Net cash flow-certainty-equivalents of the new model

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Reference no: EM13826242

The Bull Company, a lawn mower manufacturer, is considering the introduction of a new model. The initial outlay required is $22 million. Net cash flows over the 4-year life cycle and the corresponding certainty-equivalents of the new model are as follows:

Year Net Cash Flow Certainty-equivalent Factor

1 $15 million 0.90

2 $13 million 0.75

3 $11 million 0.55

4 $ 9 million 0.30

The firm's cost of capital is 14% and the risk-free rate is 6%. Bull uses the certainty-equivalent approach in evaluating above-average risk investments such as this one. What is the project's certainty-equivalent NPV?

A. $20,083,000.28

B. $6,631,663.90

C. $13,905,000.72

D. $3,019,400.20

Reference no: EM13826242

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