7 . Marginal Analysis

The Ajax Corporation has the following set of projects available to it:

 

Project	Investment Required	Expected Rate of Return
($ Million)	(%)
A	500	23.0
B	175	18.0
C	50	21.0
D	125	16.0
E	300	14.0
F	150	13.0
G	250	19.0

 

Note: All projects have equal risk.

 

 

Calculate the cumulative investment and Ajax's schedule of potential projects. (Hint: Ajax prioritizes projects according to their expected rates of return.)

 

Project	Investment Required	Expected Rate of Return	Cumulative Investment
($ Million)	(%)	($ Million)
A	500	23.0	500
C	50	21.0	550
B	175	18.0	975
E	300	14.0	1,400

 

 

Ajax can raise funds with the following marginal costs. Calculate the cumulative funds raised to complete the following table.

 

Block of Funds	Cost of Capital	Cumulative Funds Raised
($ Million)	(%)	($ Million)
First 250	14.0	250
Next 250	15.5	500
Next 100	16.0	600
Next 250	16.5
Next 200	18.0
Next 200	21.0

 

 

What is the optimal capital budget (in millions) for Ajax?

 

$1,025

$1,300

$550

$975