How Do You Answer Capital Rationing Questions in ACCA FM?
Capital rationing questions in ACCA FM test how to allocate limited investment funds to maximise value. Here's how to use the profitability index and structure your answer.
Capital rationing arises when a company has more positive-NPV projects than it has funds to invest in. ACCA FM questions ask how to allocate the limited capital to maximise total value. The approach depends on whether the projects are divisible and whether the rationing is for a single period or multiple periods.
Single-period rationing with divisible projects
When projects can be part-funded (divisible), rank them by the profitability index — the NPV per unit of the scarce capital:
- Calculate each project's profitability index (present value of inflows ÷ initial investment, or NPV ÷ initial investment).
- Rank the projects from highest to lowest.
- Allocate the available funds in ranking order, taking a fraction of the final project if needed.
Indivisible projects
When projects must be taken whole or not at all, the profitability index ranking can mislead. Instead, test the feasible combinations of projects that fit the budget and choose the combination giving the highest total NPV.
Common pitfalls
- Using the profitability index for indivisible projects instead of testing combinations.
- Ignoring the difference between hard and soft capital rationing when discussing the scenario.
Practising full capital-rationing questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your ranking or combination analysis loses marks — the fastest way to make this a reliable scorer.