Alpha Inc. combines the marginal cost of capital (MCC) schedule with the investment opportunity schedule (IOS) on a single graph. Which of the following areas on the MCC/IOS graph shows the maximum excess of marginal returns over marginal costs?

Question

Quizplus · Accepted Answer

The maximum excess of marginal returns over marginal costs occurs in the area above the MCC schedule but below the IOS schedule when the IOS line is above the MCC line. This area represents the projects with highest net present value (NPV) and is where a firm should focus its investments to maximize shareholder value. Options A and D are not relevant to this concept, while option B is incorrect since the area above the IOS schedule represents unprofitable projects. Option C is where the firm achieves equilibrium between MCC and IOS, but it does not necessarily lead to the maximum excess of returns over costs.

Alpha Inc Combines the Marginal Cost of Capital (MCC) Schedule with with the Investment