A firm’s optimal budget can be found by moving along its investment opportunity schedule until: A. it exhausts its capital budget B. average project return is equal to average cost of capital C. the next project’s return is less than the marginal cost of capital
I’m pretty sure the answer is C. It’s not A, because if a firm takes on projects just because it has capital left to allocate, it could eventually take on projects with NPVs less than zero. It’s not B… because it isn’t. 
But why would you want your next project’s return to be below the MCC? Wouldn’t you want it to be above? By the way, C is the correct answer.
You DO want projects’ returns to be above the MCC - that’s the point. Projects have positive NPVs when the return is greater than the cost of capital. You want firms to STOP taking on projects when they’ve exhausted all projects with positive NPVs and the next project they undertake will have a negative NPV. Let me know if this still isn’t clear.