A project has the following forcasted cash flows: Cash Flows, ($ thousands) C 0

ID: 2703386 • Letter: A

Question

A project has the following forcasted cash flows:

Cash Flows, ($ thousands)

?190

+130

+150

+140

The estimated project beta is 1.58. the market return rm is 18% and the risk free rate is rf is 5%.

a.) Estimate the opportunity cost of capital and the project's PV (using the same rate to discount each cash flow).

b.) What are the certainty-equilivant cash flows in each year?

Year 1______

Year 2_______

Year 3_______

c.) What is the ratio of the certainty equivalent cash flow to the expected cash flow in each year?

Year 1 ______

Year 2 _______

Year 3________

Cash Flows, ($ thousands)

?190

+130

+150

+140

a.) Estimate the opportunity cost of capital and the project's PV (using the same rate to discount each cash flow).

opportunity cost of capital = 5 + (18-5)*1.58 = 25.54%

Project's NPV = $79.49

b.) What are the certainty-equilivant cash flows in each year?

Year 1 $123.81

Year 2 $136.05

Year 3 $120.94

c.) What is the ratio of the certainty equivalent cash flow to the expected cash flow in each year?

Year 1 0.95

Year 2 0.91

Year 3 0.86

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