Tallant Technologies Is Considering Two Potential Projects,X and Y Correlation of the Project Cash Flows with Cash Flows from the Projects

question 52

Multiple Choice

Tallant 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}{c}\begin{array}{lll}\\\text {Expected NPV}\\\text {Standard deviation (oNPV) }\\\text {Project beta (vs. market) }\end{array}\begin{array}{lll}\text {Project \( X \) }\\\$ 500,000 \\\$ 200,000 \\1.4 \end{array}\begin{array}{lll}\text {Project \( Y \) }\\\$ 500,000 \\\$ 250,000 \\0.8\end{array}\end{array}$
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 highly correlated with the cash flows from existing projects. Which of the following statements is CORRECT?

• A)Project X has more corporate (or within-firm) risk than Project Y.
• B)Project X has more market risk than Project Y.
• C)Project X has the same level of corporate risk as Project Y.
• D)Project X has less market risk than Project Y.
• E)Project X has more stand-alone risk than Project Y.

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Definitions:

Degrees of Freedom

The number of independent pieces of information available to estimate another piece of information, often related to sample size in statistical analyses.

Chi-squared Distributed

Pertains to a statistical distribution one typically employs to evaluate the goodness-of-fit of observed data with theoretical expectations.

Randomized Block Model

A statistical model used to remove the variability caused by known but irrelevant variables by grouping similar experimental units.

Nonparametric Counterpart

An equivalent statistical method or technique that does not assume the data follows any specific fixed distribution, often used as an alternative to traditional parametric tests.