Figure 6-9 The IRRs of Projects A and D are higher than the cost of the required capital and should be accepted. The IRR of Project B is below the cost of the required capital and should be rejected. Project C cannot be entirely funded at the acceptable rate and also is rejected.
c. A basic principle in economics is that a firm should increase output until marginal revenue equals marginal cost. Greater output would reduce profits, and lower output would forgo profits. 1) In capital budgeting, MCC and the IOS rate are analogous to marginal cost and marginal revenue, respectively. That is why Project C as well as Project B are rejected. Project C can be only partially funded using 10 9% capital, so MCC exceeds the IOS rate. Thus, the entity should seek alternative investments for which MCC equals the IOS rate.
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