Adjusting for Risk Docs R Us has performed a risk assessment of independent projects. They adjust for project risk by raising the calculated IRR by 3% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 2% for high risk projects.

Risk

ADJ

Project Cost NPV IRR Level IRR

A $21,000 $ -2,000 10% Low

B $17,000 $ 4,000 14% Low

C $15,000 $ 2,000 12% High

D $14,000 $ 4,000 15% Average

E $ 4,000 $ -1,000 11% High

A. Without capital rationing, and given their cost of capital of 12%, and ignoring risk, based on IRR which projects should Meds R Us accept? Why?

B. Without capital rationing, and given their cost of capital of 12%, and considering risk, which projects should Meds R Us accept? Why? Note that you will add 3% to the Projects IRR if it is low risk (making it look more favorable since it is), leave average risk Projects IRRs the same, and subtract 2% from the IRR for high risk Projects (making them less favorable since they are due to the risk).