Capital rationing - part 2

In this lesson

1. 0:00 Indivisible projects and capital rationing
2. 1:01 New York investment company example setup
3. 2:04 Testing project combinations systematically
4. 3:50 Evaluating remaining project alternatives
5. 4:26 Key assumptions and real-world limitations

About this lesson

This is a practical scenario that appears regularly in capital investment questions across ACCA and CIMA qualifications, particularly in FM, AFM, and E3. When projects can't be divided, the profitability index approach doesn't work. Instead, you'll use a systematic trial-and-error method to test all viable combinations of available projects and identify which combination delivers the highest combined NPV within your capital constraint. The lesson walks through a worked example with four projects and a $5 million budget, showing you how to methodically evaluate each combination without missing any possibilities. You'll also explore the key assumptions underpinning this approach—single-period rationing, project independence, and non-delayed projects—and understand why real-world capital decisions are often more complex. While these limitations mean businesses typically use advanced modelling software for actual investment decisions, mastering the manual method gives you the conceptual foundation needed to tackle exam questions with confidence.

Duration: 7m