Given the Following Cash Flows and Certainty Equivalent Factors for an Investment

question 46

Multiple Choice

Given the following cash flows and certainty equivalent factors for an investment project, determine the certainty equivalent net present value. The firm's cost of capital is 14% and the risk-free rate is 6%. $$\begin{array} { l l l } & \text { Cash } & \text { Certainty-Equivalent } \\\text { Year } & \text { Flow } & \text { Factor } \\0 & - \$ 100,000 & 1.00 \\1 & \$ 60,000 & 0.90 \\2 & \$ 60,000 & 0.75 \\3 & \$ 60,000 & 0.55\end{array}$$

• A) $32,000
• B) $18,692
• C) $4,238
• D) Cannot be determined

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Definitions:

Average Total Costs

The cost of producing each unit, calculated by dividing the overall production expense by the number of units produced.

Average Variable Costs

The total variable costs of production divided by the number of units produced, highlighting how variable costs change with output levels.

Average Total Costs

The total cost of production divided by the total quantity produced, representing the average cost per unit.