capital rationing

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The situation that arises when managers have insufficient money to invest in all projects with a positive net present value. The term soft capital rationing is used of situations in which a company sets its own limits on the amount of money available for investment in projects; if there are external constraints on money available for investments, the term hard capital rationing is used. Whenever capital rationing exists, managers need to rank potential investments so that net present value can be maximised (see profitability index).

Subjects: Economics.

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