Zeta Inc.'s cost of capital is 12% and the risk-free rate is 5%. It plans to invest in a new project. The cash flow projections ($000) for the project are given below. Calculate the certainty equivalent NPV ($000). $\begin{array}{llllll}
\text { Year } & \mathbf{0} & \mathbf{1} & \mathbf{2} & \mathbf{3} & \mathbf{4} \
\text { Cash Flow } & -240 & 75 & 75 & 75 & 75 \
\text { CE factor } & 1 & 0.9 & 0.85 & 0.8 & 0.75
\end{array}$

Question

Quizplus · Accepted Answer

The certainty equivalent NPV is calculated as the sum of the cash flows multiplied by their respective certainty equivalent factors. The certainty equivalent factor is the discount factor that takes into account the risk of the project. In this case, the risk-free rate is 5% and the cost of capital is 12%. The certainty equivalent factors are calculated as follows:Year 0: 1Year 1: 0.9Year 2: 0.85Year 3: 0.8Year 4: 0.75The certainty equivalent NPV is calculated as follows:CE NPV = -240 * 1 + 75 * 0.9 + 75 * 0.85 + 75 * 0.8 + 75 * 0.75 = -$19.78

Zeta Inc'S Cost of Capital Is 12% and the Risk-Free Rate