if the Cash flows from a project with return of 15% is rs. 90L
and the risk free rate is 4% and risk premium is 9%, then what is the Certainty equivalent?
Menu
FM CE approach in capital budgeting
Replies (6)
Certainty equivalent cash flow = expected cash flow / (1 + risk premium)
so the answer should be
90L÷(1.9) ??
90L÷(1.9) ??
the answer is
90L÷(1.11)
I don't know how it's come
90L÷(1.11)
I don't know how it's come
Risk premium here=adjusted rate of return -RF i. e 15%-4%=11% ..... So the answer is 90/1.11 and not 90/1.09
Hope now ur query is resolved.... In CE method we take adjusted rate of reretu on which cash flow is discounted .. Here i. e 15 percent.... And risk preprem calculate accordingly
Certainty Equivalent and Cash Flow. The risk premium is calculated as the risk-adjusted rate of return minus the risk-free rate.
Recent Topics :
- LTCG - SEC54
- Foreign remittance from our client for Co Working
- UDIN generation
- Reply plz guys
- Tax Deduction and Collection Account Number
- Where can students practice XAT PYQs effectively?
- Gst on Guest house 5% without ITC
- How do you collect documents from clients for ITR
- GST ITC on Construction/ Tenant Specific Renovatio
- GST Treatment and Reporting of Share & Mutual
Related Topics :
CAclubindia
