Explain how the certainty equivalent method be combined with APV method in the valuation of projects.

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The Answer is Combined with the APV method,the certainty equivalent method provides perhaps the simplest method for evaluating risky projects,at least in cases where the debt tax shields are certain.When the debt tax shields are certain,one simply adds the debt tax shields to the certainty equivalent cash flows of the project and discounts the sum at the risk-free rate.When the tax shields are uncertain,the financial analyst also must calculate their certainty equivalents.The certainty equivalent tax savings should be somewhat less than the tax savings achieved from debt interest when the firm is highly profitable,to account for the firm's inability to use all of the debt interest expense as a tax deduction in different situations.However,it not recommended using the risk-free scenario method for computing the certainty equivalent of an uncertain tax shield.This method assumes that the distribution of outcomes is symmetrical,but the distribution of tax savings is rarely so,because,for a given amount of debt,tax savings pay-offs are capped at a maximum value.

Explain How the Certainty Equivalent Method Be Combined with APV