a majority of companies follow capital rationing as a way to isolate and pick up the best projects under the existing capital restrictions. Hence capital rationing is a process of putting restrictions on the project that can be undertaken by the company or the capital that can be invested by the company this AIIMS in choosing only the most profitable investment for the capital investment decision this can be accomplished by putting restrictive limits on the budget of selecting a higher cost of capital as the hurdle rate for all the projects under consideration. Value added project means the difference between the price of the product or service and the cost of producing it the price is determined by what customers are willing to pay based on the perceived value value is added and created in different ways. The particular reason of foregoing value added projects under capital rationing is that capital rationing introduces a sense of strict budgeting for corporate resources whenever there is an injunction of capital in the form of more borrowings or stock insurance capital the resources are properly handle an investment profitable projects capital rationing is very prevalent situation in Companies it prevents wastage of resources by not investing each and every new project available for investment capital rationing ensures that less number of projects are selected for imposing capital restrictions this helps in keeping the number of active projects to minimum and does Manish Temple through capital rationing companies invest only in projects where the expected return is Hai does eliminating projects with lower returns and capital it also provides more stability as the company is not investing in every project the finances are not overextended this helps in having adequate finance for tough times and ensures more stability and increase in the stock price of the company.