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The manager of united medtronics are evaluating the following four projects for the coming budget period. the firms 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%
a. Assuming that all four projects have an average risk, what is the firms optimal capital budget?
b. Now, suppose Medtronics manager 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 firms optimal capital budget when differential risk is considered?
(hint the firms managers lower the IRR of the high risk projects by 3percentage points and raise the IRR of the low risk projects by the same amount)
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