11-3A. (Certainty equivalents) The V Coles Corp. is considering two mutually exclusive projects.

The expected values for each project's cash flows are as follows:

Management has decided to evaluate these projects using the certainty equivalent method. The certainty equivalent coefficients for each project's cash flows are as follows:

Given that this company's normal required rate of return is 15 percent and the after-tax risk-free rate is 5 percent, which project should be selected?

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YEAR PROJECT A PROJECT B 0 1 -$1,000,000 500,000 -$1,000,000 500,000 2 700,000 600,000 3 600,000 700,000 500,000 800,000