Evaluate certainty equivalent coefficient, Financial Management

Assignment Help:

Q. Evaluate Certainty Equivalent Coefficient?

Illustration: - Presume the risky cash flow is Rs. 200000 and the riskless cash flow is Rs. 140000.

The Certainty Equivalent Coefficient =  140000 /  200000 = 0.7      

Steps occupied in Certainty Equivalent Coefficient Method: - The variety of steps involved in the certainty equivalent coefficient method is:

(1) First Step: - Initially the certainty comparable coefficient has to be calculated for each year of a project.

(2) Second Step: - Secondly the risk-adjusted cash flow of a project for every year has to be calculated. The risk-adjusted cash flow of a year is able to be calculated as follows:

Risk-Adjusted Cash Flow = Estimated Cash flow for the year X Certainty Equivalent Coefficient

(3) Third Step: - Thirdly we have to determine the present value of the capital project. The present value of the Capital Project is able to be found by adopting the following procedure. Initial the risk-adjusted cash flow for every year should be multiplied by the present value factor or discount factor applicable to that year to get the present value of the risk-adjusted cash flow of every year.

(4) Fourth Step: - Fourthly we have to conclude the net present value of the project. The net present value of the project will be

Present Value of the Project                                                   -----------

Less: Initial Investment on the Project                                   -----------

Net Present Value of the Project                                            -----------

 (5) Fifth Step: - Subsequent to the NPV of a project is calculated decision is taken as to the selection of the project.


Related Discussions:- Evaluate certainty equivalent coefficient

Financial analysis, are footnotes important in analysing ratios

are footnotes important in analysing ratios

Global equity indexes, Global Equity Indexes: As described earlier in t...

Global Equity Indexes: As described earlier in this chapter, there are several stock market indexes available which depict the performance of particular sectors and a country a

Longer-term bonds and short-term bonds, Questions How is a bond like...

Questions How is a bond like a loan?                                               How does an investor receive a return from buying a bond?  Does a bond's yield to ma

Calculate the effective annual rate, The credit term from the supplier is 2...

The credit term from the supplier is 2/30, net 60. Question: Calculate the effective annual rate if the firm does not take the discount.

Calculate the risk premium and probabilities , Johnson & Johnson (JNJ) is t...

Johnson & Johnson (JNJ) is trading at 68.15 (Sep 12th 2012 close). JNJ is a large health care conglomerate. It has done well so far this year (though not as well as the market) and

Explain the major types of audit plans, Explain the major types of audit pl...

Explain the major types of audit plans Three major types of audit plans Strategic -this the long term forward looking audit, it continually gets updated and identifies are

Calculate the ex-right stock price, DIY Inc. plans to raise $200,000 with a...

DIY Inc. plans to raise $200,000 with a right offering. The current stock price is $100 and there are 80,000 shares outstanding. a. If DIY sets the subscription price to be $80

Define advantage and disadvantage of internal rate of return, What are the ...

What are the advantages and disadvantages of the internal rate of return method? The internal rate of return (IRR) method is a discounted cash flow method and a number expressed

Duration, Now that we have an understanding about price volatility ...

Now that we have an understanding about price volatility characteristics of a bond, let us turn to the duration/convexity approach, which is an alternative

Define a sunk cost, What is a sunk cost?  Is it relevant while evaluating a...

What is a sunk cost?  Is it relevant while evaluating a proposed capital budgeting project?  Explain. A sunk cost is a cash flow which has previously occurred, or that will take

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd