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During the COVID-19 pandemic, many firms have been reluctant to undertake new projects due to economic uncertainty

Finance

During the COVID-19 pandemic, many firms have been reluctant to undertake new projects due to economic uncertainty. If a firm were to allot a fixed budget for capital expenditures, such that projects would compete for funding, this would be an example of _____?

answer choices

capital rationing

independent projects

capital budgeting

unlimited funding

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A. capital rationing.

(the above option can be selected)

Notes:

When there is fixed amount of budget to be allocated to capital projects, then such a situation calls for capital rationing.

By capital rationing the projects which are expected to provide a higher return are selected, and the total of capital provided for such projects shall not exceed the budgeted amount.

In case of unlimited funding, every project which has a positive return can be selected.

Independent projects are those in which selection of one project will not affect the selection of other.

Capital budgeting is a process which helps in deciding upon capital projects to be take up.