Explain capital rationing. In theory, should capital rationing exist? Why does it frequently occur in practice?

Two investments that Lara Fredericks is considering are mutually exclusive. The same 6-year time frame is shared by both investments. Lara anticipates receiving equal and subsequent year-end payouts of $3,000 after the initial investment, which costs$10,000. The second investment calls for an initial commitment of $12,000 and offers subsequent payouts of$3,800 in equal amounts. For the first investment, the needed return is currently 8.5%, and for the second, it is 10.5%. What is the net present value of the second investment?

Using a $14 \%$ cost of capital, determine the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable.

$$\begin{array}{lrr} & \text{Project A}&\text{Project B}&\text{Project C}&\text{Project D}&\text{Project E}\\ \hline\\ \text{Initial investments(CF$_0$)}& \$26,000 & \$500,000 & \$170,000 & \$950,000 & \$80,000 \\ \hline\\ & &\text{Cash inflows(CF$_t$)} \hspace{-8mm}\\ \text{Years(t)}\\ \hline 1 & \$4,000&\$100,000&\$20,000&\$230,000&\$0 \\ 2 & 4,000 & 120,000 &19,000& 230,000&0\\ 3 & 4,000 & 140,000&18,000&230,000&0\\ 4& 4,000 & 160,000&17,000&230,000 &20,000\\ 5 & 4,000 & 180,000 &16,000&230,000&30,000\\ 6 & 4,000 & 200,000 &15,000&230,000&0\\ 7 &4,000 & &14,000&230,000&50,000\\ 8& 4,000 & &13,000&230,000 &60,000\\ 9&4,000 & &12,000&&70,000\\ 10 & 4,000 & &11,000\\ \end{array}$$

Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project change a firm's overall risk?

Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?

How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?