C. (6 Points) Docs R Us now performs a risk assessment of the projects. They adj

Question

C. (6 Points) Docs R Us now performs a risk assessment of the projects. They adjust for project risk by raising the calculated iRR by 3% for low risk projects, leaving the IRR the same for moserate risk projects, and lowering the calculated IRR by 2% for Ngh risk projects, without capital rationing, and given their cost of capital of 11%, which prajects should Meds R Us accept? Whry? IBR 11% 16% 12% 17% 95, Risk Level High Average High Project $21,000 $17,000 $15,000 $14, $4,000 $5,000 $4,000 $2,000 $4,000 $-1,000 D. (6 Points) Considering the risk assessment in Part C above, if Docs R Us has a Capital Budget imit of $120,000, which projects should they accept? whry?

Explanation / Answer

As per given data for the firm, its cost of Capital is 11%.

As per adjustment for project risk provided,

they should use IRR as 14% with Low Risk Project

IRR of 11% for average or moderate risk project and 9% for High Risk Project.

Now in without Capital Rationing, firm can accept all projects with Positive NPV. Accordingly it should accept Projects A,B,C,D with positive NPV and should reject E with negative NPV.

D. Now firm has Capital Budget of $ 120,000. it should select project with Highest NPV i.e.A or where differene between IRR and Cost of Capital is highest, i.e. Project D to maxmize returns on investment.

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