A project has an expected cash flow of $300 in year 3. The risk-free rate is 5 percent, the market risk premium is 8 percent, and the project's beta is 1.25. Calculate the certainty equivalent cash flow for year 3, CEQ₃.

Question

Quizplus · Accepted Answer

The certainty equivalent cash flow (CECF) can be calculated using the formula:
CECF = Expected Cash Flow / (1 + Risk Premium)

Risk Premium = Beta * Market Risk Premium = 1.25 * 8% = 10%
CECF = 300 / (1 + 10%) = 273.07

Therefore, the closest choice to the calculated value is A) $228.35.

A Project Has an Expected Cash Flow of $300 in Year