Can anyone explain why the MCC is upward sloping and IOS is downward sloping?
The investment opportunity schedule is straightforward : You just arrange all the investment opportunities that you have by their IRR’s from greater to lower. Thats why there is this downward sloping line, think of it as a staircase. Investments with very high IRR’s are to the left and very desirable and as you move to the right the IRR’s are smaller and the project is less and less desirable.
The marginal cost of capital reflects the fact that if you want to raise more money it will cost you more. That creates the upward sloping line. The more money you are seeking to raise, the more expensive it is going to get.
This creates a point of intersection, on the left of which, every project is potentially wealth creating. That is because for every given investment opportunity the cost of capital is less.