The managers of American Medtronics 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 $20,000 11%

B $12,000 12%

C $11,000 14%

D $18,000 15%

a. What is the firm's optimal capital budget?

b. Now, suppose American Medtronic'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 averagerisk. What is the firm's optimal capital budget when differential risk is considered? (Hint: The firm'smanagers lower the IRR of high-risk projects by 3 percentage points and raise the IRR of low-riskprojects by the same amount.)

c. Return to the original assumption that all projects have average risk.If AmericanMedtronics are only approved for $30,000 towards their project budget, which project or projects would you accept?(Hint: Any money not used for a project will not receive any return).