A firm’s optimal capital budget can be found by moving along its investment opportunity schedule until:

The firm would not want to exhaust its capital budget on “bad” projects, (i.e., projects with IRR < cost of capital [NPV < 0]). They should continue to invest as long as the projects return is greater than the marginal cost of capital of the firm. When the projects IRR = cost of capital, the NPY = Q. This project will only make the firm larger; it will add nothing to the stock price. The investment opportunity schedule plots expected project returns from highest to lowest IRR.