Chapter $12$

Question $2$

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.

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$.$ 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 Project's 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$).$