Argo Ltd is appraising the purchase of a new machine, costing R15 million, to replace an existing machine that is out of date and has no resale value. The company is unfortunately unable to fund the new machine as they have an upcoming marketing campaign requiring an initial investment of R10 million. The directors of Argo Ltd. realized that, as funds are limited, they have now reached a point where the company has to use capital rationing. You have been employed as the financial manager.

Required:

1. As the new Financial Manager working for Argo Ltd, explain the concept of capital rationing in this scenario and the circumstances under which it may arise.