Table 12.5
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40.
-What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between Projects X and Y (See Table 12.5).

Question

Table 12.5
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between Projects X and Y (See Table 12.5).

Quizplus · Accepted Answer

The Answer of Table 12.5
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between Projects X and Y (See Table 12.5).

Table 12.5 Nico Manufacturing Is Considering Investment in One of Two Mutually