Optimal capital budget
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SkyHigh Airlines has five possible investment projects for the coming year. Each project is indivisible. They are:
Project A: $5 million investment / IRR: 22%
Project B: $12 million investment / IRR: 16%
Project C: $6 million investment / IRR: 18%
Project D: $2 million investment / IRR: 14%
Project E: $3 million investment / IRR: 12%
SkyHigh's weighted marginal cost of capital schedule is 10 percent for up to $6 million of investment; 14 percent for between $6 million and $23 million of investment; and above $23 million the weighted cost of capital is 16 percent. The optimal capital budget is ________.
a) $12 million
b) $18 million
c) $23 million
d) $28 million
e) $10 million
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Solution Summary
The solution explains how to determine the amount of optimal capital budget
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We start with the projects with the highest IRR and match with the cost of capital. The cost of capital is ...
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