Purchase Solution

# Determining the optimal capital budget

Not what you're looking for?

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.)

##### Solution Summary

Solution determines the optimal capital budget in the given case.

##### Solution Preview

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
= ...

Solution provided by:
###### Education
• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
###### Recent Feedback
• "Thank you"
• "Really great step by step solution"
• "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
• "Thanks Again! This is totally a great service!"
• "Thank you so much for your help!"

##### Exponential Expressions

In this quiz, you will have a chance to practice basic terminology of exponential expressions and how to evaluate them.

##### Graphs and Functions

This quiz helps you easily identify a function and test your understanding of ranges, domains , function inverses and transformations.

##### Multiplying Complex Numbers

This is a short quiz to check your understanding of multiplication of complex numbers in rectangular form.

##### Geometry - Real Life Application Problems

Understanding of how geometry applies to in real-world contexts