How would you prioritize capital projects when the requested capex exceeds the available budget (capital rationing)?
A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
With a hard capex constraint, you can't just accept every positive-NPV project — you maximize value per scarce euro. Rank projects by a profitability index (NPV per unit of capital, or PI = PV of inflows ÷ investment) rather than absolute NPV, so you pick the combination that delivers the most NPV within the budget. Where projects are indivisible or interdependent, evaluate feasible bundles rather than a simple ranking. Beyond the numbers, overlay strategic and risk factors: mandatory/compliance spend and maintenance capex come first (not optional), then strategic fit, risk, optionality, and timing/staging (can a project be phased to spread cost?). I'd also pressure-test the assumptions and avoid letting the biggest-NPV mega-project crowd out several higher-return smaller ones. Present it as a portfolio decision — the efficient frontier of value within the constraint — to the capital-allocation committee, not project-by-project.
WHAT INTERVIEWERS LISTEN FOR
- ✓Rank by profitability index (NPV per capital), not absolute NPV
- ✓Handle indivisible/interdependent projects via feasible bundles
- ✓Mandatory/maintenance capex first; overlay strategy, risk, staging
- ✓Present as a portfolio/efficient-frontier decision
COMMON MISTAKES
- ✗Ranking purely on absolute NPV under a constraint
- ✗Ignoring mandatory/maintenance capex
- ✗Letting one mega-project crowd out higher-return small ones
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- How do you build a pricing model?
- How do you present a scenario analysis to the board?
- How would you evaluate entering a new market?
- Walk me through using sensitivity analysis to inform a strategic decision.
- A company is considering investing in a new project with a projected 5-year payback period. What are the key factors to consider when evaluating the project's viability, and how would you present your findings to stakeholders?
- What are some common challenges that arise when implementing a driver-based planning approach in a company with a complex organizational structure and multiple stakeholders? How would you address these challenges and ensure a successful implementation?