Single period

In this lesson

1. 0:00 Capital rationing: Single and multiple periods
2. 0:23 What is capital rationing and why it matters
3. 0:52 Soft versus hard capital rationing explained
4. 2:01 Choosing between projects with limited funds
5. 3:10 Divisibility, indivisibility, and mutual exclusivity
6. 4:46 Using profitability index to rank projects
7. 5:53 Worked example: Optimal investment schedule

About this lesson

You'll discover the difference between soft and hard capital rationing, understand key project characteristics like divisibility and mutual exclusivity, and work through a practical example to rank and select projects that maximise shareholder wealth. Capital rationing occurs when a company has limited funds to invest across several viable projects. This is the reality for most organisations—they face constraints from internal decisions (soft rationing, like management choosing to limit borrowing) or external restrictions (hard rationing, like bank lending limits). Rather than simply accepting all projects with positive net present values, companies must prioritise strategically. The profitability index is your key tool here. It calculates the net present value generated per pound of initial investment, allowing you to rank projects fairly and select the combination that delivers the highest overall return within your budget. The calculation is straightforward: divide each project's NPV by its initial investment. You then work through the ranked list, scheduling projects in order of their profitability index until your capital is exhausted. Understanding whether projects are divisible (you can undertake part of them) or mutually exclusive (you can only choose one) is essential for building your optimal investment schedule. This technique applies specifically to single-period capital rationing decisions and is relevant to your Performance Management and Financial Management studies.

Duration: 8m