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Question:

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

A the next project’s return is less than the marginal cost of capital.
Explaination

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.