This part of question 1 asked for a discussion of the nature and causes of capital rationing, as well as how it can be overcome. Good answers explained that capital rationing meant that there was insufficient capital to invest in all projects with a positive NPV (note the link here with the NPV decision rule): that capital rationing could be hard or soft, explaining these terms and giving examples of each; and then discussed how the profitability index and the NPV of combination of projects could be used to find the optimal investment decision within a given investment capital constraint.

Weaker answers deviated from this approach in some or all of its component parts, for example by offering a weak or incorrect definition of capital rationing: by failing to identify and discuss soft (internal) and hard (external) capital rationing; or by giving incomplete or incorrect explanations of the profitability index and its use.