Explain why setting a higher discount rate is not a cure

Reference no: EM13302260

1. A project has a forecasted cash flow of $220 in year 1 and 242 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of 0.5. If you use a constant risk-adjusted discount rate, what is

a. The PV of the project?
b. The certainty-equivalent cash flow in year 1 and year 2?
c. The ratio of the certainty equivalent cash flows to the expected cash flows in years 1 and 2?

2. . Explain why setting a higher discount rate is not a cure for a upward-biased cash flow forecasts.

Reference no: EM13302260

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