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Noyon 1

The document discusses constraints that limit decision-making, particularly in project management and investment. It outlines the concepts of project dependence, capital rationing, and project indivisibility, explaining how projects can be economically independent or dependent and the implications of capital rationing on investment decisions. Additionally, it highlights the challenge of indivisibility in capital projects, necessitating careful comparison before acceptance or rejection.

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201839.ais
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7 views2 pages

Noyon 1

The document discusses constraints that limit decision-making, particularly in project management and investment. It outlines the concepts of project dependence, capital rationing, and project indivisibility, explaining how projects can be economically independent or dependent and the implications of capital rationing on investment decisions. Additionally, it highlights the challenge of indivisibility in capital projects, necessitating careful comparison before acceptance or rejection.

Uploaded by

201839.ais
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Constraints

A constraint is something that limits or controls what you can do.Their decision to abandon the
trip was made because of financial constraints.

For example,Lack of funding has been a major constraint on the building's design. They
demand freedom from constraint. They refuse to work under constraint any longer.

1.1 Project Dependance

Project a and b are economically independent if the acceptance or rejection of or does not
change the cash flow stream of the other or does not affect the acceptance or rejection of the
other. For example an investment in a power press and an investment in a computer installation
are economically independent. On the other hand project a and b are economically dependent if
the acceptance or rejection of an change or the cash flow stream of the other or effects the
acceptance or rejection of the other. The most conspicuous kind of economic dependency
occurs when projects are naturally exclusive. A second kind of economic dependency exist
when projects, even though not mutually exclusive, negatively influence each others cash flows
if they are accepted together. A third kind of economic dependency, which may be referred to as
positive economic dependency ,occurs when there is complementary between projects. If
undertaking a project influences the cash flows of another projects, that two projects are
complementary projects.

1.2 Capital Rationing

Capital rationing is a strategic approach where a company limits its investment in new projects
or ventures due to constraints in available capital or other factors like risk abortion or strategic
priorities.

Types of rationing

● Hard capital rationing: External factors, such as difficulty raising capital from the
market, make it difficult to fund all profitable projects. Companies are forced to choose
between projects the can't afford to fund.

● Soft capital rationing: This is delivered internal policy where the company said
limitation on investment based on wrist tolerance, internal funding limits, or other
strategic considerar

Capital rationing exists when funds available for investment or inadequate to undertake all
projects which are otherwise acceptable. Capital wish because of an internal limitation or an
external constraint. Internal capital rationing is caused by a decision taken by a management to
set a limit to its capital expenditure outlook or it may be caused by a choice of hurdle rate higher
than the cost of capital of the firm. Internal capital rationing, in either case, results in rejection of
some investment projects who is otherwise a acceptable. External capital rationing arrival out of
the inability of the farm to raise sufficient amounts of funds at a given cost of capital. In a perfect
market, a farm can obtain all its funds requirement at a given cost of capital.

1.3 Project Indivisibility

Capital projects are considered divisible, i.e., the capital project has to be accepted or rejected
in toto-a project cannot be accepted partially.
Given the individuality of capital projects and the existence of capital rationing, the need arises
for comprising projects. For example,a farm is evaluating three projects,A ,B and C, who is
involve an outlet of 5 million and 3 million respectively. The net present value of this project are
2 million, 1.5 million, 1 million respectively. The funds available to the farm for investment are 7
million. In this situation, acceptance of project A which yields any present value of 2 million
results in the rejection of projects B and Cwho is together would yield a combined net present
value of 2.5 million.Hence, because of the indivisibility of projects, there is a need for comparing
projects before the acceptance /rejection decision are taken.

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