Solution-What is the ratio of the certainty-equivalent cash

A project has the following forecasted cash flows:

The estimated project beta is 1.5. The market return r_m is 16 percent, and the risk-free rate r_f 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.

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