10-29: (Capital rationing) 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:
Project Cost Profitability Index
A $ 4,000,000 1.18
B $ 3,000,000 1.08
C $ 5,000,000 1.33
D $ 6,000,000 1.31
E $ 4,000,000 1.19
F $ 6,000,000 1.20
G $ 4,000,000 1.18
a. Under strict capital rationing, which projects should be selected?
b. What problems are there with capital rationing?