Answer
Capital rationing exists when there isn't enough capital to fund all positive-NPV projects, so they must be prioritized. With divisible projects, rank by profitability index (NPV per unit of scarce capital) to maximize total NPV within the limit; with indivisible projects, evaluate combinations. Rationing can be hard (external funds limited) or soft (internally imposed).
Profitability Index = NPV / Investment (or PV inflows / investment).Real-world example With a limited budget, projects are ranked by profitability index to maximize value within the constraint.