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This chart shows the beginning stages of plotting an investment opportunity chart (IOS). The next stage is to add in the weighted average cost of capital. This line could be straight across, beginning at the y axis, but usually as the firm adds to the capital structure, the WACC increases. The point at which this increases is called the break-point. The breakpoint is where the WACC increases, which is shown by a step up at some dollar amount on the x-axis.

Using the chart, draw a WACC at 11% all across the chart starting at the y-axis. Notice that investments E, C, D, and F are all still viable? B is eliminated since the IRR is below the 11% cost. To invest in something where the WACC is greater than the IRR is detrimental to the firm as it lowers the value of the firm. Sometimes this is unavoidable as raw materials (shoe laces) may cost the firm to make, but you cant sell shoes without them.

Using a red pen, at the $4 million in capital mark, go straight up to 13%and draw a new WACC straight across the chart. Notice now that only two investments, E and C are viable. The point at which the new WACC increases in cost over the previous WACC is called the break point.