What is the firm optimal capital budget

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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

Problem a. What is the firm's capital budget?

Problem 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.)

 

Reference no: EM132933147

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