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What is the ratio of the certainty-equivalent cash flow to

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Reference no: EM13480864

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.

Reference no: EM13480864

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