Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas

producer, are thinking of investing in natural gas wells near Houston. Both are all equity financed

companies. Dow and Superior are looking at identical projects. Theyve analyzed their respective

investments, which would involve an initial cash investment followed by positive expected cash

flows in the future. The investment and future cash inflows would be the same for both firms. No

debt would be used to finance the projects. Both companies estimate that their project would have an

NPV of $1,000,000 at an 18% discount rate but a negative NPV of -$1,100,000 at a 22% discount

rate. Dow has a beta of 1.25 while Superior has a beta of .75. The expected risk premium on the

market is 8% and risk-free bonds are yielding 12%. Which of the following is true?

a. Both companies should invest

b. Neither company should invest

c. Dow should invest but Superior shouldnt

d. Superior should invest but Dow shouldnt