XYZ Ltd. Is considering the proposal of buying one of the two machines to manufactures a new product. Each of these machines requires an investment of Rs. 50,000 and is expected to provide benefits over a period of 4 years. After the expiry of the useful life of the machine, the seller of both the machines have guaranteed to buy back the machine at Rs. 5,000. The management of the company uses CE Approach to evaluate risky investment. The companys risk adjusted discount rate is 16% and the risk free rate is 10%. The expected values of the net cash flow (CFAT) with their respective CE are: Proposal A Proposal B Year CFAT CE CFAT CE 1 30,000 0.8 18,000 0.9 2 30,000 0.7 36,000 0.8 3 30,000 0.6 24,000 0.7 4 30,000 0.5 32,000 0.4 Which machine, if either, should be purchased by the company? Is Certainty Equivalent Approach theoretically superior to the Risk Adjusted Discount Rate?

Q2. XYZ Ltd. Is considering the proposal of buying one of the two machines to manufactures a new product. Each of these machines requires an investment of Rs. 50,000 and is expected to provide benefits over a period of 4 years. After the expiry of the useful life of the machine, the seller of both the machines have guaranteed to buy back the machine at Rs. 5,000. The management of the company uses CE Approach to evaluate risky investment. The company's risk adjusted discount rate is 16% and the risk free rate is 10%. The expected values of the net cash flow (CFAT) with their respective CE are: Year 1 2 3 4 Proposal A CFAT CE 30,000 0.8 30,000 0.7 30,000 0.6 30,000 0.5 Proposal B CFAT CE 18,000 0.9 36,000 0.8 24,000 0.7 32,000 0.4 Which machine, if either, should be purchased by the company? Is Certainty Equivalent Approach theoretically superior to the Risk Adjusted Discount Rate