9. Company risk versus project risk [LO 14.5] Both Doodie Chemical Company, a large natural gas user, and Outback Oil, a major natural gas producer, are thinking of investing in natural gas wells near the South Australian and Northern Territory border. Both companies are all equity financed. Doodie and Outback are looking at identical projects.

They have analysed their respective investments, which would involve a negative cash flow now and positive expected cash flows in the future. These cash flows would be the same for both firms. No debt would be used to finance the projects. Both companies estimate that their projects would have a net present value of $1 million at an 18 per cent discount rate and a −$1.1 million NPV at a 22 per cent discount rate. Doodie has a beta of 1.25, whereas Outback has a beta of 0.75.

The expected risk premium on the market is 8 per cent, and risk-free bonds are yielding 12 per cent. Should either company proceed?

Should both? Explain.