Analysts and investors often use return on equity $($ROE$)$ to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company$$s ROE numbers look good.

If a firm takes steps that increase its expected future ROE, its stock price will increase.

Based on your understanding of the uses and limitations of ROE, which of the following projects should be chosen if they have the same risk and cost of capital?

Project Y$,$ with $40\%$ ROE and a small investment, generating low expected cash flows

Project X$,$ with $35\%$ ROE and a large investment, generating high expected cash flows