Question

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 10%
Second Block of Funds $400 11%
Third Block of Funds $300 12%
Fourth Block of Funds $200 13%
Fifth Block of Funds $100 14%
Sixth Block of Funds $100 15%