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2 Part Question
A) Milwaukee Surgical Supplies is evaluating the following projects:
Project Cost IRR
A $100,000 19%
B $75,000 17%
C $90,000 16%
D $80,000 14%
If the firm’s corporate cost of capital is 15% and all projects are of average risk, what is the optimal capital budget?
B) Using the data in the question for Milwaukee Surgical Supplies, what if the company adjusts by three percentage points for both low and high risk projects and the projects are classified as follows, Project A has high risk, Project B has high risk, Project C has average risk and Project D has low risk. What is the optimal capital budget?
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