A project has an expected risky cash flow of $200 in year 1.The risk-free rate is 6%,the expected market rate of return is 16%,and the project's beta is 1.50.Calculate the certainty equivalent cash flow for year 1,CEQ₁.

Question

Quizplus · Accepted Answer

To calculate the certainty equivalent cash flow, we need to use the formula:

CEQ = RF + β*(ERM - RF) * Risk premium

RF = Risk-free rate = 6%
β = Beta = 1.50
ERM = Expected market return = 16%
Risk premium = ERM - RF = 16% - 6% = 10%

Substituting the values, we get:

CEQ = 6% + 1.50*(16% - 6%) * 10% = $175.21

Therefore, the certainty equivalent cash flow for year 1 is $175.21.

Hence, the best choice is (A).

A Project Has an Expected Risky Cash Flow of $200