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kandiigurlz23
kandiigurlz23
08.12.2021 • 
Mathematics

Sarafina Ltd is considering two new investment projects, project A and project B. Each project would require an immediate cash outlay of Ksh. 10 million. The company expects to have available enough resources to undertake only one of the projects.The company management believe that return from existing activities and from the new projects will depend on economic environment that will prevail during the coming year. The estimated returns and probabilities of the possible economic environments are as follows:Economic 0.30.40.3Return from project A (Ksh "000")12,50012,5009,500Return from Project B (Ksh "000")10,00011,75013,000Aggregate return from existing portfolio of projects. (Ksh "000")90,000120,000130,000The company has a current market value of Ksh. 100 million. The management believe that the risks and returns per shilling of market value of their existing activities are similar to those of the stock market as a whole, including their dependence on whichever economic environment prevails. The return on treasury bills is 8% per annum.Using CAPM, advise the management of the company on which of the two projects should be accepted.

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