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For Ejection Air Seats Airlines new project, the initial outlay required is $22 million. Net cash flows over the 4-year life cycle and the corresponding
For Ejection Air Seats Airlines new project, the initial outlay required is $22 million. Net cash flows over the 4-year life cycle and the corresponding certainty-equivalents of the new model are as follows:
Year | Net Cash Flow | Certainty-equivalent |
1 | $15 million | 0.90 |
2 | 13 million | 0.75 |
3 | 11 million | 0.55 |
4 | 9 million | 0.30 |
The firm's cost of capital is 14% and the risk-free rate is 6%. Bull uses the certainty-equivalent approach in evaluating above-average risk investments such as this one. What is the project's certainty-equivalent NPV?
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