SuBJECT: COMMERCE Ctass: B. Com./ M. Com. YEAR: III/ I] SEMESTER NAME OF PAPER: BUSINESS FINANCE/ FINANCIAL MANAGEMENT ‘TOPIC: FINANCIAL MANAGEMENT ‘SUB TOPIC: INVESTMENT EVALUATION CRITERIA KEY Worbs: CAPITAL RATIONING | Prof. K. S. Jaiswal Head Department of Commerce FormerDean & Director Faculty of Commerce & Management Studies Mahatma Gandhi Kashi Vidyapith, Varanasi- 02 Email: ksjaiswal@mgkvp.acin Scanned with CamScanner=: Declaration = The content is exclusively meant for academic purposes and for enhancing teaching and leaming. Any other use for economic / commercial purpose is strictly prohibited. The users of the content shall not distribute, disseminate or share it with anyone else and its use is restricted to advancement of individual knowledge. The information provided in this e-content Is authentic and best as per knowledge. --Prof. K. S. Jaiswal Scanned with CamScannerCAPITAL RATIONING ute Teturn. Ines enterprises do not Bive unlimited funds, they cannot accept all projects which are expected to imerease the present value, depending upon the availability of funds. ‘The top management of the firm fixes the limit of its capital expenditure budget. Firms may limit thei capital budgets for keeping their growth within a limit or they may prefer safety and control as Against profit. Duc to fixed capital expenditure budget, the firm must ration the available funds to select the Projects in a manner as to maximise its long-term retums. A cut-off point is determined for this purpose which refers to the minimum acceptable Rate of Return or Payback Penod below which a Project will be rejected. It is determined in view of the number of projects, objectives of the firm and the availability of funds to finance the projects. estment_ f mount of finance than is avai e wilh {Oc fire Western and Capital Rationing as “a situation where 2 i of capital investment during a particular ion_of a_combinatio Brigham defined is placed on the total size led”. It i Scanned with CamScannerCapital Budgeting 369 tanked first and the project with the minimum acceptable rate_of return is jects are ranked in the descending order of the . These projects are exclusive of those projects which are adopted e of their urgency or legal requirements, Scanned with CamScannerdemand for them far exceeds their availability. It is for this reason that the firm cannot take up all the Drojects though profitable, and! has to select the combination of proposals that will yield the greatest Scanned with CamScannerioning and select the most profitable combination of projects within 5 al inp i 4 cash outlay o! ject No. 5 which has the lowest profitabilit u 310 lacs. index among the profitable proposals cannot be taken. IWustration 41. S Ltd. has & a The following Amount (0 Profschiiny Index Im ass 120 Las In Las Which of the above investments should be undertaken? Assume that projects are indivisible and there ‘sno alternative use of ou kw Solut Ranking of Projects on the Basis of Profitability tndex and NPV Project Amount ProfitaNiligr | Cash Inflows | NetPrese=t ‘Rent on the ‘Rant ofthe as Index (PL) | o VeleeNPI) | Bassef P| Sascof NPY T | 7 | | | 7 v 3.00.00 OO Oy) 2 1,50,000 VASO 7 3 3.50,000 ARNO a) 4 450,00 531,000 SLON s 2,00,000 24000 240 6 400,000 ARLOND ROO unter os 3 ive net present Valve seu} in project 2 because = irstnasibie and there is 1S will remain ununlisal, use of the money allocated © ' (a) On the basis of ranking om net present value TONE S Lad may unertake prgects 4 aad which will fully: utilise the Kadget anal ge BT present vals of 1.9000 . EXPY wethod and invest i) Thus, the company is advised t0 10 i) On the basis of ranking on profitability index met get of Scanned with CamScannerCapital budgeting techniques suffer from the following ee (1) Alll the technaques of capital budgeting prename that variow invexment proponais ene considerabon are mutually exclusive which may not practically be trae i@ some particu stances techniques of capital budgeting require estimation of future cash inflows aad oxfion, The future is always uncertain and the data collected for funre may not be cu Obniously the results based upon wrong dsta my not be good (3) There are certain factors like morale of the exployces, pooctenll of the firm, etc. stich cannot be correctly quantified but which other aise sabstastully inflamce the capt decision, (4) Urgency is another limitation in the evalaation of capital investment decisions. to the of capstal budgeting Uncertainty and mak ‘Scanned with CamScannerExercise ™ Short Answer Questions 1. Whatis Capital Rationing? 2. What do you mean by Rationing? = Long Answer Questions / 1. Describe the significance of capital Rationing. 2.What are the advantages of capital Rationing Scanned with CamScannerReferences 1.Khan and Jain, “Financial Management” (Tata McGraw Hill, 7th Ed.) 2. Pandey, |. M., “Financial Management” (Vikas, 11th Ed.) 3.William Hakka Bettner Carcello- “Financial and Management Accounting” (TMH-1éth Ed.) 4, Sheebakapil, "Fundamental of financial management” (Wiley,2015) 5. Chandra, na, "Fundamentals offinancial Management” (TMH, 9th Ed.) 6. Bark Demazo Thampy." Financial Management" (Pearson,2nd Ed.) 7. Rustagi,R P., “Financial Management" (Galgotia, 2000, 2nd revised ed.) 8. Damodaran, A., “Applied Corporate Finance”, 3rd Edition, Wiley, 2012 9/Ravi. M Kishore, “Financial Management” (Taxman, 7th Ed) (0.Brigham & Houston, “Fundamentalsto Financial Management”, 14/e ,Cenaage Learning 11. Kumar, Arun & Sharma, Rachna, “Financial Management-Theory and Practice" Aflantic Publishers and Distrubuters, New Delhi, Edition 2001 Gupta,S.k,, Sharma, R.K., Gupta, N., “Financial Management - Theory and Practice” Kalyani, ublishers, New Delhi, Edition2018 Gupta, 5. Sharma, F.C., “Business Finance” SBPD, Agra, Edition2019 a, R. S., Financial Management, SBPD, Agra, E Kulsharesht Scanned with CamScannerScanned with CamScanner