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What is the firm optimal capital budget

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Question - 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

$15,000

17%

B

$15,000

16%

C

$12,000

15%

D

$20,000

13%

What is the firm's optimal capital budget?

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.).

Reference no: EM133032625

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