Mec Schedule

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MEC SCHEDULE

At any time, a firm is confronted with a variety of investment opportunities. Some of these investments may be necessitated by the changes in the technology, while others may be for the expansion of the production units. The decision to incur the investment expenditures for each possible project will be made on the basis of their MEC and the current market rate of interest. The firm will select those investment projects for which the MEC is greater than the market rate of interest. The firm is expected to select the various projects in the decreasing order of their MEC, since the firm aims to maximize the returns. So, the MEC schedule is prepared by arranging the investment opportunities in the descending order with respect to their MEC, depending upon the funds availability and the market rate of interest. This is explained with the help of the following MEC schedule (Table 4.1), where 5 projects which the firm can undertake have been arranged in the descending order of their MEC.

We observe that MEC schedule relates the MEC to the alternative levels of investment of an individual firm. If the market rate of interest is 15%, only the first project costing Rs.5 crores in the schedule promises to be profitable. When the market rate of interest falls to 10%, the firm will find it worthwhile to undertake the first three investment projects costing Rs 11 crores. The additional investment will obviously raise the total volume of capital.

Suppose, to start with, the firm had the total initial capital stock (net of depreciation) of Rs20 crores. At 15% rate of interest, the total capital stock rises to Rs. 25 crores and further to 27 crores and to Rs. 31 crores, when the rate of interest declines to 12% and further 10% respectively. The firm will not undertake any new project, unless the rate of interest falls to 8% or to 6% (or less), in which case successive investment project(s) will be undertaken.

Consequently, total capital stock of the firm will rise to Rs.32 crores and Rs.35 crores respectively. These five prospective projects are ranked in order of decreasing profitability in Figure 4.3. The dark lines in this figure may be considered as the firm’s MEC schedule. The individual firm’s marginal efficiency of capital schedule, thus, moves along in steps. If the MEC schedules for all the firms are considered, we shall have almost infinite number of investment projects. When shown graphically, it may be a smooth curve because of the aggregation process.

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