Garcia and Sons is considering two mutually exclusive projects, Projects Aracena

Question

Garcia and Sons is considering two mutually exclusive projects, Projects Aracena and Project Bilbao. The company's CFO has determined that the crossover rate for these projects is 14 percent. Given this you know that:

Neither project will be accepted if the discount rate is less than 14 percent.

The preferred project at a discount rate of 11 percent will not be preferred at a discount rate of 15 percent.

Both projects have a zero NPV at a discount rate of 14 percent.

Both projects have a negative NPV at discounts rates greater than 14 percent.

Both projects provide an internal rate of return of 14 percent.

Fox News just released a report about medical fraud. The report caused five stocks to suddenly drop in value by 20 percent. What type of risk does this news report best represent?

Fox News just released a report about medical fraud. The report caused five stocks to suddenly drop in value by 20 percent. What type of risk does this news report best represent?

Explanation / Answer

1. Option b. The preferred project at a discount rate of 11 percent will not be preferred at a discount rate of 15 percent because at cross over rate both projects will have same NPV. If discount rate is 11% then NPV will be higher than the other project and at 15% which is higher than cross over rate of 14% NPV is lower than the other project.

2. Option d is unsystematic risk because medical fraud is limited to pharmaceutical industry and not a systematic problem which affects all industries.This problem can be diversified .

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