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A project has the following forecasted cash flows:
Cash Flows, $ Thousands
C0
C1
C2
C3
-100
+40
+60
+50
The estimated project beta is 1.5. The market return rm is 16 percent, and the risk-free rate rf is 7 percent.
a. Estimate the opportunity cost of capital and the project"s PV (using the same rate to discount each cash flow).
b. What are the certainty-equivalent cash flows in each year?
c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
d. Explain why this ratio declines.
Classify the following events as mostly systematic or mostly unsystematic and tell us why. Is the distinction clear in each case?
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