%u2022b. Because of the risk inherent in this type of investment, Seminole has d
ID: 2699588 • Letter: #
Question
%u2022b. Because of the risk inherent in this type of investment, Seminole has decided
to employ the certainty equivalent approach. After considerable discussion,
management has agreed to apply the following certainty equivalents to the
project%u2019s cash flows:
Year at
0 1.00
1 0.95
2 0.90
3 0.80
4 0.60
5 0.40
6 0.35
7 0.30
If the risk-free rate is 9 percent, compute the project%u2019s certainty equivalent net
present value.
c. On the basis of the certainty equivalent analysis, should the project be
accepted?
Explanation / Answer
To compute NPV enter all your cash flows, then enter your interest rate of 9 percent... (on the HB 10B2 calculator, then hit the orange key and NPV)... this will give you NPV 5.2877. And whether the project is accepted is based on information you didnt provide, like if they have a goal NPV or if their money is spent better somewhere else? They probably want to have the project with the highest present value...
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.