American Steel Corporation is considering two investments. One is the purchase o

Question

American Steel Corporation is considering two investments. One is the purchase of a new continuous caster coasting $100 million. The expected net present value of this project is $20 million. The other alternative is the purchase of a supermarket chain, also costing $100 million. It too, has an expected net present value of $20 million. The firms management is interested in reducing the variability of its earnings.
a. which project should the company invest in?
b. what assumptions did you make to arrive at this decision?

Explanation / Answer

The supermarket chain. We assume that diversifying its investments will reduce the variability of it's earnings, since the supermarket business is not perfectly correlated with the steel business.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.