Question

# With uncertain future cash receipts, the manager decides to adjust them with the appropriate certainty equivalent...

With uncertain future cash receipts, the manager decides to adjust them with the appropriate certainty equivalent factor. The company has a cost of capital of 10%. The risk-free rate is 8%. Find the certainty cash flow for year 1 of this option: 30% of $7.5 million, 50% of$15.5 million and 20% of $4 million. ____ 1.$10.603 million
2. $9.908 million 3.$11.08 million
4. $9.64 million Hint: αt = PVIF(RADR, t)/PVIF(RF, t) #### Homework Answers Answer #1 Certainity Equivalent Factor = PVIF(10%,1) / PVIF(8%,1) = 0.90909091 / 0.92592593 = 0.981818178 Expected Cash Flows = [$7.5 million * 30%] + [$15.5 million * 50%] + [$4 million * 20%]

= $2.25 million +$7.75 million + 0.8 million

= $10.8 million Certain Cash Flows = Expected Cash Flows * Certainity Equivalent Factor =$10.8 million * 0.981818178

= $10.6036363 million Therefore, Certain cash flow for year 1 for this option is$10.603 million

Option A is correct

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