A project has an expected risky cash flow of $200, in year-1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year-1.
A) $175.21
B) $164.29
C) $228.30
D) None of the above

Question

Quizplus · Accepted Answer

The certainty equivalent cash flow is calculated as follows:CE = E(CF) / (1 + r)^bwhere:E(CF) is the expected risky cash flowr is the risk-free rateb is the project's betaIn this case, the expected risky cash flow is $200, the risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Therefore, the certainty equivalent cash flow is:CE = 200 / (1 + 0.06)^1.5 = $175.21

A Project Has an Expected Risky Cash Flow of $200