A project has the following forecasted cash flows:

Cash Flows $($$ Thousands$)$

Cash Flows $($$ Thousands$)$

C $0$ C $1$ C $2$ C $3$

$-100+40+60+50$

The estimated project beta is $1\mathrm{.}5.$ The market return r m is $16\%,$ and the risk$-$free rate rfis $7\%.$

$$ Estimate the opportunity cost of capital and the project's PV $($using the same rate to discount each cash flow$).$

$$ What are the certainty$-$equivalent cash flows in each year?

$$ What is the ratio of the certainty$-$equivalent cash flow to the expected cash flow in each year?

$$ Explain why this ratio declines.