A Project Is Determined to Have Equal Probability of Generating

question 88

Multiple Choice

A project is determined to have equal probability of generating $1 million annually or $500,000 annually for four years.The initial outlay is $2 million.The expected return on Treasury bills is 6% and the market risk premium is 8%.What is the highest project Beta that will justify acceptance of the project?

• A)0.0
• B)1.00
• C)1.56
• D)2.31 Expected cash flow = (1 million x .5) + (500,000 x .5)
• = 750,000
• $2 million = 750,000

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Definitions:

Special Cause Variation

Variation in a process caused by identifiable factors, typically indicating that the process is not in control.

Process Capability

A statistical measure of a process's ability to produce output within given specifications.

Out Of Control Signals

Indicators within a process control or statistical control chart that highlight when a process is deviating from its stable state or specified limits.

Sampling Distribution

The probability distribution of a given statistic based on a random sample, used to make inferences about the population.