Merkel enterprises has 3 divisions. As part of the planning process, the CFO req

Question

Merkel enterprises has 3 divisions. As part of the planning process, the CFO requested that each division submit their capital budgeting proposals for next year. These proposals all have positive net present values and fall within the long-range plans of the firm. The requests from the divisions are $6.2 million, $4.8 million, and $3.7 million, respectively. For the firm as a whole, Merkel Enterprises has a maximum of $12 million which can be spent for new projects next year. This is an example of: a. scenario analysis b. sensitivity analysis c. determining operating leverage d. soft rationing

Explanation / Answer

Fairly sure this is D. I looked up a definition for you, too: "Capital rationing is the process of regulating the capital expenditure when capital is scarce. When capital is in limited supply then company will have to pick and choose between what investments to choose and what to just let go even if all the investments are favorable" That seems to be the case here. All of the investments have a NPV, but the company doesn't have quite enough capital to invest in all of them.

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