A company has enough capital to invest in only one project. A major company as 1

Question

A company has enough capital to invest in only one project. A major company as 100 wells in the same field. The probability of successfully striking oil is 10% for any well in in this field. Which of the following statement is most correct the risk involved in these capital budgeting projects?

Ans: The appropriate risk for the driller is systematic risk.
Ans: The risk for the driller is the same as the risk for the major oil company since they are both drilling in the same oilfield.

Ans: The best measure of risk for the oil driller is project standing alone risk.

Ans: The appropriate risk for the major oil company is contribution-to-firm risk, if all shareholders of the firm are well-diversified.

Explanation / Answer

Ans: The risk for the driller is the same as the risk for the major oil company since they are both drilling in the same oilfield.

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