Distinguish between the following: Capital budgeting and Capital rationing.

Distinction between Capital Budgeting and Capital Rationing S.No. Capital Budgeting Capital Rationing 1 Long term planning for proposed capital outlays and their financing The business puts a limit on the maximum amount that can be invested during a given period of time 2 It is a formal process for acquisition of assets and the investment of capital The amount required for all the available investment avenues is greater than the funds available 3 A number of methods like DCF, payback method, IRR, ARR etc. are used. The profitability index is to be used 4 There is no imposed limiting constraint. Capital rationing can lead to sub-optimal decisions as profitable investment proposals may be disregarded.