Question
Gilead Sciences, Inc., a lawn mower manufacturer, is considering the introduction of a new model. The initial outlay required is $45 million. Net cash flows
Gilead Sciences, Inc., a lawn mower manufacturer, is considering the introduction of a new model. The initial outlay required is $45 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 Factor 1 $30.6 million 0.75 2 $29.7 million 0.60 3 $32.4 million 0.55 4 $23.4 million 0.50
The firm's cost of capital is 18% and the risk-free rate is 6%. Gilead Sciences uses the certainty-equivalent approach in evaluating above-average risk investments such as this one. What is the project's certainty-equivalent NPV?
$16,740,191.44
$56,039,475.29
$34,051,380.91
$4,127,731.07
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