Intro

SharpPoint Accelerator is a U.S. company considering a new factory either in the U.S. or in Mexico. The cash flows generated by the new factory will account for 20% of cash flows of the entire company, while its existing U.S. business accounts for the remaining 80% of cash flows.

The cash flows from the existing business have a standard deviation of 25%. The cash flows from the new factory will have a standard deviation of 13% if the new business is placed in the U.S., and 19% in Mexico. The correlation of cash flows between the existing business and the new factory in the U.S. is 0.88, and the correlation between the existing business and the new factory in Mexico is 0.12.

Part 1

What is the variance of the total company cash flows if the company invests in the U.S.? (Answer in 4 decimal places)

Part 2

What is the variance of the total company cash flows if the company invests in Mexico? (Answer in 4 decimal places)