Info

Project £(CFAT)

Present Value of £(CFAT) at 15%

($75,000)

($75,000)

22,500

19,566

25,000

18,903

27,500

18,081

30,000

17,154

32,500

16,159

$62,500

$14,863

D. The answers to parts B and C are fully compatible; both suggest a positive risk-adjusted present value for the project. In part B, the certainty equivalent adjustment factor method reduces the present value of future receipts to account for risk differences. As is typical, the example assumes that money to be received in the more distant future has a greater risk and, hence, a lesser certainty equivalent value. In the risk-adjusted discount rate approach of part C, the discount rate of 15% entails a time-factor adjustment of 8% plus a risk adjustment of 7%. Like the certainty equivalent adjustment factor approach, the risk-adjusted discount rate method gives a risk-adjusted present value for the project. Because the risk-adjusted present value of the project is positive under either approach, the investment should be made.

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