Billy Bob is considering building a water slide park that will require a net inv
ID: 2784339 • Letter: B
Question
Billy Bob is considering building a water slide park that will require a net investment of $200,000 and yield the following net cash flows:
Year
Net Cash Flows
Cert. Equiv. Factor
1
$120,000
.95
2
90,000
.90
3
60,000
.80
4
30,000
.75
5
10,000
.50
If the risk-free rate is 6 percent and the market risk premium is 8 percent, what is the certainty equivalent NPV for this project?
$74,920
$41,497
$33,045
$10,644
Year
Net Cash Flows
Cert. Equiv. Factor
1
$120,000
.95
2
90,000
.90
3
60,000
.80
4
30,000
.75
5
10,000
.50
Explanation / Answer
NPV=Present value of inflows-Present value of outflows
241497.63-$200,000
=$41497(Approx)(B).
Cash flow Present value@6% (120,000*0.95)=$114000 (114000/1.06)=$107547.17 (90000*0.9)=81000 (81000/1.06^2)=$72089.71 (60000*0.8)=48000 (48000/1.06^3)=40301.73 (30000*0.75)=22500 (22500/1.06^4)=17822.11 (10000*0.5)=5000 (5000/1.06^5)=3736.91 Total=241497.63Related Questions
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