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A project has the following forecasted cash flows:
Cash Flows, $ Thousands
C0
C1
C2
C3
-100
+40
+60
+50
The estimated project beta is 1.5. The market return rm is 16 percent, and the risk-free rate rf is 7 percent.
a. Estimate the opportunity cost of capital and the project"s PV (using the same rate to discount each cash flow).
b. What are the certainty-equivalent cash flows in each year?
c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
d. Explain why this ratio declines.
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