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%
|