Project X is a high risk project with the following cash flows:

Year 0 = Tk -2,80,000,

Year 1 = Tk 40,000,

Year 2 = Tk75,000,

Year 3 = Tk 92,000,

Year 4 = 105,000,

Year 5 = Tk115,000, and

Year 6 = Tk 125,000.

The following are the certainty equivalent coefficients for the six years: .9, .9, .8, .8, .7, and .6.

The WACC is 20 percent and the risk-free rate is 11 percent.

a. Determine the certainty equivalent NPV of the project.

b. Should the project be selected? Why? Provide proper interpretation of your decision.

c. What are the long-term effects of relying on one discount rate for all projects and no adjustment is made for risk

Answer rating: 100% (QA)

a To calculate the certainty equivalent NPV of the project we need to first calculate the present value of each cash flow using the formula PV CF 1 rn ... View the full answer