A manufacturing firm is considering two processes for making its product. A high capacity process that allows a larger production quantity, but which is also associated with higher fixed costs, and a lower capacity process. Both processes require an initial investment of $100 million. The risk-free rate is 4% (EAR), and the market return and projects cash flows are described in the following table.

Outcome	Probability	R_m	C_L	R_L	C_H	R_H
boom	0.6	0.24	133	0.33	150	0.5
recession	0.4	-0.08	100	0	90	-0.1

a) Which process would be chosen if we assume naively that the project returns are equal to those of the projects tracking portfolios?

b) Use the cash flow CAPM method to find the correct process that the firm should implement?

I think the R_m is the market return, R_L is the return on low capacity option and R_H is the return on high capacity