KORONA Manufacturing is considering investing in either of two mutually exclusive projects, A and B. The firm has a 14 percent cost of capital, and the risk-free rate is currently 9 percent. The initial investment, expected cash inflows, and certainty equivalent factors associated with each of the projects are shown in the following table.

Project A Project B

Initial investment (II) $ 40,000 $ 56,000

Year (t) Cash inflows (CFt) Certainty equivalent factors (t) Cash inflows (CFt) Certainty equivalent factors (t)

1 $20,000 0.90 $20,000 0.95

2 16,000 0.80 25,000 0.90

3 12,000 0.60 15,000 0.85

4 10,000 0.50 20,000 0.80

5 10,000 0.40 10,000 0.80

Find the net present value (unadjusted for risk) for each project. Find the certainty equivalent net present value for each project Compare and discuss your findings in a) and b) above. Which, if either, of the projects do you recommend that the firm accept? Explain. (