The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability indexes associated with them:

a. Under strict capital rationing, which projects should be selected?

b. What problems are there with capital rationing?

PROJECT PROFITABILITY INDEX A 1.18 B 1.08 1.33 COST $4,000,000 3,000,000 5,000,000 6,000,000 4,000,000 6,000,000 4,000,000 D 1.31 E 1.19 F 1.20 1.18