# Capital Rationing Decision Memo Template: NPV, PI, Budget and Portfolio Choice

> A worked capital-rationing memo that compares NPV, profitability index, budget feasibility and project combinations before an investment decision.

- Canonical page: https://mtfinstitute.com/insights/capital-rationing-decision-memo-template-npv-pi-budget/
- Content type: Article
- Editorial category: Guides & Frameworks
- Publisher: MTF Institute of Management, Technology and Finance
- Author: MTF Institute Editorial Team- Published: 2026-09-10
- Updated: 2026-09-10
- Language: English
- Topics: Capital Allocation, Strategic Finance, NPV, Profitability Index, Investment Decisions

A capital-rationing decision memo should do more than rank projects by profitability index. It should show the budget, preserve the cash-flow and discount-rate assumptions, test feasible combinations and explain why the selected portfolio creates the most value within the actual constraint.

This guide provides a copyable **ALLOCATE-8** memo and a worked example for indivisible projects.

## The short answer

Use **NPV** to measure expected value created in currency terms. Use **profitability index (PI)** to compare value created per unit of initial investment. Under a hard budget, PI can help screen options, but a simple ranking may miss the best combination when projects are indivisible.

The decision rule is:

> Select the feasible combination with the highest total risk-adjusted NPV, subject to strategic, capacity and governance constraints.

## Worked example: a EUR 450 budget

Assume four independent, indivisible projects. The estimates below are after applying a consistent discount-rate and cash-flow convention.

| Project | Initial investment | NPV | PI = 1 + NPV / investment |
| --- | ---: | ---: | ---: |
| A | EUR 300 | EUR 90 | 1.30 |
| B | EUR 200 | EUR 54 | 1.27 |
| C | EUR 150 | EUR 39 | 1.26 |
| D | EUR 100 | EUR 20 | 1.20 |

Ranking by PI gives A, B, C, D. But A plus B requires EUR 500 and breaks the budget. The manager must test combinations.

| Feasible portfolio | Investment | Total NPV | Budget unused |
| --- | ---: | ---: | ---: |
| A + C | EUR 450 | **EUR 129** | EUR 0 |
| B + C + D | EUR 450 | EUR 113 | EUR 0 |
| A + D | EUR 400 | EUR 110 | EUR 50 |
| B + C | EUR 350 | EUR 93 | EUR 100 |
| B + D | EUR 300 | EUR 74 | EUR 150 |

Portfolio A + C has the highest total NPV among the listed feasible combinations. The PI ranking was useful, but it did not make the final choice by itself.

## Copyable decision memo

### Decision requested

Approve, defer or reject the proposed portfolio for **[period]** within a capital limit of **[amount]**.

### Constraint

- available capital:
- timing of the constraint:
- source of the limit:
- other scarce resources:
- reserved contingency:

### Common assumptions

- valuation date and currency:
- cash-flow convention:
- discount rate and risk adjustment:
- inflation and tax treatment:
- terminal or residual value:
- dependencies and mutually exclusive choices:

### Project evidence

| Project | Investment | NPV | PI | Strategic contribution | Critical dependency | Downside NPV |
| --- | ---: | ---: | ---: | --- | --- | ---: |
|  |  |  |  |  |  |  |

### Combination test

List every material feasible combination or use an approved optimization model. Preserve excluded combinations and the reason for exclusion.

### Recommendation

State the selected portfolio, total investment, total NPV, unused budget, key assumptions, downside result and conditions that would reopen the decision.

## ALLOCATE-8 quality test

| Element | Test |
| --- | --- |
| **A — Assumptions** | Are cash flows, timing and discount rates consistent? |
| **L — Limit** | Is the real capital or capacity constraint explicit? |
| **L — Linkages** | Are dependencies and mutually exclusive projects mapped? |
| **O — Options** | Were feasible combinations tested? |
| **C — Cash-flow risk** | Are downside and delay cases visible? |
| **A — Authority** | Who recommends, approves and releases funds? |
| **T — Triggers** | What evidence pauses, scales or stops a project? |
| **E — Evidence** | Can a reviewer reproduce each number? |

Score each element 0, 1 or 2. Require all eight to score at least 1 before approval. A mathematically optimal portfolio with untraceable inputs is not decision-ready.

## Three errors the memo should expose

### 1. Treating PI as an optimization engine

PI is a ratio. When projects cannot be divided, a ratio ranking can leave value on the table. Test actual portfolios.

### 2. Mixing discount-rate logic

Do not compare one project in nominal cash flows with another in real cash flows, or apply inconsistent risk adjustments without explanation. OMB Circular A-94 provides a public, authoritative example of defining net present value as discounted benefits minus discounted costs and maintaining discount-rate discipline. Corporate decisions require company-specific policy and qualified finance review.

### 3. Ignoring execution capacity

Capital may not be the only scarce resource. Two projects can fit the financial budget but compete for the same engineers, approvals, supplier capacity or change window. Add a second constraint rather than hiding it in narrative.

## A practical next step

Take the current investment list and build a one-page combination table. Recalculate NPV under one consistent convention, mark dependencies and test whether the highest-PI sequence actually produces the highest feasible portfolio NPV. Then document the decision authority and the evidence that would reopen the choice.

MTF Institute's [Executive Certificate in Strategic Finance, M&A & Corporate Valuation](https://mtfinstitute.com/lp/strategic-finance/#enroll) includes capital budgeting, time value of money, WACC, budgeting, scenario planning and valuation. The published [curriculum](https://mtfinstitute.com/programs/strategic-finance-ma-corporate-valuation/) explains the scope. It is professional, non-degree education and does not guarantee investment performance.

## Sources

- [U.S. Office of Management and Budget: Circular A-94](https://www.whitehouse.gov/wp-content/uploads/2025/12/a094.pdf)
- [MTF Institute: Capital Rationing — How to Rank Projects When NPV and Budget Conflict](https://mtfinstitute.com/insights/capital-rationing-rank-projects-npv-profitability-index/)
- [MTF Institute: Strategic Finance curriculum](https://mtfinstitute.com/programs/strategic-finance-ma-corporate-valuation/)



## Citation

When citing or summarizing this material, link to the canonical HTML page: https://mtfinstitute.com/insights/capital-rationing-decision-memo-template-npv-pi-budget/