Cranston Plastic Packaging Solutions Has Run a Simulation on a Large

question 30

Multiple Choice

Cranston Plastic Packaging Solutions has run a simulation on a large project to produce eco-friendly packaging for personal hygiene products. The mean NPV is an impressive $8,000,000, but there is a 16% probability of a negative NPV and a 5% probability of an NPV worse than ($6,000,000) .

• A) Cranston should reject the project. It is too risky.
• B) Cranston should accept the project. The odds are in their favor.
• C) Cranston should explore options to reduce the likelihood of very unfavorable outcomes.
• D) Cranston should change the probabilities used in the simulation to reduce the likelihood of a negative NPV.

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Definitions:

Market Portfolio

The portfolio encompassing all assets in which each asset is held in proportion to its market value.

Beta

The measure of the systematic risk of a security. The tendency of a security’s returns to respond to swings in the broad market.

Market Risk

Risk factors common to the whole economy; also called systematic or nondiversifiable risk.

Diversified Portfolio

An investment strategy that spreads investments among various financial instruments, industries, and other categories to minimize risk.