TT Industries has constructed a table, shown below, that gives expected cash inflows and certainty equivalent factor for these cash inflows. These measures are for a new machine with a 5year life that requires an initial investment of Tk. 390000. The firm has a 12% cost of capital, and risk-free rate is 9%.

REQUIREMENTS:

a. What is the net present value (unadjusted for risk)? 

b. What is the certainty equivalent net present value? 

c. Should the firm accept the project? 

d. Management has some doubts about the estimate of the certainty equivalent factor for year 4. There is some evidence that it may not be any lower than that of year 3. 

What impact might this have on the decision you recommended in (c) ? Explain.

Transcribed Image Text:

Year 12345 Cash Inflows 140000 140000 140000 140000 140000 Certainty Equivalent Factor 0.94 0.86 0.80 0.70 0.60 YEAR PVIF at 9% PVIFA at 9% PVIF at 12% PVIFA at 12% 1 .917 917 2 .842 1.769 .893 .797 .893 1690 3 .772 2.531 .712 2.402 4 .708 3.240 .636 3.03 5 .650 3.890 .567 3.605 Year 12345 Cash Inflows 140000 140000 140000 140000 140000 Certainty Equivalent Factor 0.94 0.86 0.80 0.70 0.60 YEAR PVIF at 9% PVIFA at 9% PVIF at 12% PVIFA at 12% 1 .917 917 2 .842 1.769 .893 .797 .893 1690 3 .772 2.531 .712 2.402 4 .708 3.240 .636 3.03 5 .650 3.890 .567 3.605

Answer rating: 100% (QA)

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