Risk-Adjusted Optimal Capital Budget. Refer to Problem 11A. Management neglected to incorporate project risk differentials into the analysis. FPI?s policy is to add 2 percentage points to the cost of capital of those projects significantly more risky than average and to subtract 2 percentage points from the cost of capital of those which are substantially less risky than average. Management judges Project A to be of high risk, Projects C and D to be of average risk, and Project B to be of low risk. No projects are divisible.
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