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Chapter 26: Q3RQ (page 1463)

What is capital rationing?

Short Answer

Expert verified

Method of awarding capital in most profitable way among the different project is called capital rationing.

Step by step solution

01

Meaning of Capital rationing

Capital rationing may be a well-thought-out approach utilized by businesses to confine the number of projectsthey take on at any given moment, permitting proprietors and administration to aim for strong and profitable activities, permitting them to produce superior benefits inside a restricted capital budget.

02

Explaining the capital rationing

The practice of assessing and selecting among potential capital projects depending on the accessibility of cash is known as capital rationing. Capital rationing happens when a company's cash accessible to spend on long-term resources is confined. Managers must choose whether and when to create certain capital investments.

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Most popular questions from this chapter

S26-6 Using the ARR method to make capital investment decisions Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Calculate the ARR. Round to two decimal places.

How is ARR calculated?

Using ARR to make capital investment decisions Refer to the Henry Hardware information in Exercise E26-20. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.

Henry Hardware is adding a new product line that will require an investment of \(1,512,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of \)310,000 the first year, \(270,000 the second year, and \)240,000 each year thereafter for eight years.

Explain the difference between capital assets, capital investments, and capital budgeting.

Using IRR to make capital investment decisions

Refer to the data regarding Hawkins Products in Exercise E26-25. Compute the IRR of each project, and use this information to identify the better investment.
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