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BRILLIANT’S Capital Budgeting 439

profitability. This process is called capital AZwgma {S>gopÝS>¨J Am°S>©a _| Aa|O {H$`o JE h¢Ÿ& Bg àmogog
rationing. H$mo H¡${nQ>b ameqZJ H$hm OmVm h¡Ÿ&
A firm should accept all investment {H$gr \$_© H$mo CZ g^r BÝdoñQ>_|Q> àmoOoŠQ²>g H$mo
projects whose NPV is positive to maximize ñdrH$ma H$aZm Mm{hE {OgH$m NPV nm°Or{Q>d h¡ Vm{H$
the wealth of shareholders. However, there eo`a hmoëS>g© Ho$ YZ H$mo _¡pŠg_mBO H$a gH|$Ÿ& {\$a ^r,
may be constraints of resources due to which a Bg_| [agmog}g Ho$ AdamoY hmo gH$Vo h¢ {OgHo$ H$maU {H$gr
firm may have to select the projects from \$_© H$mo nm°{O{Q>d NPV g{hV CnbãY àmoOoŠQ²>g _| go
among the available projects with positive
àmoOoŠQ²>g H$mo {gboŠQ> H$aZm hmoVm h¡Ÿ& Bg àH$ma, Amdí`H$
NPVs. Thus, it may not be possible to invest in
all investment proposals with positive NPVs \§$S> H$s àmpßV na AdamoY Ho$ H$maU nm°{O{Q>d NPV g{hV
due to constraints on procurement of necessary g^r BÝdoñQ>_|Q> ànmoOëg _| {Zdoe H$aZm g§^d Zht hmo
fund. gH$Vm h¡Ÿ&

Need for Capital Rationing H¡${nQ>b ameqZJ H$s Amdí`H$Vm
Capital rationing may arise due to external H¡${nQ>b ameqZJ _¡ZoO_|Q> Ûmam bmJy {H$`o JE EŠgQ>Z©b
factors or internal factors imposed by
\¡$ŠQ>g© AWdm BÝQ>Z©b \¡$ŠQ>g© Ho$ H$maU CËnÝZ hmo gH$Vo
management. So there are two types of capital
h¢Ÿ& AV: H¡${nQ>b ameqZJ Xmo àH$ma Ho$ hmoVo h¢:
rationing:
(i) External capital rationing (i) EŠgQ>Z©b H¡${nQ>b ameqZJ
(ii) Internal capital rationing (ii) BÝQ>Z©b H¡${nQ>b ameqZJ
External capital rationing arises due to EŠgQ>Z©b H¡${nQ>b ameqZJ Båna’o$ŠQ> H¡${nQ>b _mH}$Q>
imperfect capital market. If the information Ho$ H$maU CËnÝZ hmoVr h¡Ÿ& `{X H¡${nQ>b _mH}$Q> Ûmam BÝ\$m°_}eZ
from capital market is insufficient, they affect
n`m©ßV Zht h¢, Vmo do H¡${nQ>b Ho$ \«$s âbmo H$mo à^m{dV H$aVo
the free flow of capital. The NPV rule will not
be applicable if shareholders do not have access h¢Ÿ& NPV ê$b `hm§ EpßbHo$~b Zht hmoJm `{X eo`a hmoëS>g©
to the capital markets. H$m H¡${nQ>b _mH}$Q²>g Ho$ à{V EŠgog Zht h¡Ÿ&
Internal capital rationing is caused due to BÝQ>Z©b H¡${nQ>b ameqZJ _¡ZoO_|Q> Ûmam ñd`§ bmJy
self imposed restrictions by the management. {H$`o JE aopñQ´>ŠeÝg Ho$ H$maU CËnÝZ hmoVr h¡Ÿ& CXmhaU
For example, it may be decided not to obtain Ho$ {bE, `h {ZU©` {b`m Om gH$Vm h¡ {H$ A{V[aŠV \§$S>
additional funds. Whatever may be the type of àmßV Zht {H$`m Om`oŸ& Omo Hw$N> ^r aopñQ´>ŠeÝg H$m àH$ma
restrictions, the implication is that some of the
profitable projects will have to be foregone hmo, CgH$m à^md `h h¡ {H$ \§$S²>g H$s H$_r Ho$ H$maU Hw$N>
because of the lack of funds. However, the NPV àm°{\$Q>o~b àmoOoŠQ²>g H$mo N>mo‹S> {X`m Om`oJmŸ& {\$a ^r,
rule will work since shareholders can borrow NPV ê$b H$m`© H$aoJm Š`m|{H$ eo`a hmoëS>g© H¡${nQ>b
or lend in the capital markets. _mH}$Q²>g _| CYma boZm AWdm XoZm H$a gH$Vo h¢Ÿ&
It is quite difficult, sometimes, to justify H$^r-H$^r BÝQ>Z©b H¡${nQ>b ameqZJ H$mo ñnîQ> H$aZm
the internal capital rationing. But, generally it AË`§V H${R>Z hmoVm h¡& bo{H$Z, gmYmaUV`m, `h
is used as a means of financial control. In a \$m`ZopÝe`b H§$Q´>mob Ho$ gmYZ Ho$ ê$n _| à`moJ {H$`m OmVm
divisional set-up, the divisional managers may h¡Ÿ& {H$gr {S>{dOZb goQ>-An _|, {S>{dOZb _¡ZoOg© AnZo
overstate their investment requirements. One BÝdoñQ>_|Q> [aŠdm`a_|Q²>g H$mo AmodañQ>oQ> H$a gH$Vo h¢Ÿ&
way of forcing them to carefully assess their AnZo BÝdoñQ>_|Q> Am°nÀ`©w{ZQ>rO H$mo gmdYmZrnyd©H$ Egog