With uncertain future cash inflows, the manager decides to adjust them with the appropriate certainty equivalent factor. The certainty cash flow at year 3 is $8.85 million derived from an investment project with 30% of $7.5 million, 40% of $15.5 million and 30% of $4 million. Given a cost of capital of 6%, what is the underlying risk-free rate?

____

1. 3.0%
2. 2.5%
3. 2.0%
4. Undetermined

Hint: _t = PVIF(RADR, t)/PVIF(R_F, t)