The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firmâ€™s corporate cost of capital is 14 percent.
a. What is the firmâ€™s optimal capital budget?
b. Now, suppose Medtronicsâ€™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 firmâ€™s optimal capital budget when differential risk is considered? (Hint: The firmâ€™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.)