The Brown Owl Corporation manufactures high quality outdoor equipment for adventurous people who enjoy hiking, hunting, climbing, and trekking under extreme conditions. The firm has been very successful with things like cold weather clothing, boots, mountain climbing equipment, and camping gear. However, all of their products support land based activities, they've never done anything involving boating or deep water fishing. Yesterday Tim Woods, the vice president of marketing, made a proposal to the executive committee for entry into the water sports field beginning with a new and radically designed kayak. The proposal treats the venture as a capital budgeting project and includes an initial outlay along with five years of projected cash flows as follows ($M):

Tim admits his projection is optimistic but insists the water sport field is easily accessible because of Brown Owl's reputation and the innovative genius of the new kayak design. The president of the company thinks Tim is a terrific marketing VP but isn't so sure about his financial ability. He has asked you to do some risk related analysis of the idea and make a recommendation to the committee. Brown Owl's cost of capital is 12% and the risk free rate is 5%.
a. Calculate the kayak project's traditional NPV based on Tim's forecast.
b. Apply the certainty equivalent technique to the proposal assuming the CE factors start with 1.0 for C0 and fall off by .1 each year thereafter
c. Assume the factors fall off by .15 each year.
d. Comment on the advisability of the project including risk considerations

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Year 5 Cash Flow (5.5)1.5 3.0 5.0 6.0 6.5