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Optimal capital budget

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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We start with the projects with the highest IRR and match with the cost of capital. The cost of capital is ...

Solution Summary

The solution explains how to determine the amount of optimal capital budget