Do You Agree?

In a situation where capital rationing is necessary cash flow must be based on capital budgeting instead of net income which are completely organization specific. Capital rationing is a method involving the selection of product mix during funds are less than needed for all considerable projects. Profitability calculations are used to combine both initial investment and potential projects leading to the highest PI.

Maximizing the value of shareholders is most pertinent. Cash flows are considered which are not only relevant to the company’s net income. NPV is only relevant when capital rationing isn’t necessary. Capital budgeting should include all cash flows throughout the duration of the project, money’s time value, and RRR (Dr. Suyanto, 2005). DCF measures the attractiveness of an investment to investors using free cash flow projections, discounting them, and giving them a NPV. You will always weigh the investment versus the value through the DCF (I. Staff, Investopedia). In a situation where you are trying to limit taking on investments because of previous failures, you would want to make sure that you are using the NPV method which so that you arrive at the idea that the NPV which are looking at is greater than the investment cost indicating a profit (E. Bank, Chron).

If you have any other ideas as to why someone would like to cap their low investment range, please feel free to comment.

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