Original assumption that all projects have average risk

Assignment Help Financial Management

Reference no: EM131049103

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. Project Cost IRR

A $20,000 17%

B $15,000 16%

C $12,000 15%

D $18,000 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.)

c. Return to the original assumption that all projects have average risk. If United Medtronics are only approved for $30,000 towards their project budget, which project or projects would you accept? (Hint: Any money not used for a project will not receive any return).

Reference no: EM131049103

Questions Cloud

Considering new four-year expansion project : The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $2.8 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a ..

Would this be a plausible way of compressing text : With the quality setting at 100, would this be a plausible way of compressing text?

Compress into jpeg format and decompress : How far off are the resultant bytes at the default quality setting? How would you describe the inaccuracies introduced, visually? What quality setting is sufficient to recover the file exactly?

What is the discount rate : Consider a 30 year series of cash flows that pays $1,000 at the end of each year, and has present value of $12,500. What is the discount rate? (One way, but by no means the only way, to solve this problem is to use the Solver in a Microsoft Excel s..

Original assumption that all projects have average risk : 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. Project Cost IRR. What is the firm's optimal capital budget? Return to the original assumpt..

High-tech equipment to produce specialized aluminum products : ALUM, Inc. uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,520,000 to purchase plus an additional $48,000 a year to operate. The machines have a five-year life after which they ..

What are the visible effects of omitting these frames : Use mpeg play to play an MPEG-encoded video. Experiment with options, particularly -nob and -nop, which are used to omit the B and P frames, respectively, from the stream.

Declining balance depreciation method : The net annual value added that can be attributed to this machine is constant over eight years and a mounts to $15,000. An effective income tax-rate of 40% is used by the company, and the before-tax MARR equals 25% per year. Use 150% Declining Bal..

Depreciated straight-line to zero over four-year tax life : The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $2.8 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a ..

User Account

All Pages