Governments, like private sector companies, have to choose from many possible investment programmes. For government departments and agencies, the choices often become quite difficult in times when the general economy and the public finances are under pressure. In the UK, research and sciencefunding bodies are facing cuts in their capital expenditure programmes of up to 40 per cent from 2011 to 2014. According to the UK’s science minister, the capital budget cuts will maximize funding in the people doing research. Some areas like medical research have been protected from the cuts. According to a director of one research centre, however, the capital cuts will in fact affect research jobs. This is because many research projects have high maintenance costs on capital equipment and other similar longer term commitments. This means that funds will have to be found elsewhere, meaning fewer researchers will be employed and less new research projects will commence. Thus, in the same way the government rations its expenditure on research in general, each research body will have to ration its capital according to its needs.

Questions
1 If you were a director of a research centre facing cuts, how would you ration expenditures on new research projects requiring capital investment?
2 Would you ration based on measures like NPV alone?