I am 100% for having candidates do a small project or challenge. I am not ok with spending a couple hours on it in good faith and then being told days after it's submitted that another candidate was closed on and therefore had no opportunity to present. If other candidates are in final phases, it is very disingenuous to still be building a pipeline with people spending their personal time on a challenge.
For me, it would have been OK to hear back saying we have some other candidates we might close on, if we don't we will invite you to do the challenge. -that would have been the respectful thing to do.