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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.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91602341

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