Capital rationing does not lead to optimum results. Discuss.

A firm may put a limit to the maximum amount that can be invested during a given period of time, such as a year. Such a firm is then said to be resorting to capital rationing. A firm with capital rationing constraint attempts to select the combination of investment projects that will be within the specified limits of investments to be made during a given period of time and at the same time provide greatest profitability. Capital rationing may be effected through budget ceiling. It may result in accepting several small investment proposals than accepting a few large investment proposals so that there may be full utilisation of budget ceiling. This may result in accepting relatively less profitable investment proposals if full utilization of budget is a primary consideration. Similarly, capital rationing can also lead to the firm foregoing the next most profitable investment falling after the budget ceiling even though it is estimated to yield a rate of return much higher than the required rate of return. Thus, capital rationing does not lead to optimum results.