\"The mangers of United Medtronicss are evaluating the following four projects f
ID: 2677057 • Letter: #
Question
"The mangers of United Medtronicss are evaluating the following four projects for the coming budget period. The firms corporate cost of capital is 14 percent.Project Cost IRR
A $15,000 17%
B 15,000 16
C 12,000 15
D 20,000 13
a. What is the firm's optimal capital budget?
b. Now, suppose Medtronic's managers want to consider differential risk in the capital budgeting process. Project A has average risk, B has below-average risk, C has above-average risk, and D has average risk. What is the firm's optimal capital budget when differential risk is considered? (Hint: The firm's managers lower the IRR of high-risk projects by 3 percentage points and raise the IRR of low-risk projects by the same amount.)
Explanation / Answer
A All those projects where IRR> Cost of capital so A, B, C. $42,000. B. All those projects where adjusted IRR>Cost of capital so A and B only (C gets excluded because its risk adjusted IRR is 12. $30,000
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