Billy Bob Is Considering Building a Water Slide Park That

question 4

Multiple Choice

Billy Bob is considering building a water slide park that will require a net investment of $200,000 and yield the following net cash flows: $$\begin{array} { l l l } \text { Year } & \text { Net Cash Flows } & \text { Cert. Equiv. Factor } \\1 & \$ 120,000 & 0.90 \\2 & \$ 90,000 & 0.80 \\3 & \$ 60,000 & 0.65 \\4 & \$ 30,000 & 0.50 \\5 & \$ 10,000 & 0.30\end{array}$$ ? If the risk-free rate is 8 percent and the market risk premium is 6 percent, what is the certainty equivalent NPV for this project?

• A) $12,805
• B) $5,746
• C) $3,703
• D) $11,025

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Definitions:

Accrual Basis

An accounting method where transactions are recorded when they are earned or incurred, regardless of when cash is exchanged.

Cash Basis

An accounting method where revenues and expenses are recorded when they are actually received or paid out, not when they are earned or incurred.

Time Basis

A method of compensation or work arrangement based on the amount of time spent on a job rather than the task's outcome.

Expenses Recorded

The process of documenting all costs incurred during a specific period in the financial records, which are used to assess the company's profitability.