Texas Transport has five possible investment projects for the coming year.Each project is indivisible.They are: The firm's weighted marginal cost of capital schedule is 12 percent for up to $6 million of investment; 16 percent for between $6 million and $18 million of investment; and above $18 million the weighted cost of capital is 18 percent.The optimal capital budget is

Question

Texas Transport has five possible investment projects for the coming year.Each project is indivisible.They are:  The firm's weighted marginal cost of capital schedule is 12 percent for up to $6 million of investment; 16 percent for between $6 million and $18 million of investment; and above $18 million the weighted cost of capital is 18 percent.The optimal capital budget is

Quizplus · Accepted Answer

The optimal capital budget is the one where the total investment equals the amount where the weighted marginal cost of capital changes from one rate to another. In this case, the change occurs at $6 million and $18 million. Therefore, we can invest up to $6 million at a cost of 12 percent, between $6 million and $18 million at a cost of 16 percent, and above $18 million at a cost of 18 percent. Investing more than $18 million would lead to a higher cost of capital and, therefore, decrease the overall profitability of the investments. Therefore, the best choice is to invest up to $18 million.

Texas Transport Has Five Possible Investment Projects for the Coming