Capital Rational Decision In a situation where the firm has unlimited funds all independent Investment proposals yielding return greater than some predetermined level are accepted. However this situation does not prevail in most of the business funds in actual practice. They have a fixed capital budget. It large number of investment proposals compete for these limited funds. The ‘
firm must therefore ration them. The firm allocates funds to projects in a manner that it maximizes long-run returns. Thus, capital rationing refers to a situation in which a firm has more acceptable investments than it can finance. It is concerned with the selection of a group of investment proposals out of many investment proposals acceptable under the accept-reject decision. Capital rationing employs ranking of the acceptable investment projects. Tile projects can he ranked on the basis of ‘a redetermined criterion such as the rate of return. The projects are ranked in the descending order of the rate of return. This’aspect has been developed funner in Chapter 11.