Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cost of capital as shown below.
Table A: Alternative Projects, Required Investments, and Expected Rate of Return
Project
Investment Required in Millions of Dollars
Expected Rate of Return on Investment
A
150
12%
B
300
15%
C
125
10%
D
75
16%
E
50
20%
F
500
14%
G
250
18%
Table B: Cost of Capital by Amount Raised
Block of Funds (in Millions)
Amount of Funds in Block
Cost of Capital for Block
First Block of Funds
$500
Second Block of Funds
$400
11%
Third Block of Funds
$300
Fourth Block of Funds
$200
13%
Fifth Block of Funds
$100
Sixth Block of Funds