Question - 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 $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 Medtronics'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.)