Author Question: You are given risky cash flow data for a three-year project: Year Cash flow 1 2,000 2 3,000 3 ... (Read 127 times)

karen · **on:** Jul 1, 2018

You are given risky cash flow data for a three-year project:

Year Cash flow
1 2,000
2 3,000
3 4,000

The initial cash outflow is 6,000; the risk-free interest rate is 6, and the risk-adjusted discount rate is 10.

Calculate the NPV by both the risk-adjusted discount rate method and the certainty equivalent method in such a way that the NPV will be the same using either method.

Question 2

The supply for products that exhibit cost externalities is generally ________ the supply for products that do not.

A) greater than
B) less than
C) the same as
D) greater or less (depending on the market) than

Anonymous · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

Riskless Risky
Cash Flow Cash Flow
CE Riskless Discounted Discounted
Year Cash Flow Factor Cash Flow at 6 at 10
1 2000 0.963636 1927 1818 1818
2 3000 0.928595 2786 2479 2479
3 4000 0.894828 3579 3005 3005

Total 7303 7303
Less initial investment 6000 6000
NPV 1303 1303

CE factors:
1.06/1.1 = 0.963636
1.062/1.12 = 0.928595
1.063/1.13 = 0.894828

Answer to Question 2

A