Purchase Solution

Certainty equivalent net present value

Not what you're looking for?

Ask Custom Question

1. Certainty equivalents - Accept - reject decision
Pleasantville ball valve has constructed a table, shown below, that gives expected cash inflows and certainty equivalent factors for these cash inflows. These measures are for a new machine with a five-year life that requires an initial investment of $95,000. The firm has a 15 percent cost of capital, and the risk-free rate is 10 percent.

Year (t) Cash Inflows (CFt) Certainty equivalent factors (at)
1 $35,000 1
2 $35,000 0.8
3 $35,000 0.6
4 $35,000 0.6
5 $35,000 0.2

a.        What is the net present value (unadjusted for risk)?

b.        What is the certainty equivalent net present value?

c.        Should the firm accept the project? Explain why.

d.        Management has some doubts about the estimate of the certainty equivalent factor for year 5. There is some evidence that it may not be any lower than that for year 4. What impact might this have on the decision you recommended in C? Explain.

Purchase this Solution

Solution Summary

The solution calculates Certainty equivalent net present value.

Purchase this Solution


Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce