DKA uses the certainty equivalent approach to deal with total project risk and is considering a project with the following:

What is the certainty equivalent NPV for this project if the risk-free rate is 8% and the required return on the market portfolio is 15%?
A)$3,233
B)$17,743
C)-$15,243
D)$13,233

Question

DKA uses the certainty equivalent approach to deal with total project risk and is considering a project with the following:

What is the certainty equivalent NPV for this project if the risk-free rate is 8% and the required return on the market portfolio is 15%?
A)$3,233 
B)$17,743 
C)-$15,243 
D)$13,233

Quizplus · Accepted Answer

$$\begin{array} { l r r r } 
\underline { \text { Year } } & \underline { \text { Cert. Equiv. CF } } & \underline { \text { PVIF } } & \underline { \text { PVCF } } \
0 & - \$ 60,000 & 1.000 & - \$ 60,000 \
1 & 19,000 & .926 & 17,594 \
2 & 18,000 & .857 & 15,426 \
3 & 20,000 & .794 & 15,880 \
4 & 19,500 & .735 & \underline { 14,333 } \
\text { Certainty Equivalent NPV } & & &\underline { \underline { \$ 3.233 } }
\end{array}$$

DKA Uses the Certainty Equivalent Approach to Deal with Total