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).
Please show all work...thanks!
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).
Please show all work...thanks!
Related questions
The mangers of United Medtronicss 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. 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.) | ||||||||||||||||||
