Question

A manager  of “Safola Co. “ ask your advice to evaluate 3 projects, consider the following information to determine the project the manager should be select by the following criteria’s:

1. Risk Adjusted Discount Rate RADR
2. Equivalent Certainty Factor CF

Projects	A	B	C
Cost	100000	150000	200000
Expected of cash inflows	20000	25000	30000
Life( years)	7	9	10
Level of risk ( c.v)	0.24	0.34	0.18

Safola Co. usually uses the following discount rates 10%, 7%, 12%,  and certainty factors 0.633, 0.742, 0.543.

Answer 1

Solution :	Calculation fo Net present value using certainty factors
				Amount in $
	Projects	A	B	C
	(a)Annual Cash inflow	20000	25000	30000
	(b) Certainty equivalent(Certainty factors)	0.633	0.742	0.543
	(c ) Adjusted cash inflow(a*b)	12660	18550	16290
	Discount Rate	10%	7%	12%
	Life	7	9	10
	(d) Present value of annuity factor	4.8684	5.8852	5.6502
	(e) Present value of Adjusted cash inflows (c*d)	61634	109170	92042
	Less: Initial Cost	-100000	-150000	-200000
	Net Present Value (NPV)	-38366	-40830	-107958
	Selection criteria should be: project which has positive NPV
	However, in a given case, Non of the project has positive NPV. Further, Project A has lower negative NPV which is best option out of 3 projects.