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

Expert Solution

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.

jeff jeffy answered 1 year ago

What is capital rationing? How capital budgeting projects are chosen when capital rationing exist? Explain.

If there is no capital rationing problem, which of the following mutually exclusive projects should be...

If there is no capital rationing problem, which of the following mutually exclusive projects should be accepted? Project A: NPV = $8,000; NINV = $55,000 Project B: NPV = $11,000; NINV = $110,500 Question options: Neither A nor B A B Both A and B D&D, Inc., plans to build a new toll way. The cost (NINV) of the project is expected to be $2.1 billion. Net cash inflows are expected to equal $351 million per year. How many years...

Ranking is an important consideration when projects are mutually exclusive or when capital rationing is necessary....

Ranking is an important consideration when projects are mutually exclusive or when capital rationing is necessary. When projects are mutually exclusive, ranking enables the firm to determine which project is best from a financial standpoint. When capital rationing is necessary, ranking projects will provide a logical starting point for determining what group of projects to accept. However, there are instances wherein Financial Managers are faced with conflicting rankings using NPV and IRR. It is difficult to choose one approach over...

Your company is evaluation 4 independent projects and is subject to capital rationing, detailed as follows:...

Your company is evaluation 4 independent projects and is subject to capital rationing, detailed as follows: Project Initial Outlay IRR NPV 1 2 million 18% 2,500,000 2 1 million 15% 950,000 3 1 million 10% 600,000 4 3 million 9% 2,000,000 If you must select projects subject to a budget constraint of 3 million dollars, which set of projects should be accepted so as to maximize firm value? 1 and 2 1 only 1, 2 and 3 1 and 4 2, 3 and 4

Discuss the reason why capital investment projects should be evaluated for risk in the present, and...

Discuss the reason why capital investment projects should be evaluated for risk in the present, and how risk might be involved in future planning and/or forecasting. Pick a typical healthcare project to evaluate and consider the risk factors involved in the situation. How could you determine what is most important and might be the most critical sources of risk? Based on what you find, how would management mitigate those risks?

With capital fixed at one unit with 1, 2, 3 units of labor added in equal...

With capital fixed at one unit with 1, 2, 3 units of labor added in equal successive units, production of the output increases from 300 (1 unit of labor), to 350 (2 units of labor) to 375 (3 units of labor). Which of the following is a correct interpretation? a. This is long run increasing returns to scale b. This is long run decreasing returns to scale c. This is long run constant returns to scale d. This is short...

list capital decisions methods and explain the criteria of accepting or rejecting capital projects under the...

list capital decisions methods and explain the criteria of accepting or rejecting capital projects under the net present value method .

Differentiate between implementing a value-added strategy and mapping it for sustainability. From the e-Activity, provide one...

Differentiate between implementing a value-added strategy and mapping it for sustainability. From the e-Activity, provide one example of a strategy and one environmental factor that management for this organization should consider when mapping the organization for sustainability.

The Capital Budgeting Projects She must choose one of the four capital budgeting projects listed below: ...

The Capital Budgeting Projects She must choose one of the four capital budgeting projects listed below: Table 1 t A B C D 0 (19,500,000) (21,000,000) (16,500,000) (18,000,000) 1 7,500,000 6,500,000 5,200,000 7,500,000 2 7,500,000 7,200,000 5,200,000 5,800,000 3 5,000,000 8,000,000 6,300,000 4,400,000 4 3,500,000 3,000,000 5,900,000 4,500,000 Risk Average Average High Low Table 1 shows the expected after-tax operating...

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital.

Expected Net Cash Flows Year Project T Project F 0 ($100,000) ($100,000) 1 75,000 40,000 2 65,000 42,000 3 — 44,000 4 — 46,000 The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital. a. What is each project’s initial NPV without replication? b. What is each project’s equivalent annual annuity? c. Suppose you replicate Project T so...

Question