Description of this paper

The managers of United Medtronics are evaluating t...

Description

Solution


Question

The managers 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.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.

 

Paper#5595 | Written in 18-Jul-2015

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