# Reduction in risk of portfolio

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Project Evaluation. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine actually can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35 percent and the discount rate is 8 percent. Should Kinky buy the machine?

Diversification. In which of the following situations would you get the largest reduction in risk by spreading your portfolio across two stocks?

a. The stock returns vary with each other.

b. The stock returns are independent.

c. The stock returns vary against each other.

CAPM and Valuation. You are a consultant to a firm evaluating an expansion of its current business. The cash flow forecasts (in millions of dollars) for the project are:

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Project Evaluation. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine actually can be sold in 5 years for ...

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