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The amount of a company’s optimal capital budget is most accurately determined by the point on the company’s investment opportunity schedule:

A where it intersects the company’s marginal cost of capital curve.

The investment opportunity schedule is a downward sloping curve of the internal rates of return (expected returns) of potential projects ranked from highest to lowest. This curve intersects the company’s upward sloping marginal cost of capital curve at an amount of capital where the marginal projects IRR just equals the firms cost of capital. The firm should accept projects with IRRs that exceed the marginal cost of capital (lie to the left of the intersection) and reject projects with IRRs less than the marginal cost of capital (lie to the right of the intersection).

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