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what is the ratio of the certainty equivalent cash flow to the expected cash flow in 641081

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 r m is 16%, and the risk free rate r f is 7%.

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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