Meaning and Definitions of Capital Rationing and Risk Factors in Capital Budgeting Homework Help

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Capital rationing is a management act of putting restrictions on the new investments or projects taken up by a company. Companies usually want to implement this capital rationing in the cases where the past returns were much lower than the expected. It is an approach of allocating funds available across into multiple investments thereby increasing the bottom line of the company. The main objective of capital rationing is that the company should not over invest on the assets. In the absence of adequate rationing, the company will gradually encounter decreasing return rates and might even encounter financial insolvency. Capital Rationing is basically of two types: hard capital rationing and soft capital rationing. Meaning and Definitions of Capital Rationing and Risk Factors in Capital Budgeting Homework Help shall provide an insight into the capital budgeting and the various risk factors involved in it.
 

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Capital Budgeting and Risk Factors

 
Capital budgeting is a process of estimating the value of a long term project. Capital budgeting helps in comparing the value of the project based on its projected cash flows and time lines while deciding between the different investments. The relative profitability of each project must be estimated while evaluating the investments made for long term projects. The various risk factors involved with the capital budgeting have been mentioned in the Meaning and Definitions of Capital Rationing and Risk Factors in Capital Budgeting Homework Help.
 
• Project Risk: Project risk is one of the major risks that you will face in long term investments. This risk basically involves the thought that the project will not be that profitable as expected due to the initial evaluation of the project and the errors from the company. When a company invests in the area which is not under its expertise, it increases the project risk.
 
• Market Risk: Market risk is generally increased in case of weak economy. It measures a part of risk from the project from the macroeconomics factors like interest rates and inflation. A poor economy can turn the project unprofitable due to the decline in the demand of the product. For further information, students can refer to Meaning and Definitions of Capital Rationing and Risk Factors in Capital Budgeting Homework Help.
 
• International Risk: When investments are done on global basis, in the international world, it will definitely lead to international risk. The exposure to international risk will thereby entail political and exchange rate risk of the project. Like if an investment is made in a country having political instability, that investment will definitely be a loss to the company. For further details, please refer Meaning and Definitions of Capital Rationing and Risk Factors in Capital Budgeting Homework Help.
 
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