79 Time B D E 1 (2) A farm manager is considering a $15,000 investment that will yield $5,000 per year for the next five years. The risk free rate is 7%. The risk 2 adjustment factors, an (n = year), are a0-1.0, al-0.94, 02-0.88, 93-0.82, 04-0.76, a5 -0.70. 3 4 5 Risk-free rate 6 7 ) Complete the table 8 Risk PV of risk adjustment Risk adjusted adjusted 9 Cash flow factor cash flow cash flow 10 0 ($15,000) 1.00 (15,000) (15,000) 11 1 5,000 0.94 4,700 4,392.52 12 2 5,000 0.88 4,400 13 3 5,000 0.82 14 4 5,000 0.76 15 $ 5,000 0.70 16 17 m) Using the certainty-equivalent approach, determine the net present value of the investment (NPV of the risk adjustment cash flows) 18 19 NPV 20 21 b) Given the answer of the certainty-equivalent approach, what would be the risk premium needed to adjust the risk free rate? 22 Hint: Use Goal Seek (Data -> What If Analysis -> Goal Seek) 23 24 NPV $10,000.00 25 Certainty Equivalent Adjusted Rate 26 Risk premium -7.00% 27 28 29 30 31 32 33