the mangers of united medtronics are evaluating the following four projects for
ID: 2677143 • Letter: T
Question
the mangers of united medtronics are evaluating the following four projects for the coming budget period. the firm's 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 gthe firm's optimal capital budget?
b. now, suppose Medtronics'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, so Cost of optimal capital budget will be A+B+C 15000+15000+12000=$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. A+B=$30,000
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