Taussig Technologies is considering two potential projects, X and Y. In assessing the projects’ risks, the company estimated the beta of each project versus both the company’s other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following numbers:
| | | | | |
| | | Project X | | Project Y |
| | Expected NPV | $460,000
| | $460,000
|
| | Standard deviation ( NPV) | $130,000 | | $170,000 |
| | Project beta (versus market) | 1.5 | | 0.9 |
Correlation of the project cash flows with cash flows from currently existing projects.
| Cash flows are not correlated with the cash flows from existing projects. | Cash flows are highlycorrelated with the cash flows from existing projects.
|
Which of the following statements is correct?
| Correlation of the project cash flows with cash flows from currently existing projects. |
◦
Project Y has less stand-alone risk than Project X.
◦
Project Y has less corporate (or within-firm) risk than Project X.
◦
Project Y has the same level of corporate risk as Project X.
◦
Project Y has less market risk than Project X.
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