University Health Center has three divisions: Real Estate, with an 8 percent cost of capital; Health Services, with a 10 percent cost of capital; and Managed Care, with a 12 percent cost of capital. The center’s risk adjustment procedures call for adding 3 percentage points to adjust for high risk and subtracting 2 percentage points for low risk. Construct a diagram such as the one in exhibit 15.8 that illustrates the range of project costs of capital for the center.

Exhibit 15.8

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EXHIBIT 15.8 Seattle Health System: Project Cost of Capital Chart High-risk project 18% HRD cost of capital = 14% Average-risk project 14% Low-risk project 12% High-risk project Corporate cost of capital = 10% ARD cost of capital = 10% 14% Average-risk project 10% Low-risk project 8% High-risk project 12% LRD cost of capital = 8% Average-risk project 8% Low-risk project 6%