2

23.10

10.The risk free rate is 4%. The return on the market is expected to be 14%. You must choose between the following two projects that require the same piece of land and last only one year.

 

Project A

Project B
Initial Outlay

-500

-700
Expected Cash flow next year

+800

+900
Beta (b )

1.1

0.7
  1. Which project should you take? (6 pts.)

  2. Is the project you're taking the riskier or safer one? Explain. (3 pts.)

    Riskier (Beta of A is greater than Beta of B)

  3. If someone offered you $200 for the land right now, would you still take the project? Explain. (3 pts.)

No. I'd take the $200 because it's greater than NPVA and NPVB .

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