There are cases of capital limits involving capital rationing. E.g. suppose the firm is unable to borrow enough funds to finance all the investment opportunities for which the IRR exceeds interest rate (or the board of directors puts a limit upon the amount for internal financing that can be used for capital investment)
-The task of managerial decision makers is to allocate the limited funding to the investments opportunities with the highest IRR or with the highest NPV.
-Obviously, some investments with a positive NPV will have to be foregone.
-When the investments with the highest return are undertaken, the firm is maximizing its return subject to the constraint of the limited capital funding.
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