DKA Uses the Certainty Equivalent Approach to Deal with Total

question 36

Multiple Choice

DKA uses the certainty equivalent approach to deal with total project risk and is considering a project with the following: $$\begin{array} { l l l } \text { Year } & \text { Expec. NCF } & \text { Certainty Equivalent Factor } \\0 & - \$ 60,000 & 1.0 \\1 & \$ 20,000 & 0.95 \\2 & \$ 20,000 & 0.90 \\3 & \$ 25,000 & 0.80 \\4 & \$ 30,000 & 0.65\end{array}$$ ? What is the certainty equivalent NPV for this project if the risk-free rate is 8% and the required return on the market portfolio is 15%?

• A) $3,233
• B) $17,743
• C) -$15,243
• D) $13,233

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Definitions:

Format Cells

The process of changing the appearance or data type of cells in a spreadsheet.

Order of Operations

The rules that determine the sequence in which operations are performed in mathematical expressions, often remembered as PEMDAS (Parentheses, Exponents, Multiplication and Division, and Addition and Subtraction).

MAX Function

A formula used in spreadsheet programs to find the largest number in a set of values.

Pastes Formula

The action of copying a formula from one location and inserting it into another within a spreadsheet or document.