Essays on Concept of Capital Rationing and Real Options Assignment

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The paper "Concept of Capital Rationing and Real Options" is a great example of a finance and accounting assignment.   Capital rationing is the process of placing restrictions on the number of new projects or investments that are undertaken by the company. That can be accomplished by putting a higher cost of capital investment consideration or establishing a ceiling on the particular sections of the budget. Firms may wish to implement capital rationing in certain situations where previous returns of investment were less than expected (McLean, 2003). For instance, suppose a corporation has a cost of capital of 10%, however, the firm has undertaken very many projects, some of which are incomplete (Zelman, 2003).

That will cause the actual return on investment of the company to drop below the level of 10%. Due to this fact, the management will decide to place the cap on the number of new projects by raising the capital cost for the new projects up to 15%. Commencing with the new projects would give the company more resources and time to finish the existing projects (Mr.

Jamie Rogers, 2013). On the other hand, a real option is a right but not the obligation to take various objectives in business on the capital investment project. For instance, the chance to invest in the expansion of a company’ s factory or otherwise to sell the plant, is a put or real option respectively (Ehrhardt, 2002). In reality, the real options are always distinguished from conventional financial options in a manner that they are not always traded as securities. In addition, they do not unusually entail decisions on an asset that is underlying which is sold on a financial guarantee (Kaplan, Atkinson and Morris, 1998). Task 2Look into the extent of adoption of the tools and explain their impact on the decision-making process in the firm.

You must check the relative validity of NPV and Real Options while appraising risks and uncertainty (Chandra, 1997). The adoption of capital rationing and real options tools has a very high impact on the decision-making process in a company.

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