- Samreen Ltd is considering an investment in one of the two mutually exclusive proposals – Projects p1 and p2 , which require cash outlays of Rs.3,40,000 and Rs. 3,30,000 respectively. The certainty equivalent (C.E.) approach is used in incorporating risk in capital budgeting decisions. The current yield on government bond is 8% and this be used as the risk less rate. The expected net cash flows and their certainty equivalents are as follows:
|
|
Project P1
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Project P2
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||
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Year-end
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Cash Flow
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C.E.
|
Cash Flow
|
C.E.
|
|
1
|
180000
|
.6
|
180000
|
.8
|
|
2
|
200000
|
.8
|
180000
|
.7
|
|
3
|
200000
|
.7
|
200000
|
.8
|
Present Value factor os Rs. 1.00 discounted at 8% at ehe end of the year 1,2,3 are .926, .857 and .794 respectively. You are required to find out:-
I. Which project should be accepted?
II. If risk adjusted discount rate method is used, which project would be analysed with a higher rate?
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