Using the Certainty Equivalent Approach Means That

question 22

Multiple Choice

Using the certainty equivalent approach means that

• A) the expected cash flows are reduced for projects perceived to have higher risk.
• B) the required rate of return is increased for projects perceived to have higher risk.
• C) the expected cash flows are increased for projects perceived to have higher risk.
• D) the expected cash flows are increased and the required rate of return is increased for projects perceived to have higher risk.
• E) the expected cash flows are reduced and the required rate of return is increased for projects perceived to have higher risk.

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Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, a foundational concept in economics that emphasizes the potential benefits that are missed when choosing one option over another.

Bushel

A unit of measure for volume, used primarily in dry commodities trading, equivalent to about 8 gallons or 36.4 liters in the U.S.

Acre

A unit of land area used primarily in the Imperial and US customary systems, equal to 43,560 square feet or about 4047 square meters.

Opportunity Cost

The worth of the second-best option that is given up as a consequence of deciding on a course of action.