Reference no: EM132505849

The Delta corporation is considering an investment in one of the two mutually exclusive proposals, Project A involving an initial outlay of Rs. 1,70,000 and Project B involving Rs. 1,50,000. The certainty equivalent approach is used in evaluating risky investments. The current yield on treasury bills is 5% and the company uses this as the risk less rate. The relevant information are as follows:

                           Year Project - A                                                       Project - B

                        Cash flow (Rs.)           Certainty- equivalent               Cash flow (Rs.)                 Certainty- equivalent

1                           90,000                          0.8                                   90,000                            0.9

2                           1,00,000                        0.7                                    90,000                            0.8

3                           1,10,000                       0.5                                      1,00,000                             0.6

Question i) Which project should be acceptable to the company?

Question ii) Which project is riskier? How do you know?

Question iii) If the company was to use the risk - adjusted discount rate method, which project would be analyzed with higher rate?