Question: Montreal Brokers a small brokerage firm and PEI tronics a
Montreal Brokers, a small brokerage firm and PEI tronics, a software development company, are both separately considering developing and marketing a new software package. Neither party is aware that the other is considering this project and it is not at any point going to become a joint venture. These new software packages will organize mutual fund data into a new type of database and then run a series of complicated algorithms on that new database. The beta of the brokerage firm is 0.9 and the beta of the software firm is 2.3. The risk-free rate is 2 percent and the market risk premium is 10 percent. The NPV of the project, using an 11 percent discount rate, is +$1 million. However, using a 19 percent discount rate, the project has a $500,000 NPV. Should either or both parties go ahead with the project?
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