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?
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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.
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