Question
Tauch Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both
Tauch Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:
Project XProject YExpected NPV$350,000$350,000Standard deviation (NPV)$150,000$100,000Project beta (vs. market)0.81.4Correlation of the project cash flows with cash flows from currently existing projectsCash flows are not correlated with the cash flows from existing projectsCash flows are highly correlated with the cash flows from existing projects
Explain the type of risk that the projects face. Does one project have more risk than the other?Show your calculations, if any, and explain your answer.
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