Crinksys Inc. is a large firm operating in the crude oil and natural gas industries around the world. The company is heavily invested in pipeline networks and crude oil transportation. Recently, the board of directors voted for a policy of diversification related to the firm's new investments. The company's Balance Sheet as at 2016 noted current assets of $5 Billion, fixed assets net of depreciation and depletion in the amount of $14 Billion and other assets in the amount of $1.0 Billion. The firm's assets have been valued by analysts and the book values are closely aligned with the asset's market values. The company is considering an investment in the Caribbean that will require a total injection of $15 Billion. The company currently has an A+ rating and will be able to raise the required capital at favorable rates. Analysts see Crinksys Inc. as a solvent entity and assess its current risk (using standard deviation) at 6%. Crinksys' expected return on total assets has averaged 12%. If Crinksys invests in the Caribbean project, the expected return is anticipated to be 18% on that investment. However, analysts suggests that certain risks are of concern given that the project is negatively correlated (-0.8) with the firm's current operations. The analysts are especially concerned with contamination risks. The standard deviation associated with the new investment is 16%. Required: a) Calculate the expected return for Crinksys if the project is pursued. (7 marks) b) Calculate the risk of the firm assuming the investment is pursued, (9 marks) c) Justify the recommendation you would make to the board in relation to whether Crinksys should or should not pursue the investment, (4 marks) Formula sheet if needed D Po r D Po r-8 - Di + 8 Dn= D. *(1+g)" Original Cost - Salvage Value Straight - Line Depreciation n WACC = W.8*ReW.p*Rp. + W.d *RD*(1-t.) 2 2 o= wazoa? + wp?og? + 2WaWbPa,boq un = E(R.p.) = W.4*E(R.A.) + W.8.*E(RB-) -A: E(RA.) = Rx + [E(RM) R.f]*B.A - (Ra+b) = ROI* A + ROIb.* B A+B A+B