The certainty equivalent approach to project valuation may have an advantage over the risk-adjusted discount rate approach when:
A)the certainty equivalent factor does not decrease at a constant rate.
B)the certainty equivalent factor does decrease at a constant rate.
C)valuing investments in government bonds.
D)comparing projects of unequal lives.

Question

Quizplus · Accepted Answer

The certainty equivalent approach can be advantageous when the certainty equivalent factor does not decrease at a constant rate because it allows for a more nuanced adjustment to cash flows to reflect risk, unlike the risk-adjusted discount rate approach which assumes a constant adjustment for risk across all periods.

The Certainty Equivalent Approach to Project Valuation May Have an Advantage