Use the MCC schedule to find the cost of

capital for determining projects net present

values.
Investment Opportunity Schedule (IOS)
Graph of the firms investment opportunities
ranked in order of the projects internal rate of
return

2
Marginal Cost of Capital
Cost of additional capital from 1 more
unit of capital raised.
Cost of capital of each additional dollar
borrow.
MCC used in Capital Budgeting
Firm POWER has 3 Financial executives :
Financial VP
Treasurer
Director of Capital Budgeting
 THE MARGINAL COST OF CAPITAL (MCC)
A graph showing how the WACC changes as a firm raises
more capital during a planning period, usually a year
A Typical MCC Schedule
WACC

WACC

Total
Capital
Raised

The MCC breaks upward when the cost of a capital component

increases. The first break usually occurs when retained
earnings runs out and outside equity is raised at higher cost.
MCC Schedule
We can used it to determine the
discount rate used in the capital
budgeting process.
 Smooth, or Continuous,
MCC Schedule Marginal Cost of Capital
Schedule
Weighted Average Cost of Capital (WACC) (%)
WACC

0-
Dollars of New Capital Raised
7
 Weighte Average Cost of
Capital : = MCC(%)

MCC=11.8%
11.8
MCC=11.3%
11.3
MCC=10.8%
10.8

$700,000 $1,000,000
Break Points
Investment Opportunity Schedule
A graphical depiction of a companys
investment opportunities ordered from
highest to lowest expected return.
Investment Opportunity Schedule
PROJECT COST ANNUAL PROJECT LIFE ICOUNT RATE
INFLOWS (years) AT WHICH
NPV=0
A $200,000 $54,100 5 11%

B 150,000 32,850 7 12%

C 250,000 41,550 10 10.5%

D 350,000 87,600 6 13%

E 200,000 39,550 8 11.5%

F 250,000 105,000 3 12.5%
 D = 13%
13.0 %

F = 12.5%
12.5

B=12%
12
MCC
E=11.5%
11.5
11.3

A=11%
10.8
C=10.5%
IOS

250 500 750 1,000 1,250

Dollars of the new capital raised

Optimal Cash Budget: 950,000
an invested during the year