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5. A firm is considering a long-term investment project under risky environment. The following information is given about the project: Time 0 1 2 3
5. A firm is considering a long-term investment project under risky environment. The following information is given about the project:
Time | 0 | 1 | 2 | 3 | 4 |
CE Coefficient | 1.0 | 0.95 | 0.92 | 0.89 | 0.85 |
Expected Cash Flows | -40000 | 10000 | 15000 | 17000 | 19000 |
The risk-free rate of return is 8%. The risk premium commensurate with the risk profile of the project is 5%. Will you advise the firm to accept this project using Certainty Equivalent approach? Will your suggestion differ, if you base your opinion on Risk Adjusted Discount Rate approach? Which approach will you prefer?
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