Taussig Technologies Is Considering Two Potential Projects, X and Y

question 51

Multiple Choice

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 data: $$\begin{array} { l l l } & \underline { \text { Project X } } & \underline { \text { Project } \mathrm { Y } } \\\text { Expected NPV } & \$ 350,000 & \$ 350,000 \\\text { Standard deviation } \left( \sigma _ { \mathrm { NPV } } \right) & \$ 100,000 & \$ 150,000 \\\text { Project beta (vs. market) } & 1.4 & 0.8 \\\text { Correlation of the project cash } & \text { Cash flows are not correlated } & \text { Cash flows are highly } \\\text { flows with cash flows from } & \text { with the cash flows from } & \text { correlated with the cash flows } \\\text { currently existing projects } & \text { existing projects } & \text { from existing projects }\end{array}$$ Which of the following statements is CORRECT?

• A) Project X has more stand-alone risk than Project Y.
• B) Project X has more corporate (or within-firm) risk than Project Y.
• C) Project X has more market risk than Project Y.
• D) Project X has the same level of corporate risk as Project Y.
• E) Project X has the same market risk as Project Y since its cash flows are not correlated with the cash flows of existing projects.

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Definitions:

Profit-Maximizing

Profit-maximizing refers to a strategy or behavior where a firm or individual seeks to achieve the highest possible profit through their decisions and actions, often by adjusting output or pricing.

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander

Total Cost

The sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Organic

Pertaining to or derived from living organisms; in agriculture, involving food produced without the use of synthetic pesticides or fertilizers.