2 Part Question A). Milwaukee Surgical Supplies is evaluating the following proj

Question

2 Part Question

A). Milwaukee Surgical Supplies is evaluating the following projects:

Project   Cost IRR

A $100,000 19%

B $75,000 17%

C $90,000 16%

D $80,000 14%

If the firm’s corporate cost of capital is 15% and all projects are of average risk, what is the optimal capital budget?

B). Using the data in the question for Milwaukee Surgical Supplies, what if the company adjusts by three percentage points for both low and high risk projects and the projects are classified as follows, Project A has high risk, Project B has high risk, Project C has average risk and Project D has low risk. What is the optimal capital budget?

Explanation / Answer

The optimal capital budget can be determined by comparing the expected project returns to the company’s marginal cost of capital schedule. This is accomplished by first plotting the returns expected from the proposed capital expenditure projects against the cumulative

Capitl Expenditure $345000*15%= $ 51750

Hence Optimal capital buddget $ 51750

Project   Cost IRR Expected Cost $100,000 19 $      19,000.00 $75,000 17 $      12,750.00 $90,000 16 $      14,400.00 $80,000 14 $      11,200.00 $ 345,000.00 $      57,350.00

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