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# Certainty equivalent coefficient

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An individual is indifferent between a certain payment of \$20 and a game that will pay \$50 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of what?

0.20

0.40

0.80

2.50

https://brainmass.com/economics/microeconomics/317380

#### Solution Summary

The solution provides a brief answer with some explanation. The explanation is simple and easy to understand.

\$2.19

## V Coles Corp: Evaluate two projects using the certainty equivalent method

The V. Coles Corp. is considering two mutually exclusive projects. The expected values for each project's cash flows are as follows:

Year Project A Project B
0 (\$1,000,000) (\$1,000,000)
1 500,000 500,000
2 700,000 600,000
3 600,000 700,000
4 500,000 800,000

Management has decided to evaluate these projects using the certainty equivalent method. The certainty equivalent coefficients for each project's each cash flows are as follows:

Year Project A Project B
0 1.00 1.00
1 0.95 0.90
2 0.90 0.70
3 0.80 0.60
4 0.70 0.50

Given that this company's normal required rate of return is 15 percent and the after-tax-free rate is 5 percent, which project should be selected?

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