# Determining the optimal capital budget

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The managers of United Medtronic 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. Medtronic 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? (A 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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##### Solution Summary

Solution determines the optimal capital budget in the given case.

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a. What is the firm's optimal capital budget?

IRRs of projects A, B, and C are above cost of capital i.e. 14%, these should be selected.

Optimal capital budget=Cost of project A+ Cost of project B+ Cost of project C

= ...

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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India

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