Question: Operations Management EXAN projects A company uses the certainty-equivalent approach in its evaluation of risky investments. Currently, the company has two alternative approaches. The expected

Operations Management Operations Management EXAN projects A company

EXAN projects A company uses the certainty-equivalent approach in its evaluation of risky investments. Currently, the company has two alternative approaches. The expected net cash flows for the two are as follows: Year Project A Project B 0 15,000 (-) 20,000 1 7,500 12,500 2 7,500 10,000 3 7,500 7,500 4 5,000 5,000 Risk analysis of the cash flow distribution has provided the following certainty-equivalents: Year Project A Project B 0 1.00 1.00 1 0.95 0.90 2 0.85 0.80 3 0.70 0.70 4 0.65 0.60 If the after-tax risk free rate is 5% per annum, which of the two projects should be selected

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