The firm should continue to invest in new projects up to the point where the marginal rate of return earned on a new investment equals the marginal cost of new capital.

Question

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This is a basic principle in financial management known as the "marginal principle" or "marginal efficiency of investment". It states that a firm should only invest in new projects up to the point where the additional revenue generated by the investment is equal to the additional cost of obtaining the necessary capital to finance the investment. Beyond that point, the cost of capital would exceed the return on investment, leading to diminishing marginal returns and reduced profitability.

The Firm Should Continue to Invest in New Projects Up