A project has an expected cash flow of $300 in year 3.The risk-free rate is 5%,the market risk premium is 8%,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 can be calculated as the risk-free rate plus the product of the market risk premium and beta, multiplied by the expected cash flow. Thus, CE = 5% + (8% x 1.25) x $300 = $228.35. Therefore, choice A is the correct answer.

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