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

question 53

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%.
$$\begin{array} { c r c } & \text { Cash } & \text { Certainty-Equivalent } \\\hline \text { Year } & \underline { \text { Flow } } & \underline { \text { Factor } } \\\hline 0 & - \$ 100,000 & 1.00 \\1 & 60,000 & 0.90 \\2 & 60,000 & 0.75 \\3 & 60,000 & 0.55\end{array}$$

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

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Definitions:

Constant Percentage

A fixed percentage rate applied in various financial calculations, such as depreciation or interest computation.

Double Diminishing-Balance

A method of accelerated depreciation that doubles the standard depreciation rate.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, reflecting the decrease in value due to wear and tear, age, or obsolescence.

Double Diminishing-Balance

A method of accelerated depreciation which calculates depreciation at twice the rate of the straight-line depreciation method on the remaining book value each year.