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?

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PROJECT COST $4,000,000 3,000,000 5,000,000 6,000,000 4,000,000 6,000,000 4,000,000 PROFITABILITY INDEX 1.18 1.08 1.33 1.31 1.19 1.20 1.18