Principles of Managerial Finance

TABLE 11.3 Investment Opportunities Schedule

(IOS) for Duchess Corporation

Internal rate Initial Cumulative

Investment of return (IRR) investment investmenta

opportunity (1) (2) (3)

A 15.0% $100,000 $ 100,000

B 14.5 200,000 300,000

C 14.0 400,000 700,000

D 13.0 100,000 800,000

E 12.0 300,000 1,100,000

F 11.0 200,000 1,300,000

G 10.0 100,000 1,400,000

aThe cumulative investment represents the total amount invested in projects with

higher returns plus the investment required for the corresponding investment

opportunity.

Weighted Average Cost of Capital and IRR (%)

0 500 1,000 1,500

Total New Financing or Investment ($000)

X

15.5

15.0

14.5

14.0

13.5

13.0

12.5

12.0

11.5

11.0

10.5

10.0

9.5

1,100

WMCC

E

D

C

B

A

F

G

11.5%

10.3%

9.8%

IOS

FIGURE 11.2

IOS and WMCC
Schedules
Using the IOS and WMCC to
select projects for Duchess
Corporation

funds necessary to finance all projects better than and including the correspond-

ing investment opportunity. Plotting the project returns against the cumulative

investment (column 1 against column 3) results in the firm’s investment opportu-

nities schedule (IOS). A graph of the IOS for Duchess Corporation is given in

Figure 11.2.

488 PART 4 Long-Term Financial Decisions