Evaluate certainty equivalent coefficient, Financial Management

Assignment Help:

Q. Evaluate Certainty Equivalent Coefficient?

Illustration: - Presume the risky cash flow is Rs. 200000 and the riskless cash flow is Rs. 140000.

The Certainty Equivalent Coefficient =  140000 /  200000 = 0.7      

Steps occupied in Certainty Equivalent Coefficient Method: - The variety of steps involved in the certainty equivalent coefficient method is:

(1) First Step: - Initially the certainty comparable coefficient has to be calculated for each year of a project.

(2) Second Step: - Secondly the risk-adjusted cash flow of a project for every year has to be calculated. The risk-adjusted cash flow of a year is able to be calculated as follows:

Risk-Adjusted Cash Flow = Estimated Cash flow for the year X Certainty Equivalent Coefficient

(3) Third Step: - Thirdly we have to determine the present value of the capital project. The present value of the Capital Project is able to be found by adopting the following procedure. Initial the risk-adjusted cash flow for every year should be multiplied by the present value factor or discount factor applicable to that year to get the present value of the risk-adjusted cash flow of every year.

(4) Fourth Step: - Fourthly we have to conclude the net present value of the project. The net present value of the project will be

Present Value of the Project                                                   -----------

Less: Initial Investment on the Project                                   -----------

Net Present Value of the Project                                            -----------

 (5) Fifth Step: - Subsequent to the NPV of a project is calculated decision is taken as to the selection of the project.


Related Discussions:- Evaluate certainty equivalent coefficient

What is business risk, What is Business risk It is related to response ...

What is Business risk It is related to response of the firm's earnings before taxes andinterest, or operating profits, to changes in sales. When cost of capital is used to eval

Outsourcing, Outsourcing Outsourcing is referring to purchase of parts ...

Outsourcing Outsourcing is referring to purchase of parts from outside suppliers. Outsourcing is the external acquisition of services or components used in the production of go

Market efficiency, Market Efficiency Though there are various markets p...

Market Efficiency Though there are various markets present in the financial system, the ease with which the transfer of funds take place depends on the level of efficiency pres

Evaluate financial report and analysis, Project Specifications Complete...

Project Specifications Complete an individual Financial Report and Analysis. You will select a company that you would like to analyze based on the parameters provided by the

Explain term financial intermediaries, Financial intermediaries Financi...

Financial intermediaries Financial intermediaries are significant to the efficient functioning of the financial markets as they act to bring the borrowers/companies and lenders

What do you signify by cost of capital, Q. What do you signify by Cost of C...

Q. What do you signify by Cost of Capital? What do you signify by 'Cost of Capital'? What is its meaning and what are the problems in determination of cost of capital? Ans.

Illustration of valuation using multiple discount rates, Illustration  ...

Illustration  Let us assume that Vishal Mehta & Co., (from Illustration 1) is using the following discounting rates in place of one rate:

Predicting cross-sectional returns, Predicting Cross-Sectional Returns ...

Predicting Cross-Sectional Returns If the market is assumed to be efficient, all securities should lie along the security market line that relates the expected rate of return t

Calculate the risk premium and probabilities , Johnson & Johnson (JNJ) is t...

Johnson & Johnson (JNJ) is trading at 68.15 (Sep 12th 2012 close). JNJ is a large health care conglomerate. It has done well so far this year (though not as well as the market) and

Why auditors need to attain audit evidence, Why auditors need to attain aud...

Why auditors need to attain audit evidence When significant fluctuations/unexpected relationshipsare identified which are inconsistent with  other  relevant  information  or  t

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd