Another procedure by which to evaluate project risk is the certainty equivalent approach. Under this approach, a project's expected future cash flows are adjusted from their forecasted-and generally risky-values to their equivalent certain, or guaranteed, values. Thus, each certainty equivalent cash flow represents a risk-free cash flow that the decision-maker considers to be equal to the riskier cash flow. Consider the case of the Fantastique Fantom Costume Company: The company has forecasted cash flows expected from a planned investment project. Considering its uncertain economic conditions, the firm's managers want to adjust the project's risk and then estimate its net present value (NPV) using the certainty equivalent factor approach. you've been assigned to complete this analysis Using the data available to you in the following table, complete the certainty equivalent analysis for the project. Use 8% as the tax-adjusted risk-free rate in your analysis. Remember, the firm's cost of capital reflects the average riskiness of the company, and using the firm's cost of capital in your analysis would lead to a double counting of the project's risk. Fantastique Fantom Costume Company: Calculation of Certainty Equivalent Net Present Value Certainty Equivalent Cash Flow Present Value of Cash Flows Expected Certainty Equivalent Factor(a) 1.00 0.90 0.80 0.70 0.60 Year NCF 0$22,000 1 $19,800 2 $17,600 3 $16,500 4 $14,300 -$22,000 -$22,000 True or False: Since managers and financial decision makers estimate the certainty equivalent factor, the estimates are most likely to reflect managers' perceptions of risk rather than shareholder risk. O True O False Flach Piayer WiN 26.0,.13 Grade It N Save & Continue 2053 Cengge Leming except an noted All tights reserved