A limited capital budget needs a comparison of project combinations

When several projects compete for a fixed investment budget, ask finance to compare the combinations the company can actually undertake. Ranking each project separately can give the wrong selection when a system, production line or building improvement must be bought as a complete package. A partially funded project may produce none of the benefit assumed in the business case.

Write down the amount available, the period it covers and the commitments already deducted. Establish whether the limit is a management choice or a restriction that cannot presently be changed. Include later funding requirements where they exist. A selection that fits this year's allowance can still create an unfunded obligation next year.

Damodaran's NYU investment exercises explicitly distinguish constraints across periods and cases where fractions of projects cannot be taken. Those are useful questions for the company's brief. The numerical comparison below is a separate hypothetical example, with values invented to demonstrate the selection problem.

Assume a $100,000 investment limit and three independent projects. Project A requires $70,000 and has an estimated net present value of $35,000. B and C each require $50,000 and each have an estimated net present value of $24,000. All must be accepted in full, and the values already reflect the same agreed appraisal basis.

A produces $0.50 of estimated value per dollar invested, ahead of B and C at $0.48. Selecting A first leaves $30,000, which cannot fund either remaining project. Choosing B and C together uses $100,000 and produces $48,000 of estimated value, $13,000 more than A alone. The individually highest ratio does not identify the highest-value feasible set.

Before accepting the spreadsheet winner, review dependencies with the operating owners. Two projects may need the same implementation team, occupy the same site or deliver overlapping savings. One may depend on another being completed first. Record those restrictions explicitly and exclude impossible combinations from the comparison.

Check whether a project can truly be divided. Buying half as much equipment may work when units operate independently; funding half of a mandatory integration may leave an unusable system. If management proposes a smaller version, obtain its own cost and benefit estimate. Do not assume that half the spending earns half the benefit.

Show mandatory obligations separately from discretionary investments. Their inclusion may follow requirements that a financial ranking cannot override. After establishing the committed amount and required work, compare the genuinely available choices using the remaining resources.

Request the candidate list, appraisal versions, constraints and feasible combinations with the recommendation. For a larger portfolio, the adviser may use optimization software, but management still needs to understand the restrictions and inputs. Ask for a simple reconciliation from the selected projects to total spending in every constrained period.

Test whether a modest change in one uncertain benefit or cost would select a different group. A narrow advantage deserves a different discussion from a large, well-supported difference. Record any management departure from the financial result, including the operational reason and the person authorizing it.

Preserve the rejected alternatives until the next allocation review. If a selected project becomes unavailable, finance can rerun the actual remaining choices instead of automatically funding the next name on an outdated ranking. Approval should identify the combination and its conditions, not merely an ordered wish list.