Question : RADR and Certainty Equivilants
Use both risk-adjustment : 4506
RADR and Certainty Equivilants
Use both risk-adjustment techniques, certainty equivalence and RADR, for the application of the Decision Criteria NPV using the following information and cash flow. The project is considered to be of high risk, the initial investment is $45,000, the Annual operating cash flow is expected to be $15,000 per year for four years, and the terminal value is expected to be $5,000. You are certain of the initial investment, but your certainty declines by 5% each year of the forecast (as such, you are 95% certain for the first AOCF). The risk free rate is currently 4%, low risk investments use a discount rate of 6%, medium risk of 8% and high risk of 14%.