Annuity factor NPV of Asset Equivalent annual cost = P H (£000s) (£000s) Net present value Annuity factor EAC CHAPTER 3 – ADVANCED DISCOUNTED CASH FLOW TECHNIQUES 51 CAPITAL RATIONING A limit on the level of funding available to a business, there are two types: Hard capital rationing Externally imposed by banks. Due to: 1. Wider economic factors (e.g. a credit crunch) 2. Company specific factors (a) Lack of asset security (b) No track record (c) Poor management team. Soft capital rationing Internally imposed by senior management. Issue: Contrary to the rational aim of a business which is to maximise shareholders‟ wealth (i.e. to take all projects with a positive NPV) Reasons: 1. Lack of management skill 2. Wish to concentrate on relatively few projects 3. Unwillingness to take on external funds 4. Only a willingness to concentrate on strongly profitable projects. Single period capital rationing There is a shortage of funds in the present period which will not arise in following periods. Note that the rationing in this situation is very similar to the limiting factor
Annuity factor NPV of Asset Equivalent annual cost = P H (£000s) (£000s) Net present value Annuity factor EAC CHAPTER 3 – ADVANCED DISCOUNTED CASH FLOW TECHNIQUES 51 CAPITAL RATIONING A limit on the level of funding available to a business, there are two types: Hard capital rationing Externally imposed by banks. Due to: 1. Wider economic factors (e.g. a credit crunch) 2. Company specific factors (a) Lack of asset security (b) No track record (c) Poor management team. Soft capital rationing Internally imposed by senior management. Issue: Contrary to the rational aim of a business which is to maximise shareholders‟ wealth (i.e. to take all projects with a positive NPV) Reasons: 1. Lack of management skill 2. Wish to concentrate on relatively few projects 3. Unwillingness to take on external funds 4. Only a willingness to concentrate on strongly profitable projects. Single period capital rationing There is a shortage of funds in the present period which will not arise in following periods. Note that the rationing in this situation is very similar to the limiting factor
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