which of the following methods of accounting for risk in capital budgeting subst
ID: 2737900 • Letter: W
Question
which of the following methods of accounting for risk in capital budgeting substitutes a set of risk free cash flows for the original risky cash flows? Probability trees Risk adjusted rate of return Scenario analysis Certainty equivalent approachwhich of the following methods of accounting for risk in capital budgeting substitutes a set of risk free cash flows for the original risky cash flows? Probability trees Risk adjusted rate of return Scenario analysis Certainty equivalent approach
Probability trees Risk adjusted rate of return Scenario analysis Certainty equivalent approach
Explanation / Answer
Which of the following methods of accounting for risk in capital budgeting substitutes a set of risk free cash flows for the original risky cash flows ?
Answer:- Certainty equivalent approach
Explanation:- Under Certainty equivalent approach, the expected cash flows of project are converted to equivalent riskless/riskfree amounts. This approach measures the risk more accurately. Certainty equivalent approach recognizes risk in capital budgeting analysis by adjusting estimated cash flows and employs risk free rate to discount the adjusted cash-flows.
Conclusion:- Certainty equivalent approach in capital budgeting substitutes a set of risk free cash flows for the original risky cash flows.
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