bless1
May 29, 2011, 01:50 PM
The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firm's corporate cost of capital is 14 percent?
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)
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)