Capital rationing situation thus arises when numerous projects may compete for limited

resources. It may be defined as “A situation where a constraint is placed on the total size of capital investment during a particular period”.

Factors Influencing the Capital Budgeting Decisions

The following factors influence the capital budgeting decisions of the organisation.

(i) Amount of investment

(ii) Cost of capital projects

(iii) Degree of certainty

(iv) Product demand

(v) Future earnings

(vi) Relative importance of the profit

(vii) Opportunity cost

(viii) Cost of production.

RISK ANALYSIS IN CAPITAL BUDGETING

Some of the important techniques of risk analysis in capital budgeting are :

(a) General techniques :

(i) Risk adjusted discount rate

(ii) Certainty equivalent.

(b) Quantitative techniques :

(i) Sensitivity analysis

(ii) Probability assignment

(iii) Standard deviation

(iv) Co-efficient of variation

(v) Decision tree.