Thoughts on Weighted Marginal Cost of Capital

Excerpts from the Paper

Thoughts on Weighted Marginal Cost of Capital
Firms require capital to fund business operations. Management may choose to make various capital expenditures throughout the year in the hope of realizing future benefits for a long period of time. These investments may be purchases of tangible assets such as buildings, equipment, industrial machinery or vehicles. In addition, it can involve intangible investments in things like sales training, research and development or a marketing campaign. The key identifier of any capital expenditure requires that the investment uses current funds with the expectation that this investment will lead to long term future cash inflows. Nonetheless, a firm is limited in its ability to allocate capital for it...

.....m raises, just which cost should we use in capital budgeting? The answer is based on the concept of marginal analysis as developed in economics. In economics, you learned that firms should expand output to the point where marginal revenue is equal to marginal cost…this same type of analysis is applied in capital budgeting. We have already developed the marginal cost curve – it is the MCC schedule. (Brigham 13E-6)
When a firm’s marginal cost jumps these breakpoints, they need to pull back or find cheaper sources of capital.
Works Cited
“The Marginal Cost of Capital and the Optimal Capital Budget.”
Harcourt. 2001. Southwest Learning. 25 Oct 2010.
http://www.swlearning.com/finance/brigham/theory10e/resources/webextensions/Web_13_Brigham1_7.pdf