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The managers ofUnited Medtronics are evaluating the following four projects forthe coming

The managers ofUnited Medtronics are evaluating the following four projects forthe coming budget period. The firms corporate cost of capital is 14percent.

 

 

 

 

 

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 optimalcapital budget?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. Now, suppose Medtronic'smanagers want to consider differential risk in the capitalbudgeting process. Project A has average risk, B has below-averagerisk, C has above-average risk, and D has average risk.

What is the firm's optimalcapital budget when differential risk is considered?

 

 

 

 

 

 

 

 

 

 

 

 

(Hint: The firm's managerslower the IRR of high-risk projects by 3 percentage points andraise the IRR of low-risk projects by the same amount.

Nov 30 2019 View more View Less

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