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