Question

Quantitatively Subjectively Consider the case of another company.

Turkey Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Standard deviation of project's expected NPVS Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) Project A Project 6 $80.000 $40,000 0.9 02 0.6 0.4 Which of the following statements about these projects' risk is correct?

Check all that apply Project A has more corporate risk than Project B. Project B has more market risk than Project A. Project B has more corporate risk than Project A. Project A has more stand-alone risk than Project B. Ordet NOW Save & Continue Continue without saving

Answer 1

Stand alone risk is computed as per the standard deviations of the expected NPVs of the respective projects and hence it can be said that the stand alone risk for project A is higher as against project B because its standard deviation with respect to its project NPV is higher at $80,000 as against $40,000 for project B. The measurement of market risk is mainly done through beta of respective projects. It is evidenced that beta for project B is higher at 2 as against 0.9 for project A. Therefore, it can be said that the market risk for project B is high as compared to that with project A. The measurement of corporate risk is done through the correlation of cash flows for a specific project as against the cash flows of the firm’s existing projects. In this regard, it can be said that project A has more corporate risk as compared to that with project B due to higher correlation coefficient at 0.6 as against 0.4 for project B.

Hence, the statements “Project A has more corporate risk than Project B”, “Project B has more market risk than Project A”, and “Project A has more stand-alone risk than Project B” are correct.