10. A. B. Prince Inc. is considering purchasing a new machine with a useful life of...

 

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10. A. B. Prince Inc. is considering purchasing a new machine with a useful life of five years. The initial investment for the machine is $195,000. The expected cash flows and certainty equivalents are as follows: Year 1 2 2340 5 Cash-flow 80,000 80,000 80,000 80,000 80,000 H Certainty Equivalent 95 .90 Assume that the risk-adjusted discount rate is 13%, the firm's cost of capital is 10% and the risk-free rate is 5% (8 points) Using the certainty equivalent approach calculate the net present value. H .80 .70 .65 Using the risk-adjusted discount rate approach calculate net present value. 10. A. B. Prince Inc. is considering purchasing a new machine with a useful life of five years. The initial investment for the machine is $195,000. The expected cash flows and certainty equivalents are as follows: Year 1 2 2340 5 Cash-flow 80,000 80,000 80,000 80,000 80,000 H Certainty Equivalent 95 .90 Assume that the risk-adjusted discount rate is 13%, the firm's cost of capital is 10% and the risk-free rate is 5% (8 points) Using the certainty equivalent approach calculate the net present value. H .80 .70 .65 Using the risk-adjusted discount rate approach calculate net present value.

Answer rating: 100% (QA)

A Using the certainty equivalent approach we need to calculate the present value of each cash flow using the certainty equivalent factor and then subt... View the full answer